If the US Dollar’s Going to Bounce, It Better Do It Here
March 6, 2020 11:30 AM
The narrative of the US dollar as the “cleanest dirty shirt” amongst a slow-growth global economy has been ripped to shreds...
The high-volatility, alternating up-down rollercoaster in risk appetite that has characterized this week’s trade has seemingly broken on the final trading day of the week; that is, markets remain highly volatile, but we’re not seeing a recovery in risk assets after yesterday’s drubbing. Instead, equity indices across the globe are trading another 2-4% lower, while global bond yields collapse and gold tacks on another 1%.
Meanwhile, the US dollar just can’t seem to get up off the proverbial mat. Looking at the widely-followed US dollar index, the world’s reserve currency has lost 4% of its value in a little over two weeks, and the currency is now testing a massive support level in the 95.75-96.00 range:
Source: TradingView, GAIN Capital
After such a dramatic drop, it’s no surprise that the RSI indicator for the dollar index is deeply oversold, raising the probability of a bounce off this key support zone. That said, the narrative of the US dollar as the “cleanest dirty shirt” amongst a slow-growth global economy has been ripped to shreds.
For years, buck bulls have pointed at the US dollar’s relative yield advantage over its zero- and negative-yielding rivals, but with the yield on the benchmark 2- and 10-year treasury bonds falling to just 0.49% and 0.76% respectively, that comparative advantage has all but disappeared. Indeed, traders are now pricing in at least another 50bps of interest rate cuts from the Federal Reserve at its meeting in the middle of the month, meaning that the central bank will likely lower its benchmark rate by a full 1% in just two weeks.
In the short term, today’s Non-Farm Payroll report may have some bearing on the greenback, with the potential for a stronger-than-expected report to lead to a recovery rally off support in the greenback (see our full NFP preview report). Nonetheless, the technical and fundamental momentum in the US dollar index remains strongly bearish, so traders may look at any short-term bounces as an opportunity to add new shorts at a more favorable price.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.