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- US Dollar jumps as China’s imports plunge sparks global recession fears and weaker Yuan
US Dollar jumps as China’s imports plunge sparks global recession fears and weaker Yuan
- US Dollar rallies against all major peers in global flight to safe haven.
- Big batch of second-tier data from the US set to hit the markets.
- The US Dollar Index takes another stab at key level to continue the rally.
The US Dollar (USD) was able to avoid a meltdown on Monday by closing marginally in the green, avoiding a possible technical rejection in the US Dollar Index (DXY). Meanwhile, this Tuesday the Greenback is back in favor after Chinese import numbers plunged even worse than during the pandemic. This triggers some risk aversion flow with the US Dollar as safe haven and US bonds being bid.
On the economic front, a chunky calendar includes the National Federation of Independent Business Optimism Index (NFIB) and the TechnoMetrica Institute of Policy & Politics Economic Optimism Index (TIPP). Add to that US Federal Reserve (Fed) speakers Patrick Harker of the Reserve Bank of Philadelphia and Thomas Barkin from Richmond, and traders will have a dry-run for the US Consumer Price Index (CPI) numbers later this week.On Monday, the Fed’s John Williams said that cuts will come next year.
Daily digest: US Dollar as investors shun away from Yuan
- The economic calendar starts off early this Tuesday at 10:00 GMT with the National Federation of Independent Business Optimism Index (NFIB) for July, which is expected to drop from 91 to 90.6
- At 12:15 and 12:30 GMT, Fed speakers Patrick Harker of the Reserve Bank of Philadelphia and Thomas Barkin from Richmond will be speaking. Look out for any dovish comments that could be added to the comments from Fed member John Williams on Monday. If more comments are in favor of cuts in 2024, this could be the Fed preparing the markets for a very dovish speech at the yearly Jackson Hole Symposium from August 24 to 26.
- Around 12:30 GMT, the Goods and Services Trade Balance for June is expected to bear a slightly smaller deficit, moving from $-69B to $-65B. The US Goods Trade Balance will come out as well and was at $-87.8B with no forecast pencilled in.
- The last big batch of data is expected around 14:00 GMT with the TechnoMetrica Institute of Policy and Politics Economic Optimism Index (TIPP) for August expected to jump from 41.3 to 43. US Wholesale Inventories for June are expected to remain unchanged at -0.3%.
- The US Treasury Department is about to tap the markets again with a 52-week bill auction and a 3-year note placement.
- The Japanese Topix index saw the closing bell coming in right on time in order to still close this Tuesday with a 0.34% gain. The Chinese Hang Seng Index declined near 2% on the back of those weak Chinese import numbers. European and US equities are being dragged along as global recession fears are creeping back into the markets.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Fed will pause hikes at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.01% and continues its decline from Monday. The lower benchmark rate comes on the back of bonds being in demand this Tuesday as global recession fears ignite on the back of weak China import numbers. Investors are buying US bonds, triggering a jump in bond prices. Bond yields are inversely correlated to the bond price, so yields are dropping while bond prices rise.
US Dollar Index technical analysis: 102.47 crucial level
The US Dollar is back in the green after avoiding a technical meltdown, which could have gotten ugly based on the technical analysis from the US Dollar Index (DXY) on Monday. US Dollar bulls were trying to break above the 100-day Simple Moving Average around 102.30 but got rejected and saw all their gains evaporate for the day at the US opening bell. This Tuesday, the safe haven inflow puts the DXY back up above 102.30 with the possibility to get across the 55-day SMA at 102.48.
For the upside, 102.31 remains a key level to watch in the form of the 100-day Simple Moving Average (SMA) and needs to see a daily close above in order to be turned into support going forward. Even should the DXY be able to break and close above there, US Dollar bulls are not out of the woods yet, with the 55-day SMA just above there at 102.48. Two key levels need to be broken and closed above in order to avoid any large pullbacks before targeting 103 to the upside.
On the downside, the US Dollar bears will defend that same mentioned 100-day SMA at 102.31 and try to stage a firm rejection as nearly happened on Monday. The uptrend from mid-July will be broken once bears can pull the price action below 101.74, which is the low of this past Friday. Once that unfolds, the probability of the DXY collapsing all the way back to sub-100 is quite large.
US Dollar FAQs
What is the US Dollar?
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 notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took 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 went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the 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 from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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