US Dollar At A Disadvantage As Risk Aversion Returns To The Markets

What Are The Markets Facing?

Personal spending in the US is expected to have jumped 0.7 percent during the month of May, which would mark the biggest rise in six months as consumers spend more at gasoline stations and purchase building materials as the weather warms up. Indeed, the Advance Retail Sales report showed a surprisingly strong rise in consumption during May, but it is worth noting that this index is not adjusted for inflation, so the surge in gasoline prices during the survey period likely had a lot to do with the rise in the gas stations component. Indeed, according to Mastercard, the volume of gasoline purchased has actually declined, as the company reported that consumers bought an average of 9.45 million barrels of gasoline/day in the week ended June 20, down 2.7 percent from a year earlier. Rising prices may also be reflected in the core Personal Consumption Expenditure (PCE) Deflator (excluding food and energy), which is anticipated to accelerate to 2.2 percent in May from a year earlier. With the Federal Reserve already concerned about the upside risks to inflation and consumer inflation expectations, a strong core PCE reading will add to speculation that the FOMC will consider raising rates again. However, with the markets becoming risk averse once again, the price action in Treasuries, the US Dollar, and the DJIA may not necessarily be what you would expect

Bonds - 10-Year Treasury Note Futures

Treasuries have bounced quite a bit from support at 112-00, and a bout of risk aversion market-wide led the contract to spike higher on Thursday. Looking ahead to Friday, US personal spending and core PCE are both expected to rise, signaling that the Federal Reserve will continue to remain hawkish. Normally, we would look for such news to weigh on Treasuries in anticipation of higher interest rates, but given the risk averse sentiment pervading the markets, the news could actually weigh on equities and thus, push the contract up toward the 200 SMA at 114-13, with additional resistance from falling trendline looming above at 115-21.

FX - USD/JPY

Following weeks of consolidation below the 200 SMA at 107.92, USDJPY has finally broken down as market-wide risk aversion takes a toll on carry trades like the Japanese yen crosses. Looking ahead to Friday, we would normally anticipate that strong personal spending and core PCE readings would lead the US dollar higher as traders move to price in higher interest rates. However, if risk aversion remains the primary driver of the markets, the prospect of higher rates could weigh most heavily on the DJIA and thus lead the Japanese yen crosses down toward near-term support at 106.35, though additional support rests below at 105.66. Given the extent of Thursday’s declines, though, USD/JPY could simply go on to consolidate losses through Friday’s close

Equities - Dow Jones Industrial Average

Equities markets have been going through a roller coaster ride all week, with yesterday’s markets finishing flat following hawkish commentary from the FOMC. Today, however, markets took a turn for the worst as the DJIA dropped nearly 3 percent to a new annual low. Downside risks continue to threaten markets, with earnings releases falling short of expectations and the financial sector still in shambles. The upcoming release of PCE Core may add weight on the equity markets, as rising inflation would be interpreted as not only deteriorating bottom lines for major corporations, but also a sign that the Federal Reserve will consider raising borrowing costs later in the year. On the other hand, strong personal spending could act as a counterbalance to core PCE, but given the bearish tones in the market, it seems unlikely that DJIA would react in an equally volatile manner as the broad focus has shifted to inflation from economic growth.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.