Market Overview

29 July 2020

A Short Time-Out for "Big Short" Positions on the Greenback

September Futures for the U.S. Dollar Index (DXU0), which tracks the Greenback weighted average position against a basket of six other currencies, are already four % down since the beginning of July. Now they are located more than ten % lower than its highest values in March, at the peak of the quarantine-related safe-haven demand for the U.S. currency. After such a long trip, some currency pairs may take a kind of time-out for the nearest couple of trading sessions, ahead of the proposed announcement of the U.S. Federal Reserve’s (Fed) newly adjusted plans during the Fed Chairman’s press conference at 18.30 GMT this evening. 

However, both the British Pound and the Japanese Yen have managed to rewrite their four-month highs once again over the previous hours, while the Australian Dollar has updated the year's high in the vicinity of 0.72 psychological resistance. The Chinese Yuan showed its highest value in 30 days against the U.S. Dollar with USD/CNY touching below 6.9950 despite all the U.S.-Sino public tension and hostile rhetoric that is intensifying as a possible attempt to make a boxing hook during the knock-down-drag-out for the presidential fauteuil in the White House and for the parliamentary seats in Congress. All these signs in currency movements maybe be rather hinting at  just a short pause in the Greenback schussing journey than at an opportunity of any sharp exit for most investors from the comfort zone in their "big short" bets on the U.S. Dollar further sliding motion. 

The Fed is expected to conclude its two-day meeting on Wednesday with a very low probability of big surprises. The U.S. regulator is likely to stick to a clearly dovish stance in its policy review, and some part of the market's reaction may depend on a gloomy or a complacent mood in the forecasts voiced by Chairman Jerome Powell. The market participants may be very interested especially in his comments on the drop of the U.S. gross domestic product (GDP) for the second quarter, which will be published officially on Thursday. Analysts polled by Bloomberg expect an average horrible decline of the GDP of around as much as 34%. Although the second quarter’s bottom is already in the past, and it may be thought that the past is dust, because the American economy has clearly rebounded from that bottom, the official attitude of the monetary authorities to the reality of current Q2 estimates and to the dynamics of this indicator in nearby months are very important. 

There are also reports that the coronavirus is waning in some of the previous hotspots for the infection, like California and Florida, with a clear drop in new detected cases and much lower fatality vs spring figures. But the paradox is that the minimisation of the virus influence eliminates the need for the safe-haven U.S. bond buying, and this situation is weighing on the U.S. Dollar almost as much as the eroding confidence in the broad and fast recovery of the U.S. economy. It is still unclear as to when and in what form the coronavirus relief proposal will pass Congress. Any possible delay creates more downside risks to the U.S. recovery, and some Republicans in the Senate railed against their own party's $1 trillion package ideas, as some Democrats are calling for a much larger and general package of $3 trillion. "The prospects for a more pronounced and longer lasting US Dollar rebound appear to be limited, with the Dollar remaining in a structural bear trend, in our view,” said analysts at ING yesterday in their research note. 

Perhaps, emerging market currencies, such as the South African Rand or the Russian Rouble, are a little less active now, since they are getting less attention from financial capital flows for carry-trade strategies due to the subtle downside correction of the S&P500 broad market index. Major European stocks are not the queen of the ball too, because of high-flying gold and other precious metal prices. There are more alternatives for investors, but the risk-on mood may come back soon, when the season of not the best corporate reporting for the same second quarter ends. 

For example, as for the subtle decline in the major European stock indexes yesterday, they were most affected by the reporting of the luxury goods segment, which is mostly affected by the quarantine and lack of extra money owned by its regular customers. LVMH brand, which includes Louis Vuitton and Moët Hennessy French multinational conglomerate slid 2.8% more on Tuesday as Q2 reports showed that store closures tore a big hole in the luxury giant's second-quarter sales. Gucci owner Kering and France's Hermes stock prices also dropped, as well as Moncler, which makes luxury puffer jackets, slipped by four% after reporting a first-half operating loss for the first time in its history. 

The French carmaker Peugeot reported a sharp drop in its net profit in the first half of 2020, but the company reiterated the concern was aiming for a "solid rebound" in the second half of the year. Most of the disappointing figures in different reports for the second quarter already are widely expected , so much so that suffered European stock indexes began to recover today. And now global markets are preparing to breathe easier after experiencing the likely volatility of expensive and popular high-tech stocks after probably positive quarter reports from Amazon, Apple, Facebook, Google and others on July 30 and the reaction which will probably follow until the very end of the week.



Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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