USD: Equity recovery keeps volatility low – ING

Aside from US politics, currency markets remain very calm. Volatility is low and the temptation will be to rotate back into the carry trade, even if there are risks associated with the preferred funding currency (Japanese Yen) or the preferred target currency (Mexican Peso), notes Chris Turner, FX Strategist at ING.

The DXY will continue to trade in the range of 104.00-104.50

“On a quiet day, we think investors will pay close attention to US earnings releases. Two of the Magnificent Seven (a basket of seven tech stocks, down about 8% this month) are reporting second-quarter results. With surveys suggesting investors expect earnings results to fuel the next leg in the stock rally. So tonight’s release will have a big influence on whether the rally resumes.”

“Higher US stocks typically keep FX volatility levels low and support the carry trade. Previously, this would have been negative for the USD, but USD deposit rates at 5.38% for one-week money mean the USD is an expensive sell. However, these conditions mean there is a big burden on the Bank of Japan to deliver a rate hike and a sizeable reduction in Japanese government bond purchases on July 31.”

“The US calendar is quite empty today and there does not seem to be a strong reason to take the DXY out of a 104.00-104.50 range.”

Source: Fx Street

You may also like