- The Greenback heads higher again in a very volatile trading session.
- Import-Export numbers to point to a slow down, ISM inflation expectations pick up again to 3%.
- The US Dollar Index flirts with a jump above 107.
The US Dollar (USD) is picking up where it left off on Thursday, showcasing its resilience after one component of the monthly headline inflation gauge ticked up against all odds. Inflation fears got reignited again, triggering a bond sell-off. US yields soared, fueling the Greenback rally against most major peers. Where the US Dollar Index is trading at the moment, it looks like this week’s weakness was just a small decoupling, and more US Dollar strength is to be factored in.
This Friday the session is turning into a wild rollercoaster ride as Import-Export data trigger substantial US Dollar weakness. With the University of Michigan out now, the Greenback is back in the green. The US Dollar Index is trading back in the green for this Friday and for the week and could still eke out gains.
Daily digest: US Dollar volatility soars
- The US Import-Export numbers were a downbeat surprise and halted the Greenback rally in its tracks: For the monthly gauge, Export Prices went from 1.1% to 0.7%. The Yearly component went from -5.5% to -4.1%. The Import Price Index went from 0.6% to 0.1%. The yearly component went from -3% to -1.7%.
- The University of Michigan numbers are seeing the Sentiment Index drop from 68.1 to 63. The element that triggered the US Dollar rebounce is the Inflation Expectations component which soared back to 3% from 2.8% previous.
- Equities are not dealing well with the current shift in sentiment and are sliding lower: The Hang Seng is the biggest loser, down over 2%. European equities are retreating as well, though less than 1%. US equity futures are flat and clueless concerning direction for now.
- The CME Group FedWatch Tool shows that markets are pricing in a 90.2% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield soared to 4.66%, even briefly testing 4.69%. The surprise uptick in headline inflation reshuffled the bond market into higher rates again.
US Dollar Index technical analysis: Weekly gains saved by University of Michigan Inflation forecast
The US Dollar is playing tricks on investors and traders. After the US Dollar Index (DXY) briefly snapped its weekly winning streak, it snapped as well a very important technical ascending trendline that was supporting price action since July. After the surprise uptick in headline monthly inflation, it looks like the yield story is back in play and the US Dollar Index is set to restart its winning streak after a small hiatus.
The DXY opened above 106 and should at least be able to make a new high for this week, above 106.60. On the topside, 107.19 is important to reach if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.
Banking crisis FAQs
What happened during the Banking Crisis?
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency.
The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
How did Silicon Valley Bank spread the banking liquidity crisis?
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
What was the impact of the Banking Crisis on the US Dollar?
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
What was the impact of the Banking Crisis on the price of Gold?
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
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