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US dollar bulls looking closely at trade talks this week


The outcome of the US/China trade negotiations remain key for the near to medium term outlook on markets. The US dollar is a key mover on this. We look at how this is impacting on the outlook for forex, equities and commodities.

dollar

Markets move on relatives. How one country performs relative to another? In forex, interest rate differentials (i.e.  one country’s bond yields relative to another) are key. It affects the carry trade. Is one yield moving higher or lower relative to another? On 30th January, the Fed shifted its monetary policy as it hit the pause button on rate hikes, opting to be more “patient”. Since then, the US 10 year yield has fallen by around 5 basis points. A dovish move that should be dollar negative, you would think. However, the dollar has strengthened decisively, with the trade weighted Dollar Index rallying from c. 95.5 to 97.1 (over 1.5% higher). EUR/USD has fallen from $1.15 to below $1.13, and USD/JPY rallying from 109 to 110.5. How could this be? Markets are taking a view that if the Fed is turning cautious when the US economy is holding up so well, what does this mean for central banks such as the ECB and the People’s Bank of China who are presiding over proper slowdowns? The 10 year Bund yield has fallen 10 basis points to a new two year low. Perhaps the US Government shutdown has played a curious role here as US economic data has been unable to be released during a time in which growth indicators of the Eurozone and China have suffered. Whether the US economy is really such an outlier will all come out in the wash in the coming weeks as the bottleneck of US data is released. However, US retail sales gave a glimpse of weakness last week and if this is not such a rogue data point, the relative strength of the dollar may begin to struggle for traction.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.