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Sinking dollar lifts all FX boats


    • Dollar breaks down across multiple charts, without a clear trigger
    • Other major currencies climb alongside gold, Nasdaq hits new records
    • Today: European inflation, US manufacturing, and Fed’s Brainard

Dollar: The pain train rolls on

There is no shortage of volatility in the FX arena. The world’s reserve currency continues to break down, in fear that the Fed’s new regime shift may succeed in driving inflation higher and diminish the greenback’s future purchasing power.

The dollar index sunk to a fresh two-year low early on Tuesday, breaking crucial support levels across multiple charts, without anything in the way of news to justify the losses. Instead, this seems like a continuation move to the Fed’s signals,considering that 5-year breakeven inflation expectations continue to edge higher. The broader risk-on atmosphere may also be suppressing demand for defensive plays.

But the dollar’s troubles are usually a blessing for every other major currency, and that is exactly what is playing out today. Euro/dollar hugged the critical $1.20 handle before retreating somewhat, Cable is trading above $1.34 for the first time since late 2019, and the commodity-linked currencies are shining.

Gold is back in vogue as well, drawing power from the persistent recovery in inflation expectations that has not been matched by a similar spike in bond yields, and of course from the crumbling dollar. What truly matters for gold are real yields, meaning yields minus inflation, so if inflation expectations push higher but yields on bonds remain steady, then real rates fall and gold becomes more attractive.

Nasdaq gets all the love, futures point to more gains

In the equity market, it was a story of tech outperformance once again, with the Nasdaq 100 (+1%) cruising to another record, with the likes of Apple (+3.4%) and Tesla (+12.6%) being at the tip of the spear following their recent stock splits. Alas, other indices did not fare as well, with the S&P 500 (-0.2%) and Dow Jones (-0.8%) telling a story of caution.

For the Dow Jones in particular, Apple’s stock split is dire news that sets the stage for more underperformance. The Dow is a price-weighted index, so now that Apple’s stock price has been divided by four, its weight in the index is only 25% of what it used to be. This implies that the Dow will no longer benefit as much from the stock market’s star performer.

That is a longer-term narrative, though. For now, futures tracking the major US equity indices all point to a higher open on Tuesday, as the dominant theme is that inflation may be on the horizon, and stocks are considered a hedge against that risk. The fact that Trump is catching up to Biden in opinion polls in key battleground states may also be supporting the positive market tones.

Investors overlook the RBA, key events ahead

The Reserve Bank of Australia kept its policy unchanged earlier today. While policymakers stepped up their easing rhetoric a little, the market reaction was limited. The aussie did rise in the aftermath, though that seemed more like a reflection of the dollar’s troubles than genuine aussie strength.

The takeaway for currency markets was that the RBA did not express concern about the aussie’s rally, which implies we are still a long way off from levels where the Bank would jawbone the exchange rate.

As for the rest of today’s events, all eyes will be on the ISM manufacturing PMI and a speech by Fed board governor Lael Brainard at 17:00 GMT. Markets will look for clarity around how high of an inflation rate the Fed would tolerate exactly, what more it might do to get it there, and whether any action is possible before the election.

XM.COM Review

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-sinking-dollar-lifts-all-fx-boats-127714
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