The U.S. dollar has been hovering near its weakest level since March, as global stocks are set for their longest winning streak of the year, driven by optimism that the Federal Reserve may signal readiness to cut interest rates.
Overview
This bullish sentiment in the stock market, reflected by an eighth consecutive day of gains for the S&P 500, has led to a cautious approach among traders. They are holding back from placing significant bets ahead of the Fed’s Jackson Hole economic symposium later this week. The anticipation of a policy shift by the Fed, based on recent data that has alleviated concerns about a U.S. growth slowdown without igniting fears of rising inflation, is contributing to Buck’s loss in value.
Looking ahead, the market’s focus will be on key events such as the release of the US Fed minutes, the BLS preliminary annual payrolls revision, and Fed Chair Jerome Powell’s speech at the Jackson Hole symposium. These events are expected to provide further insights into the Fed’s policy trajectory and could further move the needle. Additionally, the market is pricing in at least two more rate reductions this year, which could have further negative implications for Buck.
What to Watch Today…
- Fed Minutes Wednesday
- Jackson Hole Symposium Friday
- Monex USA Online is always open.
MXN ⇓
The Mexican Peso has experienced a decline, leading global losses as the Japanese Yen rallies, undermining the carry trade appeal of the MXN. The persistent correlation between these two currencies suggests that carry trade positions are still heavily weighted. The MXN fell by 0.7%, marking the worst performance among the 31 major currencies monitored by Bloomberg on Monday, as traders reacted to movements in the Yen. The appreciation of the yen, traditionally used as one of the main funding currencies for carry trades, has been a significant long currency bet for at least the past five years. To add further damage, retail sales experienced a deeper contraction in June than estimated at (-3.9%) vs. (2.0%).
Looking forward to the rest of the week, the market’s attention in Mexico will be on the upcoming economic data releases, such as GDP data and fresh inflation numbers, on Thursday. These indicators will provide insights into Mexico’s economic health and could influence the Peso’s trajectory. Additionally, the market is anticipating the continuation of the easing cycle, especially with the Federal Reserve expected to cut rates starting in September. Short maturing swaps are pricing in 85 basis points in cuts over the next six months, which could impact the MXN’s movements. Traders will also be preparing for the Jackson Hole symposium starting on Thursday, with a keen eye on Fed Chair Jerome Powell’s speech on Friday, which could further affect the Peso’s direction.
EUR ⇑
The Euro has been at its strongest level over the dollar since the end of last December. The shared currency is currently facing a divided stance among central banks ahead of the Jackson Hole symposium, with the European Central Bank having already cut its benchmark rate and room for more cuts, as seen by Governing Council Member Olli Rehn. In contrast, the Federal Reserve (Fed) has not yet initiated rate cuts. The Bank of England moved on August 1st, but only by a narrow vote, and the Reserve Bank of Australia is also experiencing a divided debate. Options traders are betting on Fed Chair Jerome Powell to reinforce the case for cuts at the Jackson Hole gathering, positioning for further dollar losses that could impact the Euro.
European stocks are expected to rise, following gains in Asian equities and a buoyant session on Wall Street. The MSCI ACWI Index, tracking both emerging and developed equities, is heading for a ninth day of increases, the longest run of gains since December. This bullish momentum is fueled by an upbeat mood in the US, where the S&P 500 climbed for an eighth straight day. Goldman Sachs suggests that momentum traders and a surge in corporate buybacks will drive the US stocks to rally over the next four weeks. For the upcoming week, the market’s attention will be on the Eurozone inflation final readings and German PPI.
