- The US Dollar has thrived this week, though gives up part of its weekly gains.
- Durable Goods revisions hurted the Greenback.
- The US Dollar Index trades back below 105.00 and could face more downturn next week.
The US Dollar (USD) is trading softer this Friday in the US Durable Goods aftermath. The revisions snapped the five-day winning streak for which the Greenback was on track for. As with the recent Housing data, Durable Goods are contracting for a second time in a row according to the revisions.
On the economic data front, all eyes will now be on next week with the US Gross Domestic Product first reading for the first quarter of 2024. Add at the end of the week the Personal Consumption Expenditures (PCE) number on Friday, and the Greenback might be trading in another range again at the end of the week, should PCE further confirm disinflation being on track.
Daily digest market movers: Durable Goods tripped
- Durable Goods Orders for April took the wind out of the sail from PMI’s on Thursday.
- Orders got revised from 2.6 to 0.8 for the previous number. The current number comes in lower at 0.7%.
- Orders without cars and transportation fell flat from earlier 0.2% in the revision. The current number comes in at 0.4%.
- It was only after the revisions came out, the Greenback started to ease.
- Around 13:35 GMT, Federal Reserve Governor Christopher Waller will deliver a keynote address at the Reykjavik Economic Conference in Iceland.
- To round off this Friday, at 14:00 GMT, the University of Michigan will release its recent findings for May:
- Consumer Sentiment is expected to come in at 67.5, broadly unchanged from its preliminary reading of 67.4.
- The 5-year inflation expectations index is also expected to remain unchanged from the mid-month estimate of 3.1%.
- Equities are in the red this Friday from the Asia-Pacific session to Europe. US futures are flat for the day and looking for direction.
- The CME Fedwatch Tool is pricing 98.7% for no change in the policy rate for June. September futures are seeing more action where it is a neck-a-neck race with 53.2% chances for a cut against 46.2% for unchanged. A marginal 0.6% price in a rate hike.
- The benchmark 10-year US Treasury Note trades around 4.49%, near the high for this week.
US Dollar Index Technical Analysis: Bumpy road ahead
The US Dollar Index (DXY) is surging again, nearly erasing all the losses from last week on the back of the disinflationary report. Still, the US Dollar Index is not out of the woods yet. It is still a long way to go to head to 106.00, and several economic data points are starting to retreat from their peak performances.
Traders will need to ask themselves when the US is no longer exceptional in its economic performance against other countries. Is the Greenback then really earning to be back at 106.00 or higher, with the rate differential against its peer as a single main driver? Food for thought for traders over the weekend.
On the upside, the DXY Index has broken two technical elements which were keeping price action in check. The first level was the 55-day Simple Moving Average (SMA) at 104.83 and the second was the red descending trend line crossed at 104.79 on Wednesday. From now further up, the following levels to consider are 105.12 and 105.52.
On the downside, the 100-day SMA around 104.28 is the last man supporting the decline. Once that level snaps, an air pocket is placed between 104.11 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.
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.
