Down, But Not Out, Dollar Settles as Risk Sours on China-US Tension Build

Summary: The battered US Dollar settled after falling to multi-month lows against some currencies (EUR, AUD, NZD, CAD). The seemingly out-of-control resurgence of the Covid-19 outbreak in the United States and improving economic prospects overseas has weighed on the Greenback. The European Union’s agreement to a massive stimulus plan and the continent’s largely successful efforts to contain the coronavirus has seen the Euro strengthen since May from 1.08 to 1.16 highs last night. The Greenback has also slumped against other rivals such as the risk leading Australian Dollar. A favoured gauge of the Dollar’s value against a basket of major currencies, the Dollar Index (USD/DXY) has fallen 8% from its highs this year. Net speculative bets against the Dollar continue to build. Overnight, USD/DXY hit a low at 94.829 before climbing to settle at 94.973 (95.209 yesterday). Escalating tensions between the US and China saw risk sentiment sour and enabled the Dollar to bounce off its lows. The US State Department ordered Beijing to shut its consulate in Houston within 72 hours. China said it was considering closing the US consulate in Wuhan. Against the Chinese Offshore Yuan, the US Dollar (USD/CNH) soared to 7.0170 from 6.9740 yesterday. Risk leader, the Australian Dollar slipped to 0.7142 (0.7130 yesterday) after hitting a 15-month high at 0.7181 overnight. The Euro peaked at 1.16014, an 18-month high, before retreating to 1.1570 in New York, up 0.3% from 1.1530 yesterday. Against the Canadian Loonie, the US Dollar slumped to a one-month low at 1.3400, before settling at 1.3415 in late New York. Canada’s CPI increased 0.8% in July, beating forecasts of 0.4% and June’s 0.3%. Wall Street stocks pared gains. The DOW finished up 0.4% at 26,992 (26,848) while the S&P 500 rose 0.45% to 3,274 (3,260). The key US 10-year Treasury Yield was flat at 0.6%. Germany’s 10-year Bund Yield slipped 3 basis points to -0.49%.

USDCNH - H1 Chart - IG Daily FX - 22 July 2020
USDCNH – H1 Chart – IG Daily FX – 22 July 2020

Data released overnight saw Australia’s Retail Sales slump to 2.4% in June, underwhelming expectations of 7.1% and well below May’s 16.9%. US Existing Home Sales fell to 4.72 million units, missing median expectations of 4.77 million but better than the previous month’s 3.91 million.

On the Lookout: Today’s data releases are light with Japanese markets closed today in observance of Marine Day. The coronavirus pandemic continues to take its toll on global economies with around 240,000 cases reported in the last 24 hours. The US still leads with just over 66,000 new cases. However other global hotspots are also seeing record new infections, and more worryingly, new deaths. Brazil, India and the US have the largest rises, all just over 1,100. This reality will affect risk appetite, perhaps more so now. Efforts to find a successful vaccine have picked up considerably with better results, but so far none has yet proven to be the one.
Data released today kick off with Australia’s National Australia Bank’s Quarterly Business Confidence Index. European reports see Germany’s GFK Consumer Climate, Eurozone Consumer Confidence, and the UK’s Conference Board Industrial Orders Expectations. The US rounds up today’s economic data with its Weekly Unemployment Claims (forecast at 1.3 million which is the same as last week’s 1.3 million) and US New Home Sales.

Trading Perspective: The reversal of the market’s risk-on tone saw the Dollar stabilize following overwhelming bearish sentiment. An escalation of tensions between the US and China will force speculative US Dollar short bets, which according to a Reuters report, “are approaching their highest level in more than two years”, to cover some of those positions.
The strong rebound in the Dollar/Offshore Chinese Yuan (from 6.972-7.017) saw the Greenback make modest gains versus the Emerging Market currencies. As a former EM FX trader, I have observed that this can be a signal of a Dollar turn, at least temporarily.

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