The Daily Fix – USD selling fatigue creeping in

For those wanting trending conditions in the price action, the Russell 2k (R2K) was the US equity index of choice, and we’ve seen US small caps working well on the day, with the R2K closing on its highs, with the cash market filling the 1 Aug gap lower. A break above 2190 in the R2K futures and this index could see real momentum build and see traders really gravitate towards the small-cap space once again.

While we did see choppy trade in the S&P500, the bulls will still claim the session as a small win. Not just because we saw a positive close, but participation was solid with 80% of S&P500 stocks closing higher, and despite crude falling a further -1.7%, the S&P500 energy sector even closed unchanged. Banks underperformed, with the XLF/SPY ratio -0.5%, although the smaller and regional US banks held in well, with the KRE ETF +0.6%. We also saw a decent amount of short covering, with the high short-interest names easily outperforming.  

S&P500 sector performance

One could argue that US equity caught tailwinds from the US Treasury market, where yields are modestly lower across the curve. The buying has been centred in the short-term durations though, with the US 2yr Treasury closing out -5bp to 3.93%. US swaps price 33bp of cuts for the Sept FOMC meeting, which rather simplistically implies a 25% chance of a 50bp cut. Further out we see 4 25bp cuts priced by December, and 8 25bp cuts implied by July 2025.

The focus of the day was on the BLS revisions to the payroll’s growth, as well as the July FOMC minutes. Neither have offered traders much in the way of signal and despite the strong focus, I am not sure we’ve learnt a whole lot of new intel.

The FOMC minutes have signalled that a cut is coming in the September FOMC, but as detailed (in the swaps pricing), imminent easing is fully priced and aligned with recent individual Fed speeches. The BLS may have revised its payrolls growth lower by a total of 818k jobs, but if you’re calling for a 25bp cut from the Fed in September you’ve probably not altered that call based on these revisions lower, and if you have a 50bp cut pencilled in you’re probably feeling a touch more confident.

What is most important is how it affects the upcoming US nonfarm payrolls prints, and that may be an interesting factor.

The USD remains a key focal point for market players and the move in the US 2-year Treasury and the level of Fed rate cut expectations remains a headwind for the USD. The USD index (DXY) traded to a low of 100.92 – an outcome driven by EURUSD pushing into a high of 1.1174 and GBPUSD into 1.3119, with USDJPY lower into 144.46 – however, USD sellers have taken a bit off the table into the final hour of trade. And I get the sense of USD selling fatigue now, and the risk-to-reward trade-off is shifting.

USD optionality is now so skewed heavily towards put demand (over calls) that we may have reached a point of such high pessimism that this could be a hunting ground for those looking to counter or mean reversion.

Profit taking aside, in the session ahead we see manufacturing and services PMIs in the US, UK, and Europe, with US weekly jobless claims also in the mix – these data points have the potential to rock the FX world, and an oversold USD could easily react to better data.

In commodity markets, crude continues to find sellers with price falling consistently through US trade, while gasoline is now trending firmly lower on the daily timeframes. We see the crude price now pulling right into the support zone, where the buyers stated a strong case in both June and August – will it hold once again? It’s a set-up that needs close attention, as break below these lows, and I’d be looking for $68 in WTI crude.

Gold remains front and centre too, and once again moves below $2500 were well supported but there is indecision from both the bulls and the bears to really state their case. Perhaps the new signal comes from today’s data, perhaps from Powell tomorrow, but for now gold is looking for new inspiration to make a move.

Good luck to all,