The US Dollar Index, which tracks the greenback vs. its main rivals, has seen its upside suddenly renewed following the decision by the UK to leave the European Union at the referendum last week. The outcome has triggered a wave of so far perdurable risk aversion in the global markets, increasing the safe haven appeal of USD, CHF and JPY.
A priori, the current 2-day rally in USD seems to have more room to extend, as concerns over the ultimate economic and political implications of the ‘Leave’ vote in the UK seem to be just the emerging ‘tip of the iceberg’.
Volatility gauged by VIX has abruptly climbed to levels last seen in February around the 25.0 neighbourhood, reflecting the rising risk-off bias amongst market participants.
Removing support from the greenback, or at least not collaborating with the upside, US yields continue to retreat in tandem with its global peers, with US equity benchmarks tagging along: S&P500 testing the critical 2,000 pts while DowJones coming down to test the key 17,000 pts.
In the same direction, the probability of a rate hike by the Federal Reserve has drastically dwindled to levels close to zero until the December meeting, where it stands at levels just above 23%, when measured by the CME Group’s FedWatch tool. Market chatter over the weekend was even considering the likeliness of a rate cut by year-end.
Putting away the Fed’s prospects of monetary policy, it seems the near-to-medium term moves in the greenback will be largely determined by the developments coming from the divorce between the UK and the European Union.
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