The US Dollar may find a lifeline in renewed risk aversion as investors move past EM-related volatility to focus on big-picture market themes.
The US Dollar continued to face broad-based selling pressure at the start of the trading week as Asian markets played catch-up to Friday’s rally on Wall Street that brought the benchmark S&P 500 index to the highest level since January 22. The area corresponds with where prices traded on the eve of the knee-jerk selloff that materialized following the emergence of a diverse bouquet of emerging-market jitters.
Meanwhile, the closely watched VIX volatility index – investors’ so-called “fear gauge” – has now all but returned to where it started when the panic began as well. Furthermore, the latest positioning figures from the CFTC show speculators are once again net-long S&P 500 futures having been the most net-short in eight months as of February 4.
An empty European economic calendar and a US market holiday are likely to keep things relatively quiet in the near term, but big-picture concerns may fuel renewed risk aversion in the week ahead. On balance, the most significant pitfall remains the disparity between disappointing US economic data and the firm commitment to continue “tapering” QE asset purchases by the Federal Reserve.
Minutes from January’s FOMC meeting and the US CPI data take top billing. The US central bank seems intent to look through near-term performance and press with its $10 billion/month QE reduction cycle. For its part, the headline year-on-year inflation rate is seen rising to a six-month high. Softening growth dynamics coupled with ebbing Fed support may stoke wider fears global growth concerns. Needless to say, that bodes ill for sentiment.
Aggressive US Dollar selling over recent weeks has mirrored the unwinding of EM-related negativity. With that in mind, renewed deterioration in sentiment-geared assets has scope to reverse the process and send the greenback higher anew. The safe-haven Japanese Yen likewise stands to benefit, while the risk-geared Australian and New Zealand Dollars may bear the brunt of selling pressure.
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Performance of Services Index (JAN)
Retail Sales Ex Inflation (QoQ)
GDP (QoQ) (4Q P)
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Nominal GDP (QoQ) (4Q P)
GDP Deflator (YoY) (4Q P)
GDP – Consumer Spending (QoQ) (4Q P)
GDP – Business Spending (QoQ) (4Q P)
Rightmove House Prices (YoY)
Rightmove House Prices (MoM)
New Motor Vehicle Sales (MoM)
New Motor Vehicle Sales (YoY)
Industrial Production (MoM) (DEC F)
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— Written by Ilya Spivak, Currency Strategist for DailyFX.com
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