STO Fundamental - Dollar keeps gaining, but are equities at a turning point?

US rate hikes continue to dominate the agenda. Not only is this driving dollar strength and US treasury yields, but it’s also acting as a visible brake on commodity prices. With a whole raft of FOMC members speaking throughout the day ahead, the biggest risk would seem to be that the tone becomes even more hawkish, in turn accelerating these gains for the dollar.

The Traders’ View

Our prop desk is actively trading both sides of the USD/JPY trade, has booked some good profits off the back of yesterday’s oil slide, and is starting to see some of those long equity index positions finally start to come good.

Fundamentals – Dollar keeps gaining, but are equities at a turning point?


Growing conviction over the idea that we will see a rate hike from the Federal Reserve this month – augmented by last night’s hawkish FOMC member comments - continues to bolster the dollar across the board, but perhaps the most significant move is the fact that the equity rally is faltering. Yesterday the DOW posted its first triple digit decline of the year and given that accounts for a mere 0.5%, it underlines just how positive sentiment has been so far. If we see this slump sustained into the weekend break, then this could be the turning point for the Trump rally. Valuations are grossly overstated and a correction wouldn’t exactly be cause for surprise. With more Fed members due to speak later in today’s session, assuming there’s no turn around in sentiment then the equity slide could well be sustained.

The mood appears to be souring for the Australian dollar despite the upbeat economic outlooks we’ve seen reported from various channels in recent days. The key issue here is dollar strength hitting commodity prices, taking a toll on commodity currencies in general. AUD/USD is now back at levels not seen since the start of the month and with more US data due between 2.45pm and 3pm GMT this afternoon including a flurry of PMI readings, it seems as if the downside pressure on the Aussie dollar will be sustained.

Overnight we may have seen a temporary reigning in of the USD/JPY rally, but market consensus appears to be that this was simply a pause for breath. The prospect of those rising US interest rates is continuing to buoy treasury yields and this will continue to favour long dollar positions. In recent weeks we have noted how difficult this market has been to trade, but this could prove to be the foundations of a reasonable run higher for this pair.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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