US Dollar Riding August Uptrend as Risk Appetite Deteriorates
- Surge in Yen and Gold, drop in global equities a foreboding sign ahead of the weekend: risk appetite is souring again.
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All in all, as we tear another page off the calendar, it seems that the past week was fairly quiet: no central bank policy decision; no major economic data that would materially alter the outlook for the major currencies.
What has been noteworthy, however, has been how risk appetite has been slowly deteriorating through August, even as the US Dollar rebound (via DXY Index) has gathered pace. Certainly, next week will raise the bar in terms of expectations for market-moving commentary from policymakers, with the Federal Reserve's Economic Policy Symposium set to take place from August 24 to 26.
Given how sensitive higher yielding currencies and risk-correlated assets are behaving right now - remember how markets reacted to US President Trump disbanding his Strategy and Policy Council earlier this week? - any sense of incompetence among central bankers could easily be amplified within the FX space in the form of heightened volatility (something that has been sorely lacking).
Yet even before then, as we head into the weekend, it is important to recognize that risk appetite is flashing some warning signs (not too dissimilar from earlier this month) that suggest it may be a good idea to reduce leverage and unwind some risk before markets close today.
The stark contrast in performance the DXY Index and USD/JPY is one of those signs: DXY continues to ride its August uptrend; yet USD/JPY itself is near its monthly lows. Concurrently, Gold is now challenging the April and June 2017 highs near 1295. For good measure, US equity markets have offered a third signal, with the S&P 500 now having broken its uptrend from the start of the year.
Typically, Yen and Gold strength alongside weakness in equities is not viewed as a positive development for risk appetite. Now that US political risks seem to be heating up, with the Jackson Hole Economic Policy Symposium next week, we may finally see a rare August volatility surge.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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