Tickmill UK Daily Market Notes

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Dollar to come back?
Yesterday, the dollar index broke through support at 94.50 and touched the level of 94.30 before the recovery.

For several days I have been writing about the comeback of US, and today it finally seems as it might happen.

Yesterday, the dollar index broke through support at 94.50 and touched the level of 94.30 before the recovery, but what is interesting is that there is still no full-scale sell-off of the dollar. The joint move of the major currencies in the dollar index, ie. EUR, JPY, GBP, and CAD, shows that they exerted uneven pressure on the dollar in the last two weeks. In particular, the leaders of growth were CAD and EUR, while JPY and GBP grew weaker, i.е. incidentally reacting on domestic issues in Japan and UK:



Approximately for the same period there was an outflow from German Bunds, one of the main indicators of risk-taking. Their yield has grown with the hopes that the EM storm has passed. Euro could receive the boost particularly from the bond market outflow:



The Turkish lira remains a risk factor – today USDTRY is already 6.30, while the other EM currencies are also in negative territory, though in modest terms.

And the reason is one, every new portion of good economic data means tighter Fed policies, which means the contraction of dollar liquidity and as a consequence troubles for countries that borrowed heavily in dollars, for example Turkey.

What has happened to signify a likely positive change for the US economy? The index of consumer optimism jumped as much as 133.4 points in July. The market had not seen such significant rise in 18 years! The US trade deficit widened to 72.2 billion dollars, slightly higher than expected, but now it is less important.

It was clear that the market overestimated Powell’s speech in Jackson Hole, there are already articles in the FT, what Powell is cunning and that he wants to please everyone. In my opinion, the Fed will raise the rates at planned, and as such, I could argue that we should not expect a deviation from the course when consumer optimism is breaking records. We recall that consumption is the main component of growth in the US -72% of GDP. And if you take into account the leading nature of the indicator, then such a leap definitely lays the foundation for good wages and as a consequence leads solid figures in consumer inflation.

The dollar could receive a boost from the economy’s side from today. Today, data on GDP, tomorrow on consumption, in general, there is something to focus on, while politics is on the sidelines. The data will probably become an additional trigger for strengthening the dollar.

The Chinese yuan is falling today, though cautiously, the news of the inclusion of a counter-cyclical factor in the calculation so far is weakly asserting itself. Gold is just above the opening, but is trying to go below 1200, hinting that the correction after the dive at 1160 may be over. The National Development and Reform Commission published on their site a bitter note that some goals in the second half of the year may not be achieved. So it is not surprising, tariffs caught China at the time of barely noticeable signs of the economy’s weakness and a large-scale campaign to reduce financial leverage in the economy. Now, they can’t keep pursuing all goals at once – either go back to easing mode and keep accumulating debt, or sacrifice growth, but smooth out the negative effects of previous stimulus package. The burden of this hard trade-off will now hang for a long time on the shoulders of the Chinese authorities.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.