Has the USD bottomed?

Equity market sentiment seems to be rolling over globally as the wind begins to come out of the oil price rally.

Source: Bloomberg

For Australia, even the recently announced RBA rate cut and the Federal budget’s promise of a 25% corporate tax rate may not be enough to help the market hold on to yesterday’s gains. The US dollar also broke its six session losing streak overnight, gaining 0.4% in the DXY dollar index and 0.7% in the Bloomberg dollar index. The US dollar has dropped to some of its lowest levels seen since January 2015, but two Fed speakers came out last night and were very keen to talk up the possibility of rate hikes in June. While a Fed rate hike in June seems unlikely, it is perfectly sensible for them to talk up the possibility to prepare markets for a potential rate hike in 3Q.

Click to enlarge

If this is the Fed’s game plan and we begin to see a slew of Fed speakers getting more hawkish, the US dollar may start to gain from its very low levels. This may mark the turning point for the mid-February rally in commodities. WTI oil has already lost 5.1% over the past three sessions, and the CFTC report is showing net futures positions in oil last week reached their most bullish in two years, which is a pretty strong signal that a reversal is on the cards. Although the slightly smaller than expected US inventories build in the API report produced a temporary bounce. Iron ore and copper followed oil down overnight losing 4.3% and 2.1%, respectively, as momentum came out of China’s most recent PMIs.

Given the very close correlation between oil price movements and equity markets, this should be a concern for near-term performance. Although it is the MSCI Emerging Markets index that has the closest correlation to the oil price, and over the past four sessions it has already dropped 4.5%. Overnight we also saw a noticeable increase in credit spreads in fixed income markets, often a clear sign of nervousness in markets. HYG, the main high yield bond ETF, lost 0.7% over, another market closely correlated with oil.

The combination of the RBA rate cut, bounce in the US dollar, and wilting commodity prices is setting the Aussie dollar up for a fairly sustained drop. The Aussie dollar lost 2.3% overnight, and crucially broke through its key support level at US$0.75. If we do start to see consistent momentum behind this selloff, a move down to US$0.72-$0.73 could happen within a week.

Aussie banks’ American Depositary Receipts (ADRs) had a good session overnight, and any hope that the ASXwill manage to hold onto yesterday’s gains will largely rest with them. Given the move in commodity prices, the materials and energy sectors are set for a difficult session. We are calling the ASX to open 0.7% lower.

Click to enlarge

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.