US Dollar steady to close off the week in green
- US Dollar price action was very choppy on Thursday after the US issued tariffs on tin imports.
- Traders have digested the hawkish Fed Minutes and are looking forward to Jackson Hole next week.
- The US Dollar Index consolidates near the monthly high and to close this week again in the green.
The US Dollar (USD) is about to close this week off in the green again after it showed its resilience earlier this week. A few market participants are trying to push the Greenback from its pedestal: the BRICS (Brazil-Russia-India-China-South Africa) countries holding a convention to circumvent their dependency from the US Dollar when exchanging commodities, but the Chinese People’s Bank of China (PBoC) has issued its strongest fixing in its existence for the Yuan against the US Dollar. The PBoC tries to stabilise the Yuan to squeeze out speculators against the Chinese currency.
A very calm Friday on the data front with no real market moving points. This will offer market participants the chance to start preparing for the volatile week ahead, with a lot of data out of Europe and the annual Jackson Hole Symposium as the cherry on the cake. Each year, all the smart minds and souls of biggest central banks over the world meet in Wyoming to debate about monetary policy. This event will bear quite a lot of headline risk as it is often the ideal moment for the US Federal Reserve (Fed) to announce either a change in monetary policy or issue a longer-term commitment on its policy adjustments.
Daily digest: US Dollar moves sideways
- The Chinese government has issued a few measures in order to support the Beijing, Shanghai and Shenzen stock markets with reduced trading fees and cutting handling fees. After rate cuts and the strongest Yuan fixing in years, the Chinese goverment is trying to get the Chinese economy back on track.
- The main focus today will be on headlines from the BRICS convention, where the main topic is de-dollarization.
- Another red day again in equity markets, with Asian equities on their back. The Japanese Topix is about to close this Friday with a 0.70% loss. The stronger Yuan fixing does not help the Hong Kong Exchange, which is down 2%. Europe is in the red as well near 1%. US futures had a little bit of hope for a turnaround but are now eking out more losses, on average down 0.50%.
- The CME Group FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.23%, retreating a touch from its peak earlier this week.
US Dollar Index technical analysis: no surprises expected
The US Dollar is hovering at the monthly high in the US Dollar Index (DXY). The Greenback retreats a touch this Friday, though remains at several three to six-months highs against most major G10 peers. Any sudden headline or squeeze could see fresh highs if the headlines would bear a risk off tone.
On the upside, 104.00 is the level to head to. The high of July at 103.57 is vital and needs to get a daily close above in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.26, which got broken very briefly on Thursday. Passing below the 103.00 big figure, some room opens up for a further drop. However, around 102.34 both the 55-day and the 100-day SMA are awaiting to catch any falling knives.
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.