DOLLAR STRENGTHENS AS VOLATILITY RETURNS
Today, amidst a sea of red in the equities market, traders focused on the Chicago Board’s volatility index (VIX) which soared by 115% to reach a high of 37.32.
In the past year, the index, which measures the level of fear in the market, has remained subdued as investors became increasingly complacent.
Today, while the global financial markets continued to decline, the biggest winner was the dollar. The dollar index, which measures the performance of the dollar against the major currencies rose by almost 50 basis points.
On the other hand, the euro declined by 30 bps against the dollar to $1.2320. This is its lowest level in two weeks. The pound fell 70 bps to $1.3865, which is also its two-week low. The Japanese yen fell 40 bps while the South African rand rose 60 bps against the dollar.
The MSCI Emerging Markets Currency index, which, measures the performance of EM currencies against the dollar, fell 20 bps, which is its lowest point in two weeks.
As volatility increased, gold, which is often seen as a safe haven was little changed while NYMEX crude oil was down 135 bps to $63.31, which is its lowest point in more than two weeks.
EUR/USD has fallen from its multi-year high of 1.2538 to a two-week low. Observers associate the current fall to the strengthening dollar caused by expectations of high inflation, which would lead to the acceleration of rate increases. The pair is currently trading at a significant support level of 1.2331. A break from this position could see the pair test the support level of 1.2172.
The cable has fallen from the high of 1.4331. The fall is associated with the strengthening dollar and the confusion surrounding Brexit. A poll released today showed that the confidence about how Brexit was heading is falling. Traders are expecting the interest rate decision by BoE as well as an important cabinet meeting to be chaired by Theresa May on Wednesday and Thursday.
The 50-period MA has established an important position above the 14-period MA while the Chaikin Money Flow indicator (CMF) is currently below zero. This is an indication that the pair could continue moving lower.
In the past five trading sessions, the pair has moved from a low of 1.2244 to a high of 1.2564. The pair moved higher after the US jobs numbers showed improving wages. Today, data from Statistics Canada showed that the trade deficit widened by C$3.19 billion, missing the estimate of C$2.3 billion. The US trade balance also continued to widen to $53 billion, missing analysts’ estimates of $52 billion. The pair could continue to go up, potentially to the 1.2600 which forms an important resistance point.