Market Update - The impact of a weak dollar on major instruments - Tigerwit Africa

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Market Update – The impact of a weak dollar on major instruments

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The bulls won last week in the equities market despite the uncertainties concerning the US extra stimulus package. The dollar was on the backfoot against its peers. Thus, the greenback has maintained an inverse correlation with the stock market. Gold bid is maintained despite perceived risk aversion while Oil prices shed some gain.

Over the weekend, China has taken policy measures to curb Yuan appreciation which might worsen its relation with the US. Although the effect of that is quite invisible on FX as US politics and stimulus measures continue to take the central stage. Banks are closed in the US and Canada on Monday to observe the Columbus day. Here are the major events traders and investors would watch out for this week

US Politics/Presidential Election

This remains one of the core risk drivers. The US House and Senate have rejected President Trump’s nearly $1.8 trillion stimulus package – fell short of the proposed $2.2 trillion. Sanctioning a stimulus package before the election has already been written off by the POTUS. Developments in this regard could weigh on the dollar before the November 3 election.

Increased Covid 19 cases and a possible second lockdown

Covid 19 second wave remains a major concern for world leaders. Resurgence in Europe, US and India is becoming so strong that fresh shutdown might emerge. This could drag recoveries down and force the central banks to use more QE to support businesses and the financial markets. In all, it seems the Dollar downside run will come back in full force as the government will be more interested in supporting the economy.

Brexit Situation

Post Brexit trade deal negotiation is expected to be concluded on Thursday, October 15. Sterling has recovered a good fraction of the September slump. However, this recovery will be hampered by breakdown in negotiation or a no-deal Brexit outcome. On the other hand, a successful negotiation amid a weak dollar could kick the Cable to new multi-month high.

Australian employment data

Looking at the macroeconomics, the market is expecting a bad Aussie job data on Thursday. This will come after the RBA governor speaks on Wednesday. Market consensus forecasts a 0.3% surge in unemployment rate including a negative employment change data. This is largely as a result of Covid second wave.

US inflation data

US monthly CPI data will wrap up the week.

Dollar Index (DXY) technical analysis

To make reasonable forecasts on the major currency pairs, it’s important to view them through the prism of the dollar index (DXY). As the chart below shows, DXY remains vulnerable. In September, the bearish trend since late March corrects to 94.5. However, the bearish trend has resumed in October and the greenback has now lost about half of the September recovery. From the technical perspective, the September surge was just a corrective bounce. Therefore, the bearish trend is yet to complete, most probably.

From the Elliott wave perspective, a trend evolve in 5-waves. The bearish trend from 103 seems to only have completed the 4th wave correction. The current decline can then be tagged the 5th wave. By projection, wave (5) should continue to 90.4 or even 89 which are important Fibonacci projection levels. This is more of a long term view. At the intraday level, the dollar might recover to the 93.3-93.5 intraday resistance zone before taking another leg downside.

The long-term dollar weakness could project EURUSD to 1.22 as the ECB downplayed fears of jawboning the Euro. GBPUSD current bullish correction should continue to 1.3085 and 1.32 before the October 15 Brexit deadline. A no-deal Brexit could crash the Sterling back or below the 1.2725-1.28 support zone. Meanwhile, Gold continues to flow with the stock market. The commodity however remains within the large bearish correction and a fresh slump to 1800 shouldn’t be written off yet especially if it falls back into the 1900-1905 support zone. 1975 and 2015 are the next levels for the bulls in case we see sharper rallies instead. Meanwhile, fresh lockdowns could weigh on the oil market in the coming weeks.

Disclaimer: This communication is for informational purposes only and should not be viewed as any form of recommendation as to a particular course of action or as investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Opinions, estimates, and assumptions expressed herein are made as of the date of this communication and are subject to change without notice. This communication has been prepared based upon information, including market prices, data, and other information, believed to be reliable; however, TigerWit does not warrant its completeness or accuracy. All market prices and market data contained in or attached to this communication are indicative and subject to change without notice.

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