- The BRATS currencies - Brazil, Russia, Argentina, Turkey, and South Africa - are facing another wave of pressure, weighing on global risk appetite.
- The Bank of Canada's rate decision should bring little new information, although traders will be looking for clues for the timing of the next rate hike.
- Retail trader sentiment is decidedly mixed on the US Dollar at the start of September.
The US Dollar (via the DXY Index) continues to start September on strong footing, rallying modestly thus far on Wednesday for what would be its fourth gain in five days. Prior to the recent topside effort, the DXY Index had lost ground in eight of the previous nine sessions.
Generally speaking, when price moves in one direction for a sustained period of time, it is very likely that a limited set of factors are consistently making their presence felt. For the past several weeks, no factors have been more prominent than US-led trade wars or emerging market contagion (a result of rising US interest rates and a stronger US Dollar itself).
Now that trading conditions have normalized, or are nearly back to normal given the end of the summer, investors are measuring the risks that have popped up in recent weeks and weighing the odds of the summer's problems continuing into the fall. If trading conditions at the start of September are any indication, then traders should buckle up for what will likely be a very volatile month.
Ongoing pressure in the BRATS currencies - Brazil, Russia, Argentina, Turkey, and South Africa - will only cater to higher demand for the US Dollar in the short-term. Ironically, it was the strong US Dollar (and higher US interest rates) that provoked concerns over emerging markets to begin with, and it has been a strong US Dollar that has emerged in the wake of said concerns; a circuitous feedback loop.
Elsewhere, attention is on the Bank of Canada this morning, even though no change in policy is anticipated. But rates markets are pricing in another 25-bps rate hike by the end of the year, with overnight index swaps suggesting an 88% chance of a 25-bps hike by December. Given developments in growth, inflation, and labor data, there is a strong argument to be made that the BOC would have already hiked rates again this year but for the overhang of the NAFTA negotiations.
DXY Index Price Chart: Daily Timeframe (January to August 2018) (Chart 1)
Overall, the DXY Index is finding more favorable footing in the short-term. Price is now back above its daily 8-, 13-, and 21-EMA envelope, while both daily MACD and Slow Stochastics have started to retrace their recent turns lower; the former is close to issuing a buy signal in bullish territory. As such, a 'neutral' bias is still applicable at the moment, but further price development through prior key resistance at 95.53 would give cause for an upgrade assessment moving forward.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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