Dollar roars higher; Wall Street stabilizes, for now

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XM Market Review
XM Market Review
  • Dollar remains king as major peers continue to lack appeal
  • Stocks calm down after drop, but perhaps only temporarily
  • BoC stands pat, but loonie drops as officials keep a lid on optimism

Dollar reigns over FX market, nears 2-year highs

The world’s reserve currency remains the undisputed king of the FX market, as investors continue to favor dollar-denominated assets amidst worries that the conflict between Washington and Beijing is slowly morphing into a new cold war. The greenback outperformed even the traditional safe haven in the Japanese yen, despite risk aversion being the dominant theme.

The dollar index is now flirting with 2-year highs, and what’s striking is that this strength is manifesting itself even in the face of falling US interest rates, as investors bet that a slowdown in growth will push the Fed to ease. This divergence highlights that growing rate-cut expectations are only one half of the puzzle needed to weaken the dollar. The other half depends on some other major currency, and especially the euro, becoming attractive enough to offer a viable alternative to the greenback – a condition that is not satisfied yet.

In other words, until one of the gloomy narratives in the other major economies improves, the outlook for the dollar remains bright overall. Even if incoming US data – like today’s 2nd estimate of GDP for Q1 or tomorrow’s core PCE inflation – disappoint, that may only be a temporary setback for the greenback, not a game changer.

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Meanwhile, look out for remarks by Fed Vice Chair Richard Clarida today at 16:00 GMT.

Key support barriers halt losses on Wall Street

Risk sentiment remained fragile for most of Thursday, with US stocks opening noticeably lower, but managing to recoup some losses late in the session. The benchmark S&P 500 index (-0.69%) found buy orders near its 200-day moving average – a key barrier that acted as reliable support last year. A potential break below that hurdle could shift the technical picture to negative.

Futures point to a higher open today, albeit only modestly so. Yet, considering that trade rhetoric continues to escalate, with China’s vice foreign minister saying today that US actions are ‘naked economic terrorism’, this stabilization in markets may only be a calm before the next storm. With tensions so heightened, it’s difficult to see even how negotiations can restart, much less an actual deal.

Loonie softens as BoC refrains from optimism

The Bank of Canada (BoC) kept its policy unchanged yesterday, as expected, delivering a broadly balanced view on policy. Policymakers noted that global trade risks have increased uncertainty, but at the same time maintained a broadly constructive view on the domestic economy, indicating that the housing market is stabilizing and investment is firming.

The loonie moved lower in the aftermath, despite the broadly neutral tone, mainly due to what the officials chose not to say. Instead of acknowledging that recent data have been much stronger than expected, they said they were ‘in line with expectations’, playing down their strength. They were probably trying to signal that the streak of solid numbers doesn’t mean that much, as the external risks could derail this recovery quickly, in case trade conflicts escalate further for instance.

The BoC’s Deputy Governor, Carolyn Wilkins, will speak today at 18:00 GMT and may try to clarify the rationale behind this decision. As for the loonie, with the BoC so mindful of risks and oil prices back on the retreat, any meaningful rebound seems unlikely for now.

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