- The Greenback cannot bank on the risk-off flight from Monday.
- Fed’s Logan and Jefferson delivered a message that the Fed is done hiking.
- The US Dollar Index sinks below 106 briefly in European trading.
The US Dollar (USD) is seeing its gains from Monday being erased as the flight to safety eased quite quickly. Markets were quite quick to assess the situation in Israel and Gaza. For a minute, markets were bracing for a possible spillover in the region to the bigger oil-producing countries, though it was until late Monday evening when Saudi Crown Prince Mohammad bin Salman issued a statement urging both parties to come to the table and discuss opinions instead of reverting to violence.
The US markets need to catch up a bit with events as several US markets were closed on Monday for the public holiday. On Monday, both Dallas Federal Reserve (Fed) President Lorie Logan and Fed Governor Philip Jefferson said that interest rates have reached the end of their hiking path. Meanwhile, the US bond markets sees prices peaking and yields dropping in a catch-up move from Monday’s reduced schedule.
Daily digest: US Dollar whipsaws
- At 10:00 GMT on Tuesday the National Federation of Independent Business’ (NFIB) Business Optimism Index for September was released. Previous number was 91.3, with the current number a touch lower near 90.8.
- The US Wholesale Inventories for August were unchanged at -0.1%.
- A slew of Fed speakers are set to take the stage this Tuesday: Fed’s Minneapolis director Neel Kashkari is due to speak near 19:00 GMT. Mary Daly from the San Francisco Fed is due to speak near 22:00 GMT.
- The US Treasury is heading to the markets to refund some tenures. A 3-month and a 6-month bill are due to be issued together with a 3-year note auction.
- Christopher J. Waller from the Fed’s Board of Governors is expected to speak at 17:30 GMT.
- Equities are in the green as risk in the Middle East region looks to be contained for now. Asian equities soar over 2% with Japanese indices leading the charge. European equities are up over 1%. Meanwhile, US equity futures are rather reluctant and stick to rather flat quotations.
- The CME Group FedWatch Tool shows that markets are pricing in an 87.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield was closed on Monday due to the public holiday and has played catch-up with recent events. The result was quite a move upward in bond prices higher and yields sinking lower to 4.67%, down from the 4.88% seen on Friday. With half of the European trading session behind, yields are rising to 4.70%.
US Dollar Index technical analysis: DXY sinks as the Greenback starts to turn
The US Dollar was unable to thrive in the risk-off sentiment on Monday and was hardly making any waves. Where one would expect the Greenback to advance substantially against most major peers, the moves from Monday have already been erased this Tuesday on the quote board. The US Dollar Index (DXY) is starting to flirt with a turn for the worse as the July trend line got broken to the downside for the first time in thirtheen weeks.
The US Dollar Index opened around 105.96, with the Relative Strength Index (RSI) easing down further after the DXY snapped its weekly winning streak last Friday. On the topside, 107.19 is important to see if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, this barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to keep the DXY above 105.00.
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-unmoved-by-us-bond-shock-in-israel-gaza-fallout-202310101033