US Dollar Subdued In Broad Market as Equity Rout, T.Yield Inversion Curve Hurts Confidence

Summary: The demand for US dollar in broad market is relatively subdued on Thursday both in forex and commodity markets. The slide in demand could be attributed to multiple factors such as uncertainty about trade tensions between Washington and Beijing, flattening yield curve, bearish rout in global equities for two consecutive session and broad based demand for precious metals as preferred safe haven asset instead of USD as has been in recent times etc. Gold hit a 5.5 week high yesterday and has remained near recent highs since then while dollar has failed to make a breakout against dollar denominated forex majors despite increased risk aversion in market while major currencies also suffer bearish influence from local markets serves as proof that demand for USD is going down in broad market.

  • The US Dollar index (USD/DXY) which measures the strength of dollar against six major global currencies is at 97.16 up by 0.16% in early European market hours as equity markets continue to trade bearish for third consecutive session resulting in investors moving funds to US Greenback as safe haven asset.
  • Equity markets continue to trade in red today as Huawei’s global chief financial officer in Vancouver was arrested last night accused of violating U.S Sanctions and is expected to be extradited to United States which has resulted in renewed fears over possibility of talks between China & U.S. breaking down triggering safe haven demand.
  • Signals from the Federal Reserve last week that it may be nearing an end to its three-year rate hiking cycle have helped trigger the slide in Treasury yields and since it is difficult to pinpoint how much funds investors have transferred from equities to bonds in the recent risk aversion, analysts believe the slide in Treasury yields may continue to extend for few more session which is highly negative for US Greenback’s broad based outlook.

USD subdued

  • Crude Oil market is subdued ahead of OPEC Summit today with price in Asian market hours heading in bearish direction. OPEC Summit is to be held at its headquarters in Vienna, Austria, later today where investors expect members to decide on production cut plans to defuse ongoing glut scenario in global markets.

On the Lookout:

  • US T.Yields – The spread between the two-year and five-year Treasury yields inverted this week and the two-year/10-year spread was at its flattest in more than a decade amid a sharp fall in long-term rates. A flatter curve is seen as an indicator of a slowing economy, with lower longer-dated yields suggesting a potential recession down the road. Analysts believe that decline in bond market hasn’t hit its bottom yet and continued decline can even result in the spread between the 10-year and 2-year turning completely negative which could be highly negative for US Greenback as well as US economy.
  • US Fed Rate Hike – Investors are now looking forward to December FOMC update where the Fed is expected to raise interest rate and also make clear its stance on plans for future rate hikes. A positive forward guidance will help Dollar retain its safe haven appeal while bond market will also see significant rebound from its recent decline easing investor’s worries about slowdown in US economy.
  • Brexit – The situation surrounding Brexit deal is getting worse by the day. As per recent updates, the current stacking of MP’s in the UK’s House of Commons is currently set at 216 for and 423 against Prime Minister Theresa May’s current Brexit proposal. So far PM May has suffered three defeats in House of Commons in regards to Brexit deal. Situation now indicates that PM May could be forced to delay the parliamentary vote in an effort to scrape together more negotiation time as PM May is not willing to accept EU’s lifeline warning that it could invalidate the current deal and as the DUP has said it will withdraw its support for Mrs. May’s deal if she wins the backing of Parliament, as debate in the Commons and Lords raged on.

  • OPEC Summit – OPEC and its allies are expected to agree on the terms of price-boosting output cuts during its meeting today. The much-anticipated meeting comes at a time when the oil market is near the bottom of its worst price plunge since the 2008 financial crisis. Oil prices have crashed around 30 percent over the last two months, ratcheting up the pressure on budgets in oil-exporting countries. The summit is also expected to discuss Qatar’s intentions to leave OPEC citing limited benefits it enjoys from the cartel and minimal returns on investments it makes in the group after being pressured to cut production.
  • Economic Data Release & Events – While European market hours will see silent calendar schedule, American market hours will see US & Canada release key macro data updates. US markets see release of ADP Non Farm Employment and ISM Non-Manufacturing PMI data, while Canadian market will see release of Ivey PMI data.

Trading Perspective:

  • AUD/USD – AUD/USD is marking in new lows for the week below 0.7230 as risk appetite drained away in the Asian market session, fueled by an unexpected decline in Australia’s Trade Balance. Australia’s Trade Balance clocked in at just 2.316 billion, sliding over 600 million from the previous reading well below forecast of 3.2 billion. The decline in Australia’s seasonally-adjusted trade balance is due to surprise expansion of Exports which grew by 3% compared to previous reading. The Aussie initially saw a 17-week high at the open on Monday, but a steady slide has seen the AUD/USD pairing tumble back into familiar mid-term ranges, forming bearish candles for four straight days and the pair down -2.25% peak-to-trough, and the Aussie is geared for another retest of support at the critical 0.7200 handle.
  • USD/JPY – USD/JPY pair came under some renewed selling pressure in early market hours today erasing all of the modest recovery gains recorded in the previous session. Skepticism over the recent progress made in trade relations between the world’s two largest economies triggered a fresh wave of global risk-aversion trade and boosted the Japanese Yen’s safe-haven status. Adding to this, an inversion in a part of the US Treasury bond yield curve, raising concerns about economic growth in the US, further weighed on market sentiment and kept the US Dollar bulls on the defensive.
  • EUR/USD – The sentiment around the single currency is subdued since trading session began for the day as renewed fears over Sino-U.S. trade negotiations triggered a risk off market sentiment and the pair faced further bearish pressure in early European session over latest headlines that suggested divided stance between Italian Prime Minister and his deputies over how much budget plans and deficit target can be revised. Investors are now looking forward to NFP & ISM Manufacturing data for short term opportunities during today’s American market hours.