Yesterday, there was no major news on the wire to trigger the minor selloff in global equities, so it was nothing else than a correction after a long rally following an ugly meltdown. As such, the S&P 500 and Nasdaq were slightly down, by around 0.20% each, the European Stoxx 600 retreated 0.47%, while the Nikkei gave back some of yesterday’s gains in Tokyo, as the USD/JPY fell and consolidated near the 145 level.
The US Dollar Index took another dive, however, and hit the lowest levels since the beginning of January. Citi analysts said that the carry trade is back but not with the Japanese yen but with the US dollar. They say that the positioning comes as a macro risk gauge dipped below neutral, but warned that there is only a small window of opportunity for the strategy to perform well as the election risks are looming. Additionally, the Fed risks are looming as well, and the greenback - now in the oversold territory according to the RSI index - doesn’t look appetizing for further shorting the dollars.
Data-wise, the final inflation numbers from the Eurozone brought no surprise. The headline inflation remained steady at 2.9% and core inflation ticked slightly higher from 2.5% to 2.6%. The numbers were soothing but the slowing disinflation and the strong wages growth in many European countries including France, Spain and Germany, were pointed as ‘worrying signals’ for the European Central Bank’s (ECB) struggle to bring inflation down to its 2% target.
The latter cast a shadow over what the ECB could do after the anticipated September cut. The waning dovish expectations gave a boost to the single currency yesterday. As such, the EUR/USD spiked past the 1.11 level. The US dollar’s broad-based weakness helped as well.
Now, the EUR/USD is in the overbought territory and a downside correction would be healthy. Across the Channel, the weak dollar pushed GBP/USD above an important psychological mark: the 1.30 level. The pair never traded meaningfully above this level since 2022 and a meaningful appreciation above this level means more to sterling bulls than just a policy divergence between the Federal Reserve (Fed) and the Bank of England (BoE).
Elsewhere, though, the tone was mixed. In Sweden, the Riksbank cut its rate by 25bp yesterday and said that it could lower its rate three more times this year. But despite that dovishness, the Swedish krona advanced against the greenback yesterday, and the USD/SEK fell to the lowest levels since March. Across the Atlantic, inflation in Canada fell from 2.7% to 2.5% in July as expected and marked the softest increase in consumer prices since March 2021. Core inflation fell to 1.7%.
The numbers were aligned with the Bank of Canada’s (BoC) forecasts that inflation would drop toward the 2.5% mark in H2. Although inflation is expected to rebound due to incoming base effects for gasoline prices, the numbers backed the dovish BoC expectations, yet here as well, the Loonie was bid against a widely offered US dollar.
Even the selloff in crude oil didn’t give cold feet to the CAD bulls. The USD/CAD fell to 1.36 and is about to test the 200-DMA to the downside. Needless to say the pair is also approaching an overbought territory and should see traders take a break and think what to do next.
In summary, no matter the news flow or the idiosyncratic expectations, the major story is the US dollar’s weakness – that I think has stretched to unfunded levels. Today, the dollar traders will have a close look to the FOMC minutes and the BLS preliminary revision to annual payrolls.
I don’t think that we will have anything major from the Fed minutes – plus, so much has changed since the last FOMC meeting with market expectations going to wild places – but the BLS’ revision could be interesting in that, economists at Goldman Sachs and Wells Fargo expect that the revisions will show that the payrolls growth in the year through March was at least 600,000 lower than currently forecasted.
Goldman says that the revision could be as high as a million lower, while JP thinks that the numbers will be revised by around 360,000 jobs to the downside. The bigger the downside revision, the higher the worries that the Fed has waited too much before normalizing and the crazier the Fed doves will go and the higher the pressure will be on the US dollar.
And of course, the dollar’s misery is making gold shine like a new penny. The precious metal advanced to a fresh record yesterday backed by the rising expectation of Fed cuts and the lower US yields. TD Securities says that the current positioning in gold is more consistent with levels that would suggest recession.
If you believe a recession isn't imminent, gold prices may be – perhaps – inflated. The EM central banks have indeed been buying gold to diversify against inflation and diversify away from the dollar and the uncertain geopolitical, financial landscape drives capital to the safety of the yellow metal.
Yet, Chinese consumers are reportedly cutting back their purchases due to high prices, the dovish Fed expectations look overpriced and the RSI index suggests that gold is about to step into the overbought territory and correction could be healthy at the current levels.