Tensions between the US and China could re-escalate. How us the greenback trading now and what could be next? ADS Securities shares with you their latest 24 May US Dollar Trading Outlook.
24 May, ADS Securities – The re-escalation of tensions between the US and China and concerns that Trump’s meeting with North Korean leader Kim Jong Un might not happen after all send chills down investors’ spines. A coordinated flight to safety is what we’re seeing during the past 24 hours with risk-off instruments like the Yen scoring gains and equities trading in the red. At the same time, this deterioration in risk sentiment pushed Treasury yields below the key 3% level overnight forcing the Dollar to come off its highs.
24 May US Dollar Trading Outlook
The major question that we discussed yesterday was whether this risk-off rally has more room to grow and we stated that we don’t see that as our primary scenario. Dwelling on this question a little more, we see two distinct issues right now: one is how the Dollar will trade going forward and the other is what we should expect from equities. Starting with the Dollar, it is true that we’ve seen a mild slowdown in data recently but this comes on the back of some impressive figures from the US so the downtick should not be a concern. At the same time, yesterday’s PMIs beat expectations and even though the Fed minutes didn’t hint on a more aggressive policy that would have been too much to ask at this point in time.
What worries us more than anything is the retreat in the US Treasury yields on the back of the re-escalating risks, as this pullback removes some of the fundamental support behind the Dollar. However, this pullback is fueled by geopolitical risk which means that the US currency will – at the same time – outperform most of its peers as investors will be looking to reduce their exposure on higher risk instruments like the European majors. So it is our conclusion that the Dollar should remain largely afloat over the next days as the lower yields and safe haven demand catalysts should cancel each other out.
Turning our attention on equities, the story here is a bit different but points towards a similar conclusion. Granted, the risk-off bias in the markets right now is scaring investors away.
However, there are two key reasons why stocks, primarily in the US, could stage a strong rally in the days to come: one is that US yields have now retreated below 3% which presents an opportunity for investors to re-enter the market and the second is that the Fed minutes clearly hinted on a steady policy over the next few months. This means that any potential fourth rate hike would come late in 2018 allowing plenty of time for stocks to continue trending higher.
Following these – slightly more bearish than expected – Fed remarks yesterday the US markets reversed to the upside and with the exception of the Nikkei Asian stock indices are only marginally below water. Similarly, the European and US futures are pointing towards a slightly bearish opening but given the rising geopolitical concerns the fact that most bourses are expected to open less than half a percent lower can only be seen as a positive sign.
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This article was provided by analysts of ADS Securities.
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