The US dollar will fall sideways as China comes back into the markets

VaselineOctober 8, 2024

0 4 minutes read

The US dollar is trading mixed against G10 currencies during the European session on Tuesday.
China’s markets bounce back after the close of the Golden Week, triggering an increase in volatility.
The US dollar index is still trading above 102.00, although it is entering a second day of weak trading.

The US dollar (USD) eases for a second straight day as investors welcome China back into markets. Not a warm welcome, with China’s Hang Seng 300 down more than 9% at the close. There is an increase in risk reduction, with European stocks on the back foot as well.

The economic calendar is light and shouldn’t make big waves on Tuesday, with the Merchandise Trade Balance and the Economic Optimism Index not expected to be market drivers. However, comments from Federal Reserve Bank of Atlanta President Raphael Bostic and Federal Reserve Vice Chairman Phillip Jefferson could be.

Daily Market Reasons: Hangover Mode for China

China reopened after a week of Golden Week festivities. The festive mood faded rather quickly, with the Hang Seng index correcting nearly 10% at its closing bell. The negative reaction spread across European markets and reduced risk a bit overall.
At 10:00 GMT, the National Federation of Independent Business (NFIB) released its Business Optimism Index for September, which rose to 91.5 from 91.2 in August, below economists’ expectations of 91.7.
August trade balance of goods and services data is expected to be released at 12:30 GMT. The trade balance in goods and services should show a narrower deficit of -$70.4 billion, compared to a peak of -$78.8 billion in July. The trade balance, excluding services, previously showed a deficit of -$94.3 billion, with no forecasts available.
The TechnoMetrica Institute of Politics and Policy will publish its Economic Optimism Index for October at 14:00 GMT. A small increase to 47.2 is expected, coming from 46.1, although it points to continued consumer pessimism.
At 16:45 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic (voting member of the FOMC 2024) speaks on the US economic outlook at the Consular Corps Luncheon in Atlanta. At 22:30 GMT, Federal Reserve Vice Chairman Phillip Jefferson (FOMC 2024 Voting Member) speaks at an event hosted by Davidson College in Davidson, North Carolina.
As mentioned above, European stocks are infected with negative tone coming from China. All European indices fell 1%. US futures are still looking for direction ahead of the US opening bell.
The CME Fedwatch tool shows an 88.7% chance of a 25 basis point (bps) interest rate cut at the Fed’s next meeting on November 7, while 11.3% is the price for no rate cut. Chances of a 50 bps rate cut have been completely eliminated now.
The benchmark US 10-year yield is trading at 4.00%, the highest level since mid-August.

US Dollar Index Technical Analysis: Overheated

The US dollar index (DXY) eases a touch for the second day in a row. Last week’s sudden rally sees some profit-taking for the second day in a row. The fact that the US dollar can’t gain more even with the risk-off tone from Asia could mean that a short squeeze is done and could see a slow decline from here.

103.00 psychological is the first level to approach upwards. Above, the chart identifies 103.18 as the final level for this week. Once above, a very choppy area appears, with the 100-day simple moving average (SMA) at 103.32, the 200-day SMA at 103.76, and the key 103.99-104.00 levels in play.

On the downside, the 55-day SMA at 101.99 is the first line of defense, supported by the 102.00 round level and the 101.90 pivot as support to catch any bearish pressure and trigger a bounce. If that level fails, 100.62 also acts as support. Below, a test of the year-to-date low of 100.16 should occur before more declines. Finally, and this means giving up the high of 100.00, the July 14, 2023 low at 99.58 comes into play.

US Dollar Index: Daily Chart

Frequently asked questions about US dollars

The US dollar (USD) is the official currency of the United States of America and the “de facto” currency of a significant number of other countries where it is found in circulation alongside local banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken over from the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly from financial institutions . QE usually leads to a weaker US dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineOctober 8, 2024

0 4 minutes read

Daily Market Reasons: Hangover Mode for China

US Dollar Index Technical Analysis: Overheated

Frequently asked questions about US dollars

Vaseline

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