As traders return to their desks from their summer break we consider the prospects of the dollar int he coming week. Economic data makes a welcome return to switch focus away from the politics with Non-farm Payrolls topping the agenda. We consider the outlook for major forex, equities and commodities markets.
After months of outperformance, the US dollar has begun to struggle, begging the question, has the medium term dollar bull rally run out of steam? Trade fears have previously been a key driver of dollar strength as Donald Trump has picked disputes everywhere (Canada, Mexico, the EU, China, Iran, North Korea) with neither friend nor foe escaping his ire. He has played into his “America First” mantra causing significant ripples through global markets. Emerging markets have struggled with supply lines threatened, which has driven a move out of EM currencies and, with the Fed set firm on its tightening course, into the perceived safe haven of the US dollar. You could buy risk-free 10 year Treasuries that yield between 2.8% to 3.0%, or US equities with over 20% earnings growth as a viable alternative to bonds. However, there seems to be a shift in sentiment following slightly more dovish than expected comments from Fed chair Powell at Jackson Hole. Although nothing overly dollar negative, Powell, appeared to hint at gradual hikes ahead. EM currencies (e.g. Turkish Lira, South African Rand, Indonesian Rupiah) underperform on trade fears, but there are serious question marks of the dollar performance against the G4 majors (EUR, JPY, GBP). What was also notable was that on Friday, gold started to be supported on a safe haven flow, something not seen for months, even in the face of a stronger dollar. A hugely long dollar position could now begin to unwind. With strong medium term Dollar Index technical indicators on the wane, are dollar rallies now going to start to fade?
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