Dollar Edges Higher, While Equities Trade Heavily to Start the New Week

Dollar Edges Higher, While Equities Trade Heavily to Start the New Week

Dollar Edges Higher, While Equities Trade Heavily to Start the New Week

by Marc Chandle

The US dollar is mostly firmer against most of the major and emerging market currencies. The main impetus appears to be some position adjustment emanating from equities. The equity markets turned south in the second half of last week and are moving lower today. Foreign investors appeared to have sold around $100 bln of European equities in 2016 and bought around a third back this year.

The Dow Jones Stoxx 600 is off around 0.25% today. It could be the second three-day drop this month. This benchmark of European shares peaked three months ago and fell 6.3% through August 11. It bounced in the first part of last week, but, after gapping lower before the weekend is back near the recent lows.

The euro peaked August 2 a little above $1.1900. Last Thursday marked the low a little ahead of $1.1660. The euro has been confined toabout a third of a cent range in Asia and the European morning. With a light events schedule and the focus on Jackson Hole, participants seem content to tread water. The 20-day moving average that served as support now is acting as resistance. It is found near $1.1770.

The MSCI Asia Pacific Index fell for the second day. This two-day decline (~0.5%) broke a four-day advance. This regional benchmark gapped lower before the weekendand spent today's session inside the previous day. While most markets in Asia were lower, the Greater China markets (Shanghai, Shenzhen, Hong Kong, and Taiwan) all advance. Nearly every other market fell, with Thailand ((~0.2%) an exception, perhaps aided by the better than expected Q@ GDP (1.3% vs.1.0% median forecast). While there is a strong correlation (~0.76, 60-days, percentage change basis) between the MSCI Asia Pacific Index and the MSCI Emerging Market Index, the latteris posting a small (~0.2%) gain so far today.

That said, EPFR reported that emerging market equity funds saw the first net liquidation in several months and the largest of the year. This fund tracker says that $1.6 bln left emerging market equity funds in the week ending August 16. It also said that investors liquidated $79 mln in emerging market fixed income funds, the first time since January.

The main focus this week is on the central bank gather at the end of the week in Jackson Hole. We do not expect much light to be shed on current policy debates either in the US or Europe. The topic at hand "Fostering a Dynamic Global Economy," lends itself to a broader discussion of structural forces. Draghi champions structural reforms in the EMU, while Yellen has argued in favor of increasing participation, especially women, in the labor market.

Meanwhile, US-South Korean military exercises start to and run a couple of weeks. Although they have long been scheduled, and is a bit of an annual event, in the current content, they may be provocative. Last year, North Korea launched a ballistic missile from a submarine, demonstrating the difficulty in denying it a second strike capability. Korean shares fell 0.15% for the second day, though the Korean won's 0.2% advance leads the regional currencies higher today. It has been alternating between gains and losses daily for the past week.

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About the author

Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting firms and global investment banks.

Officially, Marc Chandler is Global Head of Currency Strategy, Brown Brothers Harriman since October 2005. Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank.

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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