The US Dollar (USD) is having a change of heart ahead of the US trading session and is weakening again, while in European trading hours the US Dollar tried to trade in the green. The Greenback is down over 0.50% against the Japanese Yen (JPY) and the Chinese Renminbi (CNY) as the overall risk sentiment looks to be in favour of risk-on investment, with equities soaring and safe havens abating, adding to the depreciation call for the Greenback.
The calendar for this Tuesday is picking up pace, with one main event right at the end of the day: the FOMC Minutes from the latest Federal Reserve (Fed) meeting in November, when the central bank opted to leave interest rates unchanged. Traders and analysts will look for clues and side remarks on whether inflation is coming down quickly enough for the Fed to end its hiking cycle and either stay steady or enter a cutting cycle immediately thereafter. On Monday, the Chicago Mercantile Exchange (CME) Fed Fund futures, a tool that gauges market expectation of potential changes to the Fed funds rate, briefly priced in a small possibility of already a rate cut at the upcoming December meeting.
The US Dollar is sticking to the technical approach after on Monday it breached the 200-day Simple Moving Average (SMA) at 103.62 when gauged by the US Dollar Index (DXY). The Fed FOMC Minutes could briefly provide some support and ease the Relative Strength Index, which is starting to trade in the oversold area on the daily chart. Although relief, do not expect a substantial turnaround as the market broadly anticipated that the Fed is done hiking, at least for now.
The DXY was unable to bounce off the 100-day SMA and is treading further water at the 200-day SMA. Look for the recovery bounce towards the 100-day SMA near 104.20. Should the DXY be able to close and open above it, look for a return to the 55-day SMA near 105.71 with 105.12 ahead of it as resistance.
Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially. The 200-day SMA is trying to keep everything together, though it is losing its impact quickly. The psychological 100-level comes into play. With a very slim economic calendar and several US market participants off the desk for the holidays, there is room for a potential big downturn this week.
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.
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.
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.
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.