Looking for the light amidst the USD pressure

The strong dollar appears to be placing a lid on the equity market rally in the US, forming weak leads at the start of the week.

US flag
Source: Bloomberg

Meanwhile, concerns remain on the stress the stronger USD has placed on Asian markets.

The markets continued to play by the same theme following the December Fed FOMC meeting decision, holding up the US dollar and allowing the equity markets to trend sideways, providing little inspiration for markets at the start of the new week. The S&P 500 index was last seen in moderate red on Friday while the DJIA held off printing fresh highs for a second session. Notably, a strong technical resistance is seen for the DJIA, ahead of the key psychological barrier at 20,000 level, keeping the upsides capped.

Early movers including the KOSPI and Nikkei have slipped into the red, down by more than 0.20% when last checked at 8:45am (Singapore time) and the HSI and MSCI Singapore Index look set to join. A quick recap finds that amongst the Asian ex-Japan markets, MYR, KRW and SGD have led the decline against the USD when compared to levels prior to the President-elect Donald Trump’s victory. Meanwhile the offshore CNH was seen in the middle of the lot, down approximately 2.3% against the USD. Despite this fact, the market’s attention have been paid extensively to capital outflows for the Asian giant and have taken a toll on both China and regional equity markets.

A stronger USD coupled with the government’s clamping down of outflows have taken the spotlight in the discussion of China’s markets. With the latest Fed FOMC outlook exacerbating yuan weakness against the dollar, the consensus has been that the issues have snowballed.

Dwindling reserves, incoming stressor in the form of a reset for the $50,000 individual conversion limit and the diminished likelihood of a year-end profit-taking in the US taking have kept the outlook dim for the Chinese yuan. The light at the end of the tunnel could nevertheless shine through from a relief in the ongoing trends in the US. As things stand, the market could wait another six months before seeing the next Fed hike and as Federal Reserve Bank of St. Louis President James Bullard emphasised, there would be some time until the impact from Trump’s policies could be seen.

Separately, Japan’s November trade performed better than the market consensus. Exports came in at -0.4% YoY, up from -10.3% YoY previously and outperformed the market’s expectation of -2.3% YoY. Albeit remaining in negative territory, this is the highest figure printed since September 2015 and would have the sliding JPY to thank.

Friday: S&P 500 -0.18%; DJIA -0.04%; DAX +0.33%; FTSE +0.18%

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