Published On: Fri, Oct 12th, 2018

Currencies unperturbed by the improving risk sentiment across other markets

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Major currencies are still locked in a tight range


Risk in markets are rebounding as we are seeing a move higher in E-minis, European equity futures, oil prices, and yields. However, that has done little to move the needle in the currencies market.

There are only two decent movers so far on the day and that being the loonie and the yen. Even so, the ranges remain relatively narrow still. The loonie is gaining on the back of higher oil prices with USD/CAD now sitting at a low of 1.3015. Meanwhile, USD/JPY is inching to a high of 112.42 currently as the yen softens in the wake of better sentiment and rising Treasury yields.

That aside, there isn’t any notable movement across the major bloc thus far as we begin the session. But I just want to highlight on the dollar’s position in all of this. The period of risk aversion this week saw the dollar lose its appeal as a haven currency and that raises some real questions of the dollar’s outperformance moving forward.

Since the end of June, the dollar index has been trading sluggishly and apart from an attempt to break higher in August, it’s been mostly sideways trading for the dollar in general. And if the greenback has lost its status as a haven currency, it presents a real conundrum moving forward for currency traders.

All that’s left to back the dollar is the Fed’s rate hikes and a robust economy at this point. Higher yields will surely help to promote flows as well but with Trump constantly sniping at the Fed – and potentially more conflict to come – it’s making for a very unattractive proposition for investors to flock to Treasuries when there is an element of uncertainty in that regard.

And with other developed nations also set to hop onto the tightening path soon enough (Europe next year), the case of monetary policy divergence isn’t going to last that much longer for the dollar. Add to the fact that the Fed is moving closer to a neutral rate where the tightening cycle will encounter a pause, we’re reaching closer to a point where with every Fed rate hike the sentiment for the dollar will grow more negatively.

This is something to ponder upon in the long-term view of the market but it’s certainly worth thinking about now as the game starts to change again. Trump has already shown his hand that he will blame the Fed if markets start to turn sour and the Fed’s reaction suggests that they won’t bow down to him – which puts the tightening cycle well on track but as mentioned above, it means we’re only getting closer to a ceiling for rates (and the dollar’s upside) sooner rather than later.

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