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Dollar has Worst Month in a Decade

GBP/USD – Weekly Candlesticks
Source: GKFX / MT4 (August 2, 2020)
 

TAKEAWAYS


•    Dollar has its worth month in a decade
•    Question: Dollar losing credibility as reserve currency?
•    New month: Choppy August trading coming
•    DAY AHEAD: Swiss CPI, PMIs, HSBC earnings

GBP/USD broke higher last week and is now testing a 5-year old down-sloping trendline, which could put an end to the short-term rally. A break above the trendline is another indication that GBP has bottomed.

MARKETS


Weakness in the US dollar that had been taking hold all week went into reverse on Friday. Many G10 currencies hit multi-month highs before closing the day near the lows. The short-term reversal can for now be explained by month-end portfolio adjustments. GBP/USD was a top riser on the week (see the chart above). 

Gold and silver had pre-empted the moves in other currencies and had already tuned lower versus the dollar mid-week and bounced back with a haven bid on Friday. 

Moving in a mirror-image to the dollar, Wall Street had been sharply lower on Friday but erased most of the losses and finished near highs of the day. The Shanghai Composite finished the week higher but has been choppy ever since the sharp sell-off on July 16. 
 

GURU WISDOM


“If you can’t take a small loss, sooner or later you will take the mother of all losses.” – Ed Seykota
 

USD: Bad Month


The US dollar index (DXY) just put in its worst month in a decade, falling 5%. The drop corresponded with a rip to 2-year highs in EUR/USD. The euro makes up 58% of the dollar index. When the dollar experiences such a sharp decline, investors inevitably start to question whether it is losing its place as the world reserve currency. 

We think it is probably too soon to call the dollar’s demise. The drop in the dollar has corresponded to a rally in stock markets. This is the typical ‘risk on’ scenario where risky assets are rising and havens are falling. What has made the last month different is that the move lower in the dollar has been much stronger- and has come alongside record high gold prices. This largely reflects the relatively poor handling of the pandemic in the United States versus other parts of the world, which for now have it better contained. 
 

Choppy August


It’s the first day of August, a month which can see outsized opportunity because of big price swings- but also thinner volumes which means chopper markets. Typically in August; trends do not last as long and breakouts are not as reliable- but what can work well is short term momentum and ‘return-to-the-mean’ based strategies such as the use of Bollinger bands.
 

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