Tuesday, October 9, 2018

Risk aversion and higher inflation expectations should push the Dollar higher this week

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks

MORNING BRIEFING

The start of the week saw a volatile session with many instruments posting large price swings on the back of the thinner liquidity as the US and Canadian markets were closed. The Pound was among the most active currencies with prices dropping 100 pips before recovering during the US hours. Yen also gained versus the Dollar as risk aversion gripped market participants casting doubts on the currency pair's broader upside momentum. Commodities were quite active as well, with Gold dipping by as much as $20 at some point while Oil ended the day in the green after a series of bearish sessions.

The Dollar was marginally lower versus its peers yesterday with most losses coming against the Japanese Yen. Risk aversion was the theme of the day on Monday and traders looked towards the safe haven Yen as China's reserve ration decision hit the wires. The Euro stagnated around 1.15 for yet another day while the Pound saw an impressive U-turn midday. In terms of the greenback though, our assessment is that the Non-Farm Payrolls report was not that bearish after all, especially if we attribute the miss in the jobs added component to the recent hurricane in the US.

Moreover, the US inflation reading on Thursday should confirm that prices are climbing higher in the US and that would require a reaction from the Fed, meaning higher interest rates. As such, this might be a good opportunity for traders to re-establish longs on the Dollar, with the UDS/JPY a prime candidate after yesterday's correction. With prices now around 113, a fresh rally from the Dollar's side will push the pair towards the 114.50 area again. The same stands true for the commodity currencies as China's slowdown should take a toll on their exports and eventually weaken their respective domestic economies.

Taking a look at the Pound, we are confronted with the same exaggerated optimism we witnessed before the Salzburg meeting that eventually ended in a fiasco. This week, the European Union is expected to present their view on a future trade proposal post-Brexit but given the lack of any significant progress the risk lies to the downside. If Barnier's proposal is another pointless offer that doesn't resolve the deadlock then the Pound will collapse again. Throw in a potential miss in the UK GDP figures tomorrow and Sterling might revisit last week's lows below 1.2950.

Commodities started the day in the red yesterday but eventually both Gold and Oil bounced higher to limit their losses. The yellow metal proceeded lower once again after spending a couple of days near the top end of its sideways pattern; many traders might consider this to be a boring recurrence but given the width of the $1,180 to $1,210 range we believe it presents good enough odds for intra-day gains when Gold trades near its boundaries. Oil on the other hand found some support just above the $73 level which underpins our view that the demand is there. For this to be confirmed though we will need a break above the $75 level and then we can look towards the $77 highs once more.

Stocks in Asia are mostly in the red with only the Hang Seng holding onto marginal gains while Europe ended the first day of the week in deep negative territory. China's decision to decrease their reserve requirements to stimulate growth falls in line with IMF's global growth warning, a combination of factors that dampens investors' sentiment. Futures in Europe and the US are slightly bearish this morning so we should expect another day of losses for global equities; investors are taking stock of these recent developments that should be treated as a “wake up call” while trade tensions persist.

MARKET EVENTS TO WATCH

  • Fed's Kaplan Speaks to Economic Club of New York - 4pm
  • BOE's Broadbent testifies to Parliament - 6.35pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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