- ASX SPI 200 futures little changed at 7,154.00
- Dow Average up 0.2% to 34,576.59
- Aussie up 0.2% to 0.6388 per US$
- U.S. 10-year yield rose 2.0bps to 4.2641%
- Australia 3-year bond yield fell 5.8 bps to 3.78%
- Australia 10-year bond yield fell 7.6 bps to 4.08%
- Gold spot little changed at $1,919.08
- Brent futures up 0.8% to $90.65/bbl
A seemingly unstoppable rally drove the dollar to a record streak of weekly gains, with traders betting the Federal Reserve will keep interest rates higher for longer as the US defies a global economic gloom.
The Bloomberg Dollar Spot Index notched its eighth straight up week — the longest such run since 2005. The advance sent its 14-day Relative Strength Index above 70 — which is seen by some on Wall Street as a sign of an overbought market. The greenback barely budged on Friday. Stocks also saw small moves, with the S&P 500 edging higher after a three-day drop. Nvidia Corp. and Tesla Inc. weighed on the megacap space, while Apple Inc. bounced after a rout that erased $190 billion in value just a few days before the unveiling of the iPhone 15, new smartwatches and the latest AirPods.
Every major currency has slid against the greenback during the past month, with emerging-market heavyweights such as the Chinese yuan and the Indian rupee hovering near record lows. The recent dollar rally reflects the fissures that are opening in the global economy, with reports signaling that the US is accelerating even as growth cools in Europe and China.
“The dollar has become quite overbought and overloved,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Therefore, it’s getting ripe for a pullback. Sentiment is reaching extreme levels for the greenback, and thus that doesn’t leave many more buyers to take it higher at least over the near-term. Short-term traders should be careful about long positions in the dollar.”
Laura Cooper, senior investment strategist at BlackRock said the dollar upside has been surprising.
“We question the sustainability of that, largely as we look forward to the Fed, we think it is going to signal a hawkish pause,” she told Bloomberg Television.
Meantime, HSBC Holdings Plc has made a u-turn on its dollar forecast, predicting the world’s reserve currency will now strengthen well into next year given weaker global economic prospects.
“King dollar has already been making a comeback but its reign can last longer,” the strategists wrote in a report. “As tightening begins to bite, a faltering global growth outlook should further benefit the counter-cyclical dollar.”
Fed Bank of New York President John Williams said late Thursday US monetary policy is “in a good place,” but officials will need to parse through data to decide on how to proceed on interest rates. His Dallas counterpart Lorie Logan noted that skipping an interest-rate hike at the central bank’s upcoming policy meeting may be appropriate, while also signaling rates may have to rise further to get inflation back to 2%.
The rising threat of interest rates staying higher for longer is likely to dent prospects of a soft landing for the US economy and drive a selloff in stocks over the next two months, according to Bank of America Corp. strategists led by Michael Hartnett.
The consensus probability of a hard landing is “around 20%,” but oil, dollar and bond yields remaining elevated, as well as tighter financial conditions, “remain the September-October risk,” they said.
Meantime, BofA rates strategists abandoned their recommendation to be tactically long 10-year Treasury notes, seeing risk that US economic resilience could drive the yield to 4.75%.
While they continue to expect 10-year Treasury yields — which reached a multiyear high last month — will end the year around 4%, that forecast is at risk, strategists led by Mark Cabana wrote in a note.
Investors betting Australia’s dollar will continue to weaken may want to reconsider. Analysts see the currency rebounding on China stimulus and Reserve Bank of Australia rate-hike prospects.
The Australian dollar fell to a 10-month low of 63.57 cents versus the greenback last week, with asset managers holding a record net short position of 94,107 contracts on the currency. Growth concerns in China, the nation’s largest export market, and higher US yields have made it the worst-performing G-10 currency this quarter.
But the Aussie is poised to rally in the coming weeks, ending the year at 66 cents and reaching 68 cents by March, according to a Bloomberg survey of strategists and economists. The outlook is seen improving as China is taking measures to boost its economy, while the RBA may go for another rate increase by December, showed a separate Bloomberg survey.
A potential final rate hike by the RBA is currently underpriced by markets, said Simon Harvey, head of FX Analysis at Monex Europe in London. “In the fourth quarter, Chinese officials are more likely to embark on more direct stimulus should the 5% growth target seem unattainable, which would immediately boost risk sentiment,” he added.
The Aussie dollar may come back under pressure if data on Sept. 14 shows the nation’s unemployment rate rose by more than expected, as the weakening labor market may spur investors to unwind their expectations of another RBA rate increase.
Domestic factors aside, given the Australian dollar’s correlation with the yuan, Macquarie Group sees it benefiting from China’s policies, such as influencing the markets to discourage yuan selling, and prospects of Federal Reserve rate cuts in 2024.
The Aussie’s downside may be limited as many negatives are priced in and AUD/USD is “already looking undervalued relative to its short-term and especially long-term value,” said Valentin Marinov, Head of G10 FX research & strategy at Credit Agricole CIB in London.