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US Dollar Boosted, S&P 500 Threatened by Renewed China Tension

US Dollar Boosted, S&P 500 Threatened by Renewed China Tension

2020-05-22 15:45:00
Rich Dvorak, Analyst
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US DOLLAR SUPPORTED, S&P 500 INDEX PRICE OUTLOOK AT RISKAMID ESCALATING CHINA TENSION & LINGERING VOLATILITY

  • USD price action catches a bid owing to rekindled risk aversion and US Dollar demand
  • S&P 500 slides as US-China tension escalates and market sentiment deteriorates
  • Choppy ranges underscore the juxtaposition of coronavirus vaccine hope with fresh trade war uncertainty

The US Dollar gained ground while the S&P 500 Index edged lower headed into the final trading session this week. The latest slide in stocks, and move back into safe-haven assets like the USD, looks largely driven by an uptick in perceived trade war risk as tension escalates between China and the United States once again.

US 500 BEARISH
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Change in Longs Shorts OI
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In addition to the Senate Oversight Bill just passed by US Congress, which could force Chinese stocks to delist from American exchanges, President Trump has recently talked tariffs and increased his hawkish rhetoric aimed at Beijing.

US DOLLAR BOLSTERED, S&P 500 PRESSURED AS CHINA TENSION INTENSIFIES

US Dollar Price Chart SP500 Index China Tension

Chart created by @RichDvorakFX with TradingView

Investor exuberance nevertheless remains fostered by efforts toward reopening the economy from the ‘great lockdown’ and progress made on finding a potential coronavirus vaccine. This fundamental theme poses a conflicting driver that broadly enhances risk appetite and crushes volatility.

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In fact, stocks are now down only 10% year-to-date measured by S&P 500 performance while the VIX Index trades about 50-points below its recent swing high. Nevertheless, anxiety surrounding possible responses from China, as well as the chance that Sino-American relations worsen further, present material headwinds for the S&P 500 Index.

US DOLLAR TO YUAN PRICE CHART WITH S&P 500 INDEX OVERLAID

US Dollar to Yuan Price Chart China Tension S&P 500 Index

Chart created by @RichDvorakFX with TradingView

Market sentiment could keep deteriorating if stock prices continue sliding which, in turn, might facilitate an extended rebound in the broader US Dollar after getting hammered lower earlier this week. That said, the direction of the US Dollar against its Chinese Yuan (USD/CNH) peer could provide markets with a bellwether to where the S&P 500 heads next. This is considering the major EM FX pair has previously served as a trade war gauge.

Keep Reading – Stock Market Forecast: Should I Sell in May and Go Away?

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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