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Here's Why Stock Sell-Off Hurt USD Alone

By Kathy LienForexOct 11, 2018 04:14PM ET
www.investing.com/analysis/heres-why-stock-selloff-hurt-usd-alone-200348078
Here's Why Stock Sell-Off Hurt USD Alone
By Kathy Lien   |  Oct 11, 2018 04:14PM ET
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By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It was another rocky day in the foreign-exchange market with currencies taking their cue from equities. At the start of the NY session, the greenback traded lower against all of the major currencies but as the day progressed and stocks came off their lows, so did the U.S. dollar. In the past few days, the Dow lost what it earned over a 2-month period and given the magnitude of the moves seen this week, there’s no doubt that sentiment is shifting. Unfortunately the declines can become lasting as investors who fear further losses take profits on positions they have held onto for some time. A lot of money was made in the equity market over the past 2 years and with U.S. interest rates expected to rise further, liquidation or the usage of stops to protect these positions will become even more attractive to investors. And when these stops are triggered, the selling will exacerbate. The U.S. dollar has been falling all week but the decline in equities pushed it even lower. What’s unique about the recent moves is that risk currencies such as euro and the Australian dollar are not being hurt by risk aversion. Investors are looking at this as a U.S. story because the Federal Reserve is the only major central bank tightening monetary policy. The softer consumer price report added salt to the wound as economists had been looking for a strong CPI. Instead, price growth slowed to 0.1% in September with the year-over-year rate sinking to 2.3% from 2.7% the previous month. Is the dollar dead? Certainly not, but it could decline further before buyers come in.

Euro was one of the primary beneficiaries of U.S. dollar weakness. The single currency hit 1.16 on the back of anti-dollar flows and positive ECB minutes. Although the account of the last central bank meeting showed a concern that the risks are tilted to the downside, the ECB feels that the “uncertainty about their inflation outlook appears to recede.” We’ve heard quite a bit of comment from Eurozone policymakers recently about rising inflation including from President Draghi and the message is consistent, which is that price pressures are growing. Part of this is due to higher oil prices but the weaker euro also boosts inflation. While we could see more short covering in EUR/USD, the pair also has multiple moving-average resistance between 1.1.1580-1.1630.

Thursday's best-performing currencies were the Australian and New Zealand dollars. Considering that there was very little economic data out of the region, there are only a few reasons that we can point to for their outperformance. First, AUD and NZD have been hit particularly hard this year so they are benefitting the most from anti-US dollar sentiment. The Chinese yuan also experienced its strongest one-day rise in 5 weeks. Coming on the heels of the U.S.’ warning against currency devaluation and the Chinese government’s promise to not weaken its currency, some investors believe that this could mark a bottom for the yuan. Although we are skeptical of these hopes, if the yuan did bottom, it would be exceptionally positive for AUD and NZD. China's trade balance was due Thursday evening and softer numbers were expected. Still, for AUD and NZD, the most significant parts of the report will be import and export levels. The Canadian dollar also appreciated against the greenback but with house prices stagnating and oil prices falling sharply, its gains were limited.

Unlike euro, the Japanese or commodity currencies, sterling did not benefit from U.S. dollar weakness. It ended the day right where it started, which is a concern given the extent of the dollar’s decline against other currencies. Although EU Chief Brexit Negotiator Barnier said Wednesday that a deal next week is within reach, it still hinges on Prime Minister May's acceptance of a customs union. May is resistant as she said that she cannot in good conscience recommend a Brexit deal that places a trade barrier on businesses moving goods from one part of the UK to another so it remains to be seen whether she’ll be willing to concede. With a major EU Summit in less than a week, reports from Brussels show “no breakthrough yet” in the talks. Ireland’s Prime Minister isn’t optimistic – he said Thursday that a November deadline is achievable but may not be possible. So the bottom line is that until a deal is done, sterling traders remain skeptical.

Here's Why Stock Sell-Off Hurt USD Alone
 

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Here's Why Stock Sell-Off Hurt USD Alone

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Jhonny Cozzamara
Jhonny Cozzamara Oct 14, 2018 4:24PM ET
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Yep, she is good! One question: during this week-end summit in Nusa Dua a lot of officials raised their concerns over the italian debacle. Don't you think that this may hurt the Euro? Thank you
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Russ Monroe
Russ Monroe Oct 13, 2018 3:12PM ET
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She’s the best!!!
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Aben Reyes
Aben Reyes Oct 12, 2018 10:50PM ET
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Kathy conveys it clearly and ties everything up for the marketeers
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Oei Budi Widarsono
Oei Budi Widarsono Oct 11, 2018 11:21PM ET
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I love that girl
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Mohd Norhakimi Mohd Zaki
Mohd Norhakimi Mohd Zaki Oct 11, 2018 9:45PM ET
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I love this article!
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Ravi Verma
Ravi Verma Oct 11, 2018 8:11PM ET
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What I feel that buying at this level with long term prespective would be the best strategy.
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Neven Petrov
Neven Petrov Oct 11, 2018 5:56PM ET
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What kind of levels do you think these sell offs might trigger in the next 3 months...S&P for example?
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King Power
King Power Oct 11, 2018 5:56PM ET
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I donu0027t think she will give you positions to trade. Thatu0027s your job.
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Hussein Osman
Hussein Osman Oct 11, 2018 5:56PM ET
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Mid 26's for SP
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Moussa Raki
Moussa Raki Oct 11, 2018 5:31PM ET
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Just a narration
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Harry Taylor
Harry Taylor Oct 11, 2018 5:31PM ET
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she's not a signal service. read the narrative, make up your own mind.
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