- The US currency rose against most currencies on Tuesday, further boosting the rate differential.
- Tuesday’s US economic agenda will include housing market data.
- The Dollar Index hits a new 10-month high above 106.00.
The US dollar pushed almost all assets to the bottom on Monday in another show of dollar strength. With US bond yields rising to new highs again, the rate differential is clearly the main driver between the dollar and other currencies. As stocks begin to fall, bonds sell off, and questions arise about whether this is the start of a feared recession and a hard landing for the U.S. economy.
This Tuesday there will be a lot of data from the US real estate sector, in which the tighter and higher credit conditions are still expected to filter through. Both the housing price index and the consumer confidence index will probably move the markets for the Dollar . Capitol Hill incumbents could also turn the tables, as a stopgap bill will be introduced in the House on Tuesday.
Daily summary: The dollar near highs
- The United Auto Workers (UAW) strike welcomes US President Joe Biden this Tuesday at one of its positions in Michigan. The strike enters its twelfth day.
- Minneapolis Federal Reserve President Neel Kashkari advocated for another interest rate hike this year. For his part, JP Morgan CEO Jamie Dimon has warned that US rates could head towards 7%.
- Regarding economic data, Tuesday’s trading will begin with the publication of the US Redbook Index at 12:55 GMT, corresponding to the week of September 22. The previous week, the index rose 3.6%.
- At 13:00 GMT the July House Price Index will be published. The monthly index is expected to rise 0.1%, less than the 0.3% rise recorded in June. The annual figure is expected to show prices fell 0.5%, less than the previous drop of 1.2%.
- US Consumer Confidence for September will be released at 14:00 GMT.
- Also at 2:00 p.m., new home sales data for August will be published. In July, sales of new homes in the United States increased 4.4% monthly.
- Also at 14:00 GMT the Richmond Fed manufacturing index for September will be published. The index is expected to rise slightly, but remain negative, from -7 to -6.
- Finally, Michelle Bowman of the US Federal Reserve Board of Governors is expected to speak at 17:30 GMT.
- Stock markets are trading lower as investor sentiment has deteriorated following news that Evergrande failed to pay interest to foreign investors on Monday. Meanwhile, the strength of the Dollar and the massive sale of bonds are not helping to recover risk sentiment.
- CME Group’s FedWatch tool shows that markets are pricing in an 81.5% chance that the Federal Reserve will keep interest rates unchanged at its November meeting. The likelihood that they will remain unchanged increases by the day as strikes at auto factories and a possible US government shutdown loom.
- The benchmark 10-year US Treasury yield was trading at 4.54%, retreating slightly from Monday’s peak.
Technical Analysis of the Dollar Index: Stable after GDP
The Relative Strength Index (RSI) of the US Dollar is in the overbought zone, after its best performance on Monday. Traders remain focused and concerned about the current and possibly persistent rate differential between the US Fed and other major central banks, which could keep the US dollar stronger for longer. The US Dollar Index (DXY), which tracks the dollar against a basket of major currencies, broke above 106.00 and recorded a new 10-month high.
The Dollar Index opens above 106.00, although the overheating RSI could make it difficult to hold. Traders looking to reach that new 52-week high should be aware that there is still a long way to go, towards 114.78. Better to look for 107.19, the high of November 30, 2022, as the next upside profit target.
On the downside, the recent resistance at 105.88 should be considered the first support. Still, it has just broken to the upside, so it is not likely to be a strong barrier. It is preferable to look for 105.12 to keep the DXY above 105.00.
Risk Sentiment FAQ
What do the terms “risk appetite” and “risk aversion” mean when referring to sentiment in financial markets?
In the world of financial jargon, the two terms “risk appetite” and “risk aversion” refer to the level of risk that investors are willing to bear during the reference period. In a market “risk appetite” , investors are optimistic about the future and are more willing to buy risky assets. In a “risk-free” market, investors start to “play it safe” because they are worried about the future and therefore buy assets less risky ones that are more likely to bring benefits, even if they are relatively modest.
What are the key assets to follow to understand risk sentiment dynamics?
Typically, during periods of “risk appetite”, stock markets rise, and most commodities – except gold – also appreciate as they benefit from positive growth prospects. The currencies of countries that are large exporters of raw materials strengthen due to increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds – especially major government bonds – rise, Gold shines and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar benefit.
Which currencies strengthen when the sentiment is “risk appetite”?
The Australian dollar (AUD), the Canadian dollar (CAD), the New Zealand dollar (NZD) and minor currencies such as the ruble (RUB) and the South African rand (ZAR) tend to rise in markets where there is an “appetite for risk.” This is because the economies of these currencies rely heavily on commodity exports for their growth, and these tend to rise in price during periods of “risk appetite.” This is because investors anticipate higher demand for raw materials in the future due to increased economic activity.
Which currencies strengthen when sentiment is “risk averse”?
The major currencies that tend to rise during periods of “risk aversion” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The Dollar, because it is the world’s reserve currency and because in times of crisis investors buy US public debt, which is considered safe because it is unlikely that the world’s largest economy will go into default. The Yen, due to the increase in demand for Japanese government bonds, since a large proportion is in the hands of domestic investors who are unlikely to get rid of them, even in a crisis. The Swiss franc, because strict Swiss banking legislation offers investors greater capital protection.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
