Safe Haven or Illusion? The Dollar Sways Under Pressure

DXY at Key Levels
DXY is trading right around the massive 100 level. Betting on breakouts in either direction on the DXY has proven to be an expensive endeavor in recent years. Is this time different? Why not see a hammer candle—just to confuse the crowd even more…

USD Safe Haven Status – Shifted?
Markets are clearly pricing in a negative risk premium for the U.S. Despite a short pause in geopolitical tension, the damage to sentiment around the dollar is evident. Unusually, U.S. Treasuries sold off alongside equities and the falling dollar, pushing 2-year rate differentials to 6-week highs while DXY hit a 6-month low. The typical correlation between the dollar and real rates is breaking down, and the usual flight-to-safety pattern (buying USD and Treasuries) never materialized. (BofA on recent moves).

Dollar and Equities
While Euro Stoxx is outperforming the S&P, the dollar’s sensitivity to equities has dropped to zero.

Dollar and Volatility
The dollar tends to lag during most historical episodes of market volatility.

Too Much?
Momentum in the euro is massive. It is currently trading above the top end of its range. We haven’t seen this much deviation above the 200-day moving average in a long time. Is this the moment traders feel forced to jump into the trend—only to witness another overshoot?

See Chart 2 – Euro vs net non-commercial position.

Lull
Interest from “real money” in the euro remains relatively weak.

Euro(pean) Love
The euro may benefit from the ongoing shift toward Europe, according to BofA.

Front-run Selling?
Soc Gen on the dollar: “…what the FX market did was sell the dollar ahead of expected bad news—even before the rates market priced it in. This suggests we’re entering a consolidation period, though thin liquidity could cause serious distortions (overshoots).”

Yen Too
Short-term divergence between JPY and 10-year U.S. yields is widening.