- The US Dollar rolls through markets and strengthens against most major G20 currencies.
- US equities are falling further while markets calibrate the new normal for the Fed interest-rate outlook.
- The US Dollar index adds even more gains to its October rally and trades in a crucial technical area.
The US Dollar (USD) speeds up its rally this Wednesday just ahead of the US Opening Bell, fueled by uncertainty ahead of the US presidential election and safe-haven inflow after equities extend their downbeat performance. Meanwhile, US bonds are continuing to sell off, which means US rates are surging with the US 10-year benchmark having rallied from 4.07% on Monday to 4.23% on Wednesday. The King Dollar is back on the scene and might even accelerate further as uncertainty picks up ahead of the November 5 election.
On the US economic front, a very light calendar is ahead for markets to digest on Wednesday. Besides the Existing Home Sales numbers, nothing really from an economic data view that could alter the current stance. Rather look at US earnings where heavyweights Tesla, IBM, Boeing and Coca cola are due to release earnings.
Daily digest market movers: Mortgages the canary in the coal mine
- At 11:00 GMT, the Mortgage Bankers Association (MBA) has released the weekly Mortgage Applications for the week ending October 18. A forth week on contraction with a -6.7% against the contraction of 17% the prior week.
- At 13:00 GMT, Federal Reserve Governor Michelle Bowman delivers opening remarks at the Eight Annual Fintech Conference Hosted by the Federal Reserve Bank of Philadelphia.
- At 14:00 GMT, the Existing Home Sales for September are due, with expectations for a surge to 3.9 million units against 3.86 million units in August.
- At 16:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin speaks about community colleges at the 2024 Virginia Education and Workforce Conference.
- China’s indices are the last man standing in a pool of red in the equity markets. US equity futures are struggling to pair losses ahead of the US Opening Bell.
- The CME Fedwatch Tool is backing a 25 basis point (bps) rate cut with an 88.9% probability against an 11.1% chance of no rate cut for the upcoming Fed meeting on November 7.
- The US 10-year benchmark rate trades at 4.23% and continues to rally for this week.
US Dollar Index Technical Analysis: Nervousness is starting to spread
The US Dollar Index (DXY) rallies again, set to close out October on a very high note in what looks to be a very solid rally. King Dollar is returning to the scene with traders finally up and starting to position themselves for the US elections on November 5 and the US Federal Reserve rate decision on November 7. It is one of the heaviest weeks in this financial year, and the Greenback looks to be the place to be ahead of those two events.
The DXY has broken above 104.00 and is now in an empty area that could quickly see 105.00 emerge as the first cap on the upside. Once above that level, watch out for the pivotal 105.53 and 105.89. Ultimately, 106.52 or even 107.35 could show sharp resistance and selling pressure with profit taking on the rally to materialize at these levels.
On the downside, the 200-day SMA is very strong support due to a test at 103.81. Look out for false breaks, and consider waiting for a daily close below that level when reassessing if there will be more downside for the DXY. The next big support is double, with the 100-day SMA at 103.19 and the pivotal 103.18 level (the March 12 high). If that level breaks, a big gap lower would occur to the 101.90 support zone, with the 55-day SMA at 101.91.
US Dollar Index: Daily Chart
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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