The US Dollar remains sensitive to ongoing US-China trade negotiations, with recent developments triggering sharp moves across FX and bond markets, according to ING’s FX strategist Chris Turner.
Tariff Threats Shake Markets
President Trump’s threat last Friday to impose 100% tariffs on Chinese imports sparked significant market reactions. While USD/CNH (US Dollar/Chinese Yuan offshore) surged, the broader DXY dollar index actually fell, as investors assessed that the economic fallout could hit the US harder than China.
China’s newly released export data supports that view, showing it has been successful in diversifying its export markets and reducing dependence on the US.
In bond markets, short-dated US Treasury yields fell by 5 to 8 basis points, signaling a broader macroeconomic concern rather than a specific loss of confidence in US assets.
Short-Term USD Outlook: Volatility Tied to US-China Headlines
- US equity futures have recovered about half of Friday’s losses, following softer comments from Washington over the weekend.
- However, the risk remains, with the tariffs potentially taking effect on November 1, just after the expected Trump-Xi meeting at the APEC summit in South Korea.
- Market positioning and rhetoric from both sides are likely to intensify in the coming weeks as the deadline approaches.
Government Shutdown and Data Drought Add to Uncertainty
Adding to the uncertainty is the ongoing US government shutdown, which has limited the flow of economic data. Betting markets now assign a 67% probability that the shutdown will extend into November, further clouding the outlook.
Instead, market attention this week turns to central bankers speaking at the IMF and World Bank meetings in Washington:
- Fed Chair Jerome Powell is due to speak on Tuesday.
- ECB President Christine Lagarde follows on Thursday.
- The IMF’s Financial Stability Report, set for release on Tuesday, is expected to raise concerns about elevated stock market valuations, with the S&P 500’s CAPE ratio at 39, not far off the Dot-Com era peak of 45.
What to Watch This Week:
- Fed’s Beige Book (Wednesday): Analysts will watch closely for signs of further cooling in the US labour market or economic slowdown.
- Holiday-thinned Trading: Markets are expected to remain quiet on Monday due to public holidays in the US and Japan, keeping US Treasury markets closed.
Technical Outlook: DXY May Test 98.00 Near-Term
According to ING, the DXY Index may remain choppy in the near term, driven by US-China headlines. A resistance level is forming near 99.50, while a downside move toward 98.00 is possible by Tuesday or Wednesday, especially around Powell’s speech or the release of the Beige Book.
