Greenback weakness has been the primary focus of FX trading this year. On Tuesday, the Dollar Index fell to a 2.5-year low of 91.62, with losses exceeding 10% since the beginning of 2017. This underperformance was a result of many factors, including the collapse of Trump trade, convergence in monetary policies, a flattening U.S. yield curve and better economic prospects throughout the globe.
Equities across the globe traded mostly in the red on Tuesday, after North Korea launched a ballistic missile over Japan. Although investors have become sensitized to such actions by Kim’s regime, firing missiles over Japan is a rare occurrence and the message appears to be that North Korea is ready to escalate tensions.
After stocks and the dollar surged on Tuesday, following a Politico report that Trump’s team have taken a significant step on tax reforms, the President’s threats on Tuesday night to shut down the government and terminate the NAFTA agreement, were not well received by investors, who responded by dragging both equities and the dollar lower.
Less than a month ago the CBOE volatility index – known as the best indicator of fear in the markets – dropped to a record low of below 9. The declines were a result of steady equity markets, low trading volumes, and optimism that the markets were heading higher. This has all changed in the past two weeks, with the fear index rallying from a low of 9.52 to 17.28 – an 81% spike in 4 days from Aug 8 to Aug 11.
No, not the sustained collaboration Troika between the European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) that is overseeing the Greek Debt Bailout. While we feel the Greek Debt Bailout situation is still festering in the background on the IMF actually only funding its commitment once the European creditor nations agree much more extensive Greek debt relief, that is not the ‘troika’ of the moment.
Thursday saw U.S. stocks suffer one of their worst sessions so far this year. The benchmark S&P 500 index closed 1.5% lower to represent its biggest one-day drop since May. The sell-off continued in Asia overnight and there was some follow-through in Europe this morning. U.S. index futures have drifted further lower on follow-up technical selling momentum as more bullish speculators have been forced to liquidate their positions.
The U.S. dollar remained on the defensive early Thursday, after yesterday’s declines led by increased uncertainty over another U.S. rate hike in 2017 and President Donald Trump’s fiscal agenda after abolishing the Manufacturing Council and Strategy & Policy Forum.
There is nothing like the thought of your friendly neighborhood unstable dictator happily cheering along his newly confirmed intercontinental ballistic missiles (ICBMs) and miniaturized nuclear weapons to give the markets pause. And of course, we say ‘neighborhood’ in the sense that media genius Marshall McLuhan noted back in the 1960’s that the new high-speed video communications had turned the entire planet into a ‘global village’.