5 charts - Currencies in freefall as US dollar index breaks the 100 level
The USDX broke the 100 level overnight for the first time in almost three years, as talks circled of lockdowns in New York and London. With the worrying image of empty trading desks in the major financial hubs, investors are fleeing to cash, specifically the USD.
I explored the cash grab for USD in yesterday’s piece on the plummeting AUDUSD, but the crux of it is that the world’s largest economy (the US), which is less dependent on global trade than other countries, can better withstand global headwinds than its peers. The best house in a bad neighbourhood, perhaps.
So even though the US is headed for a recession, the USD is in hot demand and should hold at the eye-watering high levels until global markets stabilise. Although technicals don’t mean a great deal in markets near record-high volatility, it’s worth noting the 14-RSI on the USDX is barely in oversold (>70) territory yet, reinforcing the prospect of a move higher.
As markets make some fast, sharp moves, here’s some trading opportunities that have been on our radar.
The safe haven that isn’t...for now at least.
As markets pursue a USD cash grab, investors are liquidating even gold to get cash in hand.
It might take markets a few weeks to decide what to do with all the USD cash it’s holding, but the outlook will be uncertainty in another low-rate world. When the dust settles, cash will have very little yield and this should, theoretically, work in gold’s favour. There’s even talk that global low rates could propel the precious metal to new record highs once markets stabilise.
Gold isn’t the only safe haven suffering. Precious metals across the board have sold off, as have currency safe havens like the JPY and CHF.
For now though, cash is king and gold stays low.
The euro has found only temporary relief in the European Central Bank’s (ECB) €750bn emergency bond-buying program announced overnight. ECB President Lagarde stated the central bank had no limits for its commitment to euro stability, a hint of even more stimulus if needed. Of course, flooding the market with euros makes it less valuable, and although EURUSD bounced from 1.0800 to 1.0900 temporarily, the euro faced strong selling pressure in the US session overnight.
4-hr chart: The ECB’s €750bn emergency bond-buying package boosted EURUSD above 1.0900 but the gruelling downtrend remains in play
And of course the USD remains king, so the EURUSD downtrend remains in play. EURUSD is hovering around 1.0650 in the early Sydney session (Friday). If the 1.0600 level gives way, we’re looking at a freefall to March 2017 support at 1.0500.
Cable has fallen to the lowest level since 1985 as markets face the impending shutdown of London.
Over the past two weeks as the magnitude of this crisis has become more apparent, the pound has sold off considerably. Lower than the post-Brexit crash, the GBP finds itself at the lowest levels since 1985 when the USD was depreciated under the Plaza Accord.
There’s very little support from here. Cable needs little conviction to move even lower, the sharp fall so far showing markets underwhelmed with fiscal measures from Downing Street, which have fallen short compared to those taken by other nations, particularly within Europe.
The effect of the strong USD on emerging markets is devastating. Currencies like the Mexican peso are getting smoked by the one-way flow of US dollars.
This is devastating for developing economies who hold large US dollar debts and liabilities, a pile of debt that gets more and more expensive as the USD strengthens. You can see below on the USDMXN weekly chart just how hard and fast the change has occurred.
USDMXN had for several years been converging into a triangle pattern and had broken lower until the CoVID-19 pandemic altered its path. 40% of Mexico’s foreign debt is owed to United States entities. The higher USDMXN goes, the more crippling the credit burden will be on the Mexican economy and its peso.
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