US Dollar retreats a touch while Nvidia advances in a surge of risk appetite in US equities

The US Dollar turns lower with the US session kicking off the week.
Traders will focus on US inflation numbers later this week.
The US Dollar Index steadies around 102.00, though technical rejection on Friday points to more downturn ahead.

The US Dollar (USD) trades a bit softer this Monday after the start of the US trading session. Main driver for the step back is the Risk On mode that is being switched on with the US opening bell. Mainly the Nasdaq is leading the charge, up over 1% while Nvidia shares hit a fresh all-time high, sparking a positive tone across the board with even the Dow Jones in green, despite Boeing shares sinking after the incident over the weekend with a broken down door in full flight mode.

On the economic front, a calm Monday is ahead with only Consumer Credit data for November due. The focus on credit numbers, loans and defaults is likely to grow in the coming months as several banks signal they are seeing more payment delinquencies. For this week, the main event will be the US inflation numbers on Thursday.

Daily digest Market Movers: Nvidia takes over this Monday

Nvidia shares are jumping higher, hitting a new all-time high and triggering a wave of risk appetite with a mild negative US Dollar as end result.
Tensions are building up further in the Middle East after Israel claims it discovered Chinese weaponry in a Hamas depot.
China's biggest construction firm Evergrande sinks 17% in Hong Kong after reports that its Vice Chairman has been detained.
Tit-for-tat between China and the US, with China sanctioning five US defence industry companies after a US arms sale to Taiwan.
Dallas Fed President Lorie Logan said that the Fed should begin discussing a slowdown in its balance sheet runoff.
The US Treasury is taking a stab at the markets by placing a 3-month and a 6-month bill at 15:30 GMT.
US Consumer Credit Change for November is due to come out at 20:00 GMT, with credit expected to jump from $5.13 billion to $9 billion.
Equity markets are in the red across the board at the start of this week. Dow Jones futures are leading the decline, down near 0.50%.
The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place.
The benchmark 10-year US Treasury Note is pulling back further from the high of Friday and looks ready to snap back below 4% in the US trading session.

US Dollar Index Technical Analysis: Rates tell it all

Bets on the US Dollar look split. On the one hand, traders place bets favoring the US Dollar due to increasing geopolitical tensions in the Middle East, with ongoing headlines over the Red Sea and Chinese weaponry found in Hamas storages by Israel. On the other side, traders see reasons for quick rate cuts by the Fed after the implosion of the ISM numbers last Friday. Expect geopolitics to take over control for now, as long as new headlines point to further heightened tensions.

In the DXY US Dollar Index, the first level on the upside is 103.00, which falls nearly in line with the descending trend line from the top of October 3 and December 8. Once broken and closed above there, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be a bit too far off, with 103.93 (55-day SMA) coming in as the next resistance on the upside.

To the downside, the rejection on the descending trendline is giving fuel to the Greenback bears for further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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