- The Greenback starts its week on a high note after breaking its weekly winning streak.
- Traders run for safety as Hamas attacked Israel over the weekend in its biggest offence in two decades.
- The US Dollar Index breaks back above 106.00 and looks primed to head higher.
The US Dollar (USD) is at ease on this US public holiday on Monday. Despite Columbus Day, the Greenback is soaring higher after it gapped up on Sunday night amidst headlines from Hamas attacking Israel with a major offensive not seen in decades. All bets are off with safe havens seeing massive inflows.
With an empty economic calendar, expect this Monday’s moves to be driven by the Israel-Gaza conflict. Several headlines from world leaders and organisations like OPEC+ are driving safe havens higher. Israel is preparing for retaliation while it proclaimed that Iran is behind the attacks, with Western leaders not yet confirming or backing these findings, showing the sensitivity of the matter and the interest in Crude Oil supply out of the region.
Daily digest: US Dollar supported
- Amidst all the headlines around Israel and Hamas, two US Federal Reserve members are due to speak this Monday: Near 13:00 GMT, Dallas Fed President Lorie Logan is due to speak. Near 16:45 GMT, Fed Governor Philip Jefferson will also speak.
- Israel has issued a statement saying that Iran is behind the coordinated attacks. Thus far, Western leaders have refrained from backing this statement. Meanwhile, US naval ships are on route to the region to provide support for Israel.
- Equities are down, though starting to pare losses as market participants get a grip on the situation at hand. If this recovery continues, expect to possibly even see green numbers near the end of this Monday.
- The CME Group FedWatch Tool shows that markets are pricing in a 78.9% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is closed for the US holiday. Expectations would be that yields will drop as bids for safe US bonds will soar to enormous proportions.
US Dollar Index technical analysis: Snaps its winning streak
The US Dollar is remorseless in its winning streak after a squeeze on Friday snapped its winning streak, which lasted for twelve weeks. The US public holiday keeps US bond markets closed, though where it was open, it would have triggered even more safe-haven flow into the Greenback. Expect for the US Dollar Index to still remain in its uptrend and look to reboot its weekly winning streak.
The US Dollar Index opened around 106.29, with the Relative Strength Index (RSI) easing down a touch after the DXY snapped its weekly winning streak on Friday. On the topside, 107.19 is important to see 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 should be seen as first support. Still, this barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to keep the DXY above 105.00.
Risk sentiment FAQs
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.
