- The US Dollar trades mixed on Friday with some profit taking after another ferocious week.
- The focal point to end the week will be the PMI numbers for the US.
- The US Dollar Index resides near new six-month high
The US Dollar (USD) is confirming yet again it is worth its label as ‘King”, booking gains against nearly every major G20 currency. Backed by higher US yields, the Greenback advances in an environment where the rate differential seems to be the driving factor to determine which currency weakens and which appreciates. With the US 10-year yield hitting 4.51%, breaking above the high of October 2007, it looks like King Dollar is affirming its earned title.
The Purchase Managers Index (PMI) from S&P Global did not bring much to the table in terms to move the needle. A small uptick in the Manufacturing sector saw its number still in contraction. The Services declined, though still above 50, which made the US Dollar remain steady and not moving substantially weaker or lower.
Daily digest: US Dollar seeks confirmation from PMIs
- United Auto Workers (UAW) strike is nearing its deadline for a deal. At the curent situation it looks like more walkouts will be triggered this Friday. This time aspecially the bigger SUV factories could get targeted.
- House Speaker Kevin McCarthy has sent lawmakers home after a deal still not made it to the House floor to vote. A shutdown would go into effect as of September 30th.
- No breakthrough to report neither on the looming US Government shutdown.
- The Purchase Managers Index (PMI) from S&P Global did not move the needle: Services went from 50.5 to 50.2. The Manufacting component went from 47.9 to 48.9. The Composite ended at 50.1 from 50.2
- Baker Hughes US Oil Rig Count data will come at 17:00 GMT. Previous number was 515. Energy remains a weak spot in the inflation bag that the Fed can not control in order to get inflation back to 2%. With the Baker Hughes Rig Count numbers remaining very low in the past few months, an energy deficit could linger in the US during the winter, pushing energy prices further up.
- Big dispersion in the equity markets: Japanese Nikkei and Topix reside in the red, down 0.50%. In China, both the Hang Seng and the CSI 300 indexes are up over 1.50%. European equties are marginally green with US indices heading higher near 0.50%.
- The CME Group FedWatch Tool shows that markets are pricing in a 73.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The last rate hike is expected for either December or January.
- The benchmark 10-year US Treasury yield traded at one point at 4.51%, the highest level since October 2007. It later fell back to 4.48%. The rate differential story remains the main driver in the forex space.
US Dollar Index technical analysis: brutal week
The US Dollar looks set to close this week with another positive print in the US Dollar index (DXY). King Dollar has yet again confirmed its status, though there looks to be some fatigue creeping in the price action. This afternoon’s PMI numbers will be crucial to either see a final attempt for a new yearly high or rather a drop back to 105.00 or lower.
The US Dollar Index (DXY) goes sideways after reaching 105.68 on Thursday. Should the DXY close above the yearly high near 105.88, expect the US Dollar to follow on with more bullish moves in the medium term. US yields will remain crucial to support current levels in the DXY.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 give way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.
Banking crisis FAQs
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency.
The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
Source: https://www.fxstreet.com/news/us-dollar-locks-in-weekly-gains-backed-by-higher-us-yields-202309221129