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- US Dollar in the red with markets choking on Chinese rate cut
US Dollar in the red with markets choking on Chinese rate cut
- The US Dollar mildly in the red against most major peers.
- Markets are not moving on Loan Prime Rate cuts by China.
- The US Dollar Index trades away from the 104 marker and moves slightly higher.
The US Dollar (USD) is turning red with markets not applauding the overnight move by the People’s Bank of China (PBoC) to cut its 5-year Loan Prime Rate. China is playing in a whole other ballpark in terms of economic data with deflation, a sluggish job market, a haunted housing market and abating growth. The cuts are bigger than expected, though the market reaction is signalling more needs to be done in order to give China the boost to head back to its pre-pandemic growth and economic levels.
On the economic data front, The US Treasury will have its work cut out this Tuesday with no less than three bond auctions coming up. For more economic data, most data points are pushed forward to Wednesday due to the public holiday on Monday. All eyes are on the retailers in the stock markets this week with Walmart and Home Depot releasing earnings this Tuesday.
Daily digest market movers: Tuesday is the new Monday
- European bond yields are jumping higher against US bond yields this Tuesday after the European Central Bank (ECB) released a report that revealed wages in the Eurozone are still remaining elevated, which could add to sticky inflatoin in the coming months, pushing back on current rate cut expectations. This pushes the Euro up against the US Dollar to 1.08, a level not seen since February 2nd.
- China has lowered its Loan Prime Rate in the following maturities:
- 1-year tenor unchanged at 3.45% where 3.40% was expected.
- the 5-year tenor cut from 4.20% to 3.95%, where 4.10% was expected.
- European car sales jumped 11% in January.
- Near 13:55 GMT the Redbook Index is due to be released. Previous was for 2.5%.
- The US Treasury department is doing a triple auction at 16:30 GMT. A 3-month, a 6-month and a 52-week bill will be auctioned.
- Equities are looking for direction ahead of the retailer earnings in the US before the US opening bell. Chinese equities are not really jumping on the Loan Prime Rate cut in China. European equities are mildly lower in European trading together with US equity futures.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 91.5%, while 8.5% for a rate cut.
- The benchmark 10-year US Treasury Note trades a little bit higher, near 4.29%, after its close on Friday at 4.28% and being closed over Monday due to the US public holiday.
US Dollar Index Technical Analysis: Do not get trapped
The US Dollar Index (DXY) is holding its ground above 104 though pressure is mounting again on the support level. This does not mean anything substantial as this Tuesday is actually Monday after the US was closed due to President’s Day. Expect to see traders catch up, with the first moves taking place on Wednesday in the buildup to the US Federal Reserve Minutes release on Wednesday evening.
Should the US Dollar jump to 105.00 by Friday, 105.12 is a key level to keep an eye on. One step beyond there comes 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row.
The 100-day Simple Moving Average looks to be holding for now, though pressure is building on it to snap, near 104.18, so the 200-day SMA near 103.70 looks more solid. Should that give way, look for support from the 55-day SMA near 103.14.
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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