- The Greenback partly recovers Friday’s losses.
- US Treasury yields trade sideways around 4.61%.
- The US Dollar Index is trying to recover from last week’s drop, though still has a long way to go.
The US Dollar (USD) is recovering further and picks up speed as the US session kicks off. Traders are trying to let the dust settle in the aftermath of the disappointing US jobs report. Instead, investors try to look forward and might see the US Dollar Index recover some partial losses.
On the economic data front, a few more data points after a very calm Monday. The US trade balance already came out and revealed a bigger than expected deficit. Meanwhile, speeches from Fed Governor Christopher J. Waller and New York Fed President John C. Williams f might deliver some more interest-rate guidance to the markets.
Daily digest: US Dollar stronger despite bigger deficit
- A few suprise comments from Chicago Fed member Austan Goolsbee, who said the Fed will not precommit to any rate decisions. The Fed is paying attention to the movements in the bond market though.
- China trade data showed a decline in exports by 6.4%, while imports rose by 3.0%.
- US Goods and Services Trade Balance for September saw an even bigger deficit of $-61.5 billion, against the previous $-58.7 billion.
- The Redbook Index went from 5.3% to 3.1%.
- Many Fed speakers will take the stage: at 15:00 GMT Fed Governor Christopher J. Waller is due to speak, followed by New York Fed President John C. Williams at 17:00 GMT.
- The US Treasury is heading back to the markets for a 3-year note auction .
- Consumer Credit Change numbers for September are due atr 20:00 GMT: Previous data saw a decline of $15.63 billion, and an increase of $10 billion is expected.
- Asian equities are setting the tone: red. That comes on the back of weaker export data out of China. Asian equities are all down over 1%. European equities are mildly in the red, as they areUS equity futures.
- The CME Group’s 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 December.
- The benchmark 10-year US Treasury yield trades at 4.61%, finding some calmer ground after the volatile week last week.
US Dollar Index technical analysis: US Dollar sees glass half full
The US Dollar is no longer speculators’ favoured trade this year. Recent data from the Commodity Futures Trading Commission (CFTC) sees US dollar contracts coming off their highs. This means that speculators are starting to unwind their US Dollar Index holdings. This could be a sign that more profit taking is underway, and that more weakness could be in the cards for the Greenback.
The DXY is looking for support near 105.00, though it is struggling to find it. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A return first to 105.51 would make sense, near the 55-day Simple Moving Average (SMA). A break above could mean a test on the descending trend line near 105.88.
On the downside, a big air pocket is developing and could see the DXY drop to 103.98, near the 100-day SMA, before finding ample support. In case it turns into a falling knife, 103.52 – the 200-day SMA – could act as circuit break. If that level snaps as well, the road is open to head to 101.00.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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