- The Greenback starts its week on a high note after breaking its weekly winning streak.
- Traders run for safety as Hamas attacked Israel over the weekend in its biggest offence in two decades.
- The US Dollar Index breaks back above 106.00 and looks primed to head higher.
The US Dollar (USD) is not at ease on this US public holiday on Monday. Despite Columbus Day, the Greenback is soaring higher after it gapped up on Sunday night amidst headlines from Hamas attacking Israel with a major offensive not seen in decades. All bets are off with safe havens seeing massive inflows.
With an empty economic calendar, expect this Monday’s moves to be driven by the Israel-Gaza conflict. Several headlines from world leaders and organisations like OPEC+ are driving safe havens higher. Israel is preparing for retaliation while it proclaimed that Iran is behind the attacks, with Western leaders not yet confirming or backing these findings, showing the sensitivity of the matter and the interest in Crude Oil supply out of the region.
Daily digest: US Dollar eases as markets digest
- Amidst all the headlines around Israel and Hamas, two US Federal Reserve members are due to speak this Monday: Near 13:00 GMT, Dallas Fed President Lorie Logan is due to speak. Near 16:45 GMT, Fed Governor Philip Jefferson will also speak. Comments from Lorie Logan mentioned that the Fed could be done hiking as possibly real market rates are to remain elevated.
- Israel has issued a statement saying that Iran is behind the coordinated attacks. Thus far, Western leaders have refrained from backing this statement. Meanwhile, US naval ships are on route to the region to provide support for Israel.
- Equities are down, though starting to pare losses as market participants get a grip on the situation at hand. If this recovery continues, expect to possibly even see green numbers near the end of this Monday.
- The CME Group FedWatch Tool shows that markets are pricing in a 78.9% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is closed for the US holiday. Expectations would be that yields will drop as bids for safe US bonds will soar to enormous proportions.
US Dollar Index technical analysis: Snaps its winning streak
The US Dollar is remorseless in its winning streak after a squeeze on Friday snapped its winning streak, which lasted for twelve weeks. The US public holiday keeps US bond markets closed, though where it was open, it would have triggered even more safe-haven flow into the Greenback. Expect for the US Dollar Index to still remain in its uptrend and look to reboot its weekly winning streak.
The US Dollar Index opened around 106.29, with the Relative Strength Index (RSI) easing down a touch after the DXY snapped its weekly winning streak on Friday. On the topside, 107.19 is important to see if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, this barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to keep the DXY above 105.00.
Banking crisis FAQs
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency.
The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
Read the full article here