US Dollar dispersed as Yuan rallies and Jackson Hole Symposium puts traders on high alert
- US Dollar price takes a step back with Scandinavian currencies as biggest winners this Monday.
- Traders will try to keep their powder dry for the main event on Friday with US Fed Chair Powell's speech at Jackson Hole.
- The US Dollar Index slides lower as Yuan strenghtens in volatile intraday session with a 6-figure intraday move from high to low.
The US Dollar (USD) takes a broader step back near the US opening bell with Scandinavian currencies as the Norwegian Krone and the Swedish Krona are the biggest winners against the Greenback. Next to that the Chinese Yuan is making waves and weighs on the Greenback after local Chinese banks were forced to sell the Greenback and buy Yuan locally, ordered by the People's Bank of China (PBoC). Traders are facing one of the pivotal moments each year in the financial calendar: The annual Jackson Hole Symposium is due to take place on Friday where US Federal Reserve chairman Jerome Powell will give an important speech that could prove to be a game changer for the Greenback’s performance throughout the last quarter of 2023.
A very calm Monday thus gets underway as traders prepare for Jackson Hole and keep their powder dry in the meantime. On the economic data front, no real data points of meaning coming out. Meanwhile, some attention leans toward China as markets reacted with disappointment to the small rate cut by the Peoples Bank of China (PBOC) overnight. The policy change has made equities slump at the start of the week.
Daily digest: US Dollar choppy
- Local Chinese banks stepped in during European and US trading hours and are selling the Greenback, buying Yuan in order to support the local Chinese currency. The USD/CNY slides from nearly 7.3380 to 7.2825, in a wild trading session moving nearly 6 figures intraday.
- More headlines out of China during European trading session as the Chinese goverment asks banks to ease controls and requirements for car loans, in order to boost demand.
- The China's onshore Yuan closed its domestic session at 7.3139 per US Dollar (USD/CNY), the weakest level since November 3rd, 2022.
- China has cut the five-year loan rate less than expected by 10 basis points to 3.45%, which is triggering a backslash in global markets for the Yuan and the Chinese stock market. At least 15 basis points were pencilled into expectations. Meanwhile mortage rates remain unchanged.
- Belarusian forces are conducting drills near the Polish border.
- Over the weekend China held military drills near the Taiwan Straight.
- At 12:30 GMT, the Chicago Fed National Activity Index for July will be printed. The previous number was a slight contraction at -0.32, but no expectations are available.
- The US Treasury will auction a 3-month and a 6-month bills at probably high rates based on the recent jump across the whole US yield curve.
- The BRICS convention is set to take place this week in South Africa with the conglomerate welcoming nearly 20 new members. Major theme will be the discussion on dedollarization and the setup of a payment system between the nations.
- China is being singled out in the stock market this Monday. The Hang Seng Index drops over 1.7% percent on the day, while Japan closes up 0.20%. European equities are shooting higher together with US futures toward the Monday opening bell.
- The CME Group FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.29% and is back up after its decline on Friday. The bond market in particular will be very sensitive to any news on Friday at the Jackson Hole Symposium. The whole US yield curve could move up or down depending on the speech from Fed chairman Jerome Powell.
US Dollar Index technical analysis: Yuan trips Greenback
The US Dollar decline is starting to add into its losses on Monday with the US Dollar Index (DXY) breaking below important downside support in the form of the 200-day Simple Moving Average (SMA) at 103.20. The Greenback retreats a touch this Monday as traders will try to keep their ammunition dry for the main event on Friday. Expect any sudden moves or breakdowns to be rather headline driven and short-lived for the most part this week.
On the upside, 104.00 is the level to reach. The high of Friday at 103.68 is vital and needs to get a daily close above it in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become the reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.20, which got broken very briefly past Thursday. Passing below the 103.00 figure, some room opens up for a further drop. However, around 102.34 both the 55-day and the 100-day SMAs await to catch any falling knives.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
