- The US Dollar broke higher on Tuesday against most currencies in another rate differential push.
- Tuesday’s US economic docket will feature housing market data.
- The US Dollar Index makes a new 10-month high above 106.00.
The US Dollar (USD) pressured nearly every asset class against the floor in another demonstration of Greenback strength on Monday. With US bond yields rising again to new highs, the rate differential is clearly the main driver between the Dollar and other currencies. As stocks are starting to decline, bonds are being sold, questions arise if this is the start of a feared recession and hard landing for the US economy.
Plenty of data to dig in this Tuesday from the US housing sector, where the tighter and higher credit conditions are still awaited to filter in.. The Housing Price Index and Consumer Confidence Index will both likely be market moving for the Greenback. Headlines from Capitol Hill could be a game changer as well as a stopgap bill will be brought to the House floor later onTuesday.
Daily digest: US Dollar near the highs
- The United Auto Workers (UAW) strike welcomes US President Joe Biden this Tuesday in one of their posts in Michigan. The strike enters its twelfth day.
- Minneapolis Federal Reserve President Neel Kashkari called for another interest-rate hike this year. Meanwhile, JP Morgan CEO Jamie Dimon has warned that US rates could head to 7%.
- On the economic data front, Tuesday will start with the US Redbook Index at 12:55 GMT for the week of September 22. In the prior week, the index rose 3.6%.
- The Housing Price Index for July is expected at 13:00 GMT. The monthly measure is expected to increase 0.1%, less than the 0.3% rise seen in June. The yearly figure is expected to show that prices declined 0.5%, less than the previous 1.2% fall.
- US Consumer Confidence data for September is expected at 14:00 GMT..
- Also at 14:00, the New Home Sales data for August will be published. In July, sales of new homes in the US increased 4.4% on month.
- The Richmond Fed Manufacturing Index for September will come in as well at 14:00 GMT. The index is expected to edge up marginally but to remain in negative, from -7 to -6.
- To close off, Michelle Bowman from the US Federal Reserve Board of Governors is expected to speak at 17:30 GMT.
- The US Treasury is to auction a 2-year note near 17:00 GMT.
- All red across the board in equity markets as investors’ mood soured after news that Evergrande missed an interest payment to foreign investors on Monday. Meanwhile, the stronger US Dollar and the bond sell-off is not helping risk sentiment to recover.
- The CME Group FedWatch Tool shows that markets are pricing in a 81.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The probability for an unchanged stance increased by the day as strikes at auto plants and a US potential government shutdown loom.
- The benchmark 10-year US Treasury yield traded as high as 4.54% and takes a small step back from Monday’s peak.
US Dollar Index technical analysis: Steady in the wake of GDP
The US Dollar pushes the Relative Strength Index (RSI) into overbought territory after its outperformance on Monday. Traders remain focused and worried on the current and possibly persistent rate differential between the US Fed and other main central banks, which might keep the US Dollar stronger for longer. The US Dollar Index (DXY), which tracks the Greenback against a basket of other major currencies, broke above 106.00 and posted a new 10-month high.
The US Dollar Index opens above 106.00, though the overheated RSI might make it difficult to hold there. Traders that want to hit that new 52-week high need to be aware that a lot of road needs to be covered, towards 114.78. Rather look for 107.19, the high of November 30, 2022, as the next profit target on the upside.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, it has just been broken to the upside, so it isn’t likely to be a strong barrier. . Rather look for 105.12 to do the trick and keep the DXY above 105.00.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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