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  • Writer's picturen ev

The US dollar index closes at a 5-week high

A week dominated by central bankers closes with the US dollar and New Zealand dollar as the strongest currencies to have been invested in. The USDCAD was the largest mover closing 1.17% higher as Oil supply/demand worries weigh on the energy markets.

Market Wrap

The US dollar strength is gaining momentum against all currencies whose Central Banks have not tapered their stimulus and monetary policies this week. Which to me suggests that if the Federal Reserve were to taper, the US dollar would probably appreciate against all of the G-20. All of the major indices that I follow are down today which means, that even though US retail numbers were much better than analysts’ expectations the consumer sentiment and worries around COVID-19 are having a greater effect on the markets.

The Michigan consumer sentiment data missed the consensus falling to 80.8 from 88.5, with inflation metrics climbing to a post-pandemic high of 4.8%.

The US dollar index is traveling neatly higher within a tightly controlled channel and the upwards pressure is weighing on the GBPUSD, EURUSD, AUDUSD and lifting the USDJPY and USDCAD.

The NZDUSD is within a well-defined range but has ended the London session and week with a solid green close. The Hawkish moves by the RBNZ could set up the NZDUSD for a continued rise until the Fed makes their move, which according to Fed Chair Powell is some ways off yet.

Investors are also moving money into fixed income and especially the long-term maturity bonds that are encapsulated in the TLT. This week Fed Chair Powell said the central bank will continue to support the US economy until progress towards its employment goal is achieved, saying inflationary pressure is seen as temporary and that the current policy stance remains appropriate for the time being. Chair Powell also discussed the failings of cryptocurrencies while lauding the Stable Coins which has now been echoed by Treasury Secretary Yellen and ECB President Lagarde.

The semiconductor supply chain crunch is limiting the inventory of new cars, hence why we are seeing the rising costs of purchasing second-hand vehicles. Retail sales have been bolstered by government-backed stimulus plans which are now coming to an end and those with money are moving away from goods into services. But with a divide being created between those that have been vaccinated compared to those that don’t, retailers and service providers are going to have to hope that pandemic level infections do not return.

This week saw multiple new highs in the risk-on markets, so to end the week with some profit-taking is understandable. The Dow Jones Industrial Average, Nasdaq, and S&P500 are all still trading above their daily 20 exponential moving average, and momentum + price action remain bullish.

The above chart shows the relative performance of the 3 major indices that I follow this year plus the Dow Jones Transportation Index (black) which is signalling all is not well with transport stocks. If you add in the small-cap stocks that reside in the Russell 2000 the picture starts to look really gloomy. I am keeping an eye on the DJIA especially as if that fails at a daily swing low, the house of cards could tumble.

One saving grace could be that the fiscal flows stop abating when the US child tax credits are distributed and that the new stimulus keeps the equities markets head up until the infrastructure stimulus arrives.

The distribution phase in GBPUSD could be coming to a conclusion soon, as the pound drops heavily on the rising dollar but also on investors picking through the news that British Chancellor of the Exchequer Rishi Sunak is considering delaying the next United Kingdom budget announcement until the spring of 2022. The reason given so far is that the Treasury may need more time to assess the impact of the expiry of the government's coronavirus-related economic support that is due to take place in the coming months.

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