- US Dollar price action was very choppy on Thursday after the US issued tariffs on tin imports.
- Traders have digested the hawkish Fed Minutes and are looking forward to Jackson Hole next week.
- The US Dollar Index consolidates near the monthly high and to close this week again in the green.
The US Dollar (USD) is about to close this week off in the green again after it showed its resilience earlier this week, though without any safe haven inflow while stock markets are sliding lower hits Friday. A few market participants are trying to push the Greenback from its pedestal: the BRICS (Brazil-Russia-India-China-South Africa) countries holding a convention to circumvent their dependency from the US Dollar when exchanging commodities, but the Chinese People’s Bank of China (PBoC) has issued its strongest fixing in its existence for the Yuan against the US Dollar. The PBoC tries to stabilise the Yuan to squeeze out speculators against the Chinese currency.
A very calm Friday on the data front with no real market moving points. This will offer market participants the chance to start preparing for the volatile week ahead, with a lot of data out of Europe and the annual Jackson Hole Symposium as the cherry on the cake. Each year, all the smart minds and souls of biggest central banks over the world meet in Wyoming to debate about monetary policy. This event will bear quite a lot of headline risk as it is often the ideal moment for the US Federal Reserve (Fed) to announce either a change in monetary policy or issue a longer-term commitment on its policy adjustments.
Daily digest: US Dollar ends with weekly profit
- China holdings of US Treasury bonds is at an 14-year low, numbers from June reveal.
- Special attention for the energy futures such as Crude Oil and Natural Gas, which are under some selling pressure as the demand for fossil fuels is fading: the summer season is nearing its end with less demand for flights and the European gas stockpile is ahead of its projection with now alreay being above the 90% target for October.
- The Chinese government has issued a few measures in order to support the Beijing, Shanghai and Shenzen stock markets with reduced trading fees and cutting handling fees. After rate cuts and the strongest Yuan fixing in years, the Chinese goverment is trying to get the Chinese economy back on track.
- The main focus today will be on headlines from the BRICS convention, where the main topic is de-dollarization. For now no real comments or breakthrough being communicated.
- Another red day again in equity markets, with Asian equities on their back. The Japanese Topix is about to close this Friday with a 0.70% loss. The stronger Yuan fixing does not help the Hong Kong Exchange, which is down 2%. Europe is in the red as well near 1%. US futures had a little bit of hope for a turnaround but are now eking out more losses, on average down 0.50%.
- The CME Group FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.23%, retreating a touch from its peak earlier this week.
US Dollar Index technical analysis: already in weekend mode
The US Dollar is hovering at the monthly high in the US Dollar Index (DXY). The Greenback retreats a touch this Friday, though remains at several three to six-months highs against most major G10 peers. Any sudden headline or squeeze could see fresh highs if the headlines would bear a risk off tone.
On the upside, 104.00 is the level to head to. The high of July at 103.57 is vital and needs to get a daily close above in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.26, which got broken very briefly on Thursday. Passing below the 103.00 big figure, some room opens up for a further drop. However, around 102.34 both the 55-day and the 100-day SMA are awaiting to catch any falling knives.
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.