Why the Sell-off in Stocks Only Hurt the Dollar
Daily FX Market Roundup 10.11.18
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
It was another rocky day in the foreign exchange market with currencies taking their cue from equities. At the start of the NY session, the greenback traded lower against all of the major currencies but as the day progressed and stocks came off their lows, so did the U.S. dollar. In the past few days, the Dow lost what it earned over a 2-month period and given the magnitude of the moves seen this week, there’s no doubt that sentiment is shifting. Unfortunately the declines can become lasting as investors who fear further losses take profits on positions they have held onto for some time. A lot of money was made in the equity market over the past 2 years and with U.S. interest rates expected to rise further, liquidation or the usage of stops to protect these positions will become even more attractive to investors. And when these stops are triggered, the selling will exacerbate. The U.S. dollar has been falling all week but the decline in equities pushed it even lower. What’s unique about the recent moves is that risk currencies such as euro and the Australian dollar are not being hurt by risk aversion. Investors are looking at this as a U.S. story because the Federal Reserve is the only major central bank tightening monetary policy. The softer consumer price report added salt to the wound as economists had been looking for a strong CPI report. Instead, price growth slowed to 0.1% in September with the year over year rate sinking to 2.3% from 2.7% the previous month. Is the dollar dead? Certainly not but it could decline further before buyers come in.
Euro was one of the primary beneficiaries of U.S. dollar weakness. The single currency hit 1.16 on the back of anti-dollar flows and positive ECB minutes. Although the account of the last central bank meeting showed a concern that the risks are tilted to the downside, the ECB feels that the “uncertainty about their inflation outlook appears to recede.” We’ve heard quite a bit of comments from Eurozone policymakers recently about rising inflation including from President Draghi and the message is consistent, which is that price pressures are growing. Part of this is due to the higher oil prices but the weaker euro also boosts inflation. While we could see more short covering in EUR/USD, the pair also has multiple moving average resistance between 1.1.1580-1.1630.
The best performing currencies today were Australian and New Zealand dollars. Considering that there was very little economic data out of the region, there are only a few reasons that we can point to for their outperformance. First AUD and NZD have been hit particularly hard this year so they are benefitting the most from anti-US dollar sentiment. The Chinese Yuan also experienced its strongest one day rise in 5 weeks. Coming on the heels of the U.S.’ warning against currency devaluation and the Chinese government’s promise to not weaken its currency, some investors believe that this could a mark a bottom for the Yuan. Although we are skeptical of these hopes, if the Yuan were to bottom, it would be exceptionally positive for AUD and NZD. China will be releasing its trade balance this evening and softer numbers are expected but for AUD and NZD the most significant parts of the report will be import and export levels. The Canadian dollar also appreciated against the greenback but with house prices stagnating and oil prices falling sharply, its gains were limited.
Unlike euro, the Japanese or commodity currencies, sterling did not benefit from U.S. dollar weakness. It ended the day right where it started which is a concern given the extent of the dollar’s decline against other currencies. Although EU Chief Brexit Negotiator Barnier said yesterday that a deal next week is within reach it still hinges on Prime Minister May acceptance of a customs union. May is resistant as she said that she cannot in good conscience recommend a Brexit deal that places a trade barrier on businesses moving goods from one part of the UK to another so it remains to be seen whether she’ll be willing to concede. With a major EU Summit in less than a week, reports from Brussels show “no breakthrough yet” in the talks. Ireland’s Prime Minister isn’t optimistic – he said today that a November deadline is achievable but may not be possible. So the bottom line is that until a deal is done, sterling traders remain skeptical.