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- USD hits ropes amid rout in the U.S. bond and stock markets.
- Trump and weak demand in U.S. debt auction trigger sell-off.
- September inflation data due at 13:30 risks exacerbating rout.
The Dollar is in retreat following a rout in the bond prices that spooked stock markets across the globe and now analysts from some of the world's largest institutions are offering their views on where the greenback could head next.
The Dollar index has declined more than 50 points since the opening bell Wednesday while stock markets have wracked up their largest single-day losses since February after U.S. bond yields rose to their highest level since 2011.
Pound Sterling Live covered the underlying causes of the rout as well as the mechanics driving the interaction between the various markets Thursday.
Price action comes just hours ahead of inflation figures for September, which could either spark either spark fresh carnage in the markets, or de-escalate the situation on behalf of investors.
What will determine the actual outcome is whether or not data reveals a further pickup in U.S. consumer price pressures during the recent month when it is released at 13: 30 London time.
The inflation data itself will come ahead of an eagerly-anticipated report detailing the U.S. Treasury's latest assessment of other nation's foreign exchange policies.
If some analysts are correct, there is a danger that President Donald Trump may use the report's findings to justify a possible decision to label China as a "currency manipulator", which might then give him further scope to clobber the world's largest economy with various forms of trade sanction such as new tariffs.
Ahead of these events analysts are offering a range of views on where the mighty Dollar is likely to head during the rest of the week and beyond.
The Dollar index was quoted 0.33% lower at 95.14 during early trading Thursday after having fallen from 95.64 since Wednesday's opening bell in New York.
The Dollar index previously converted a 4% first-quarter decline into a near-4% 2018 gain during the seven months to October.
The Pound-to-Dollar rate was 0.07% lower at 1.3195 while the Euro-to-Dollar rate was 0.13% higher at 1.1548. The greenback was down against around half of the G10 currency basket during the European morning.
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Kit Juckes, chief FX strategist, Societe Generale
"For much of 2018, the US economy has been oblivious to a turn in the global economic cycle, and the US equity market has been unaffected as emerging market equities and currencies have come under pressure. This week has seen the S&P, and the Nasdaq, sit up and pay attention to what's going on."
"The President's criticism of the Fed adds colour, but no real substance to the situation. It has long been assumed by market participants that when global market malaise finally transfers to the US, the Fed will pay attention and the dollar's rally will start to run out of steam."
"The big global data point is US CPI, where core inflation is expected to edge up to 2.3%. That's discounted by markets but the idea that inflation edges higher as equity markets soften, leaving the Fed with a dilemma is one plenty of clients want to discuss as I travel. It wouldn't be good for the currency, that much is for sure."
Viraj Patel, FX strategist, ING Group
"The US Treasury is set to release its semi-annual FX report anytime now. While no major US trading partner meets the technical criteria to be labelled a currency manipulator, there are trivial risks the US administration finds a loophole using old US trade law."
"Should the US opt to take the trade war into the currency arena, then a market positioned long USD may quickly bail on the greenback. Should any country – in particular China – be branded an FX manipulator by the Trump administration, we think the initial market reaction would be positive for non-USD major reserve currencies (JPY and EUR) – which is also where the greatest positioning risks lie."
"There are outside risks of seeing USD/JPY under 110 if a ‘trade war’ does indeed spill over into a ‘currency war’."
Simon Derrick, chief currency strategist, BNY Mellon
"The point at which everything changed yesterday was the opening of the US equity markets. While that might seem an obvious point, it’s worth noting that right up to this point the USD had been trading steadily just above JPY113.00, US 10 year Treasury yields had been steady around 3.22% while E-mini Dow futures on the CBOT had been equally calm in the previous few hours."
"Looking at the news headlines heading into the US open the main events had been warnings overnight from Treasury Secretary Mnuchin about CNY devaluation and from the IMF about Chinese growth. Both, in turn had fed into concerns about a rise in the USD beyond CNY 7 and the potential this might have to feed through into broader market volatility."
"Historically, the currencies that have typically outperformed during times of market stress have been the USD and the JPY. However, it is noticeable that the USD has not performed well against in many of its G10 peers over the past two days with even the EUR making ground over the past two days despite fresh headlines out of Italy."
"While Asian and European equity indices had a bad time, the sell off in USD/JPY coincided largely with the hours that US equity markets were open. This in turn indicates that today's US trading session will be the key to what happens next."
Ned Rumpeltin, European head of FX strategy, TD Securities
"Risk appetite remains dented but the European session has made an early attempt to stabilize. S&P 500 e-mini Index futures continue to hover around the 200-dma. This is likely to remain the key theme today but investors will keep a close eye on today's US CPI reading."
"An as-expected (or lower) reading could help sentiment recover further.Global yields have realigned with equities after a brief, but notable, de-coupling Wednesday. Against this backdrop, G10 FX markets remain strikingly resilient."
"The USD has flouted its typical safe-haven status. We still like it lower against the major reserve currencies with the US midterms offering the next major pivot point."
"USDJPY has formed a top. Despite the back-up in 10yr Tsy yields, Japanese investor flows have favored equities in recent months, suggesting that the feedback loop from higher rates and equity markets will take precedence. Further, market-implied long-term Fed funds expectations have already converged to the Fed's terminal rate."
"We sell USDJPY in our FX Model Portfolio. We enter at spot ref of 112.50, stop at 113.80, targeting 110."
Richard Franulovich, head of FX strategy, Westpac
"The current bout of equity turbulence is yet to match the February 2018 episode. Yet even that dramatic price action was brushed aside by Fed officials as they proceeded to raise rates in March."
"If anything, the Fed sounds even more confident about the resilience of the US economy now than in Q1. So equity investors might have say farewell to the “Fed put”. This would limit the impact on FX markets."
"Long term USD uptrend has further to run but with Fed pricing over the next 6mths converging on the dot plot and midterms on the horizon, DXY likely to consolidate 94-97 a while longer."
Mark Haefele, chief investment officer, UBS Chief Investment Office
"While significant, it’s important to keep these moves in perspective: the S&P 500 rose nearly 8% in Q3 and the
year-to-date total return for the index is 5.8%. We see a few factors contributing to this sell-off."
"The recent rise in rates has made stocks relatively less attractive. The 10-year Treasury yield has risen over 40bps in the past six weeks, including almost 20bps in October alone, as the market has priced in a more aggressive outlook for Fed rate hikes."
"US stocks may be belatedly pricing in the potential cost of tariffs on earnings. In the past few days a handful of companies exposed to trade with China have discussed how the tariffs are starting to adversely impact their business through both higher costs and slower demand."
"Rising rates have fueled concerns that the economy has entered the latter stages of the business cycle and thus growth will slow. In the past week, defensive sectors have outperformed the market
"What hasn’t changed over the past week are the solid US economic and earnings fundamentals. With Q3 earnings season about to start, we expect EPS growth of about 23-24%, very similar to the first two quarters of this year."
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