The stripped back chart of the US dollar (DXY) index illustrates the dramatic rush to liquidity that has been the major feature of markets since 9th March. The price action is more typical of a small-cap tech stock that has just announced a major breakthrough rather than the value of the US dollar relative to a basket of foreign currencies – a trillion-dollar market, not a small-cap start-up.
USDX – Daily candles – 3rd December 2019-19th March 2020
A price move this steep, in a market of this size, demonstrates a significant shift in risk appetite across the broader market. It also forms the fastest-paced dollar rally for five years.
“It all stems from a shortage of US dollars,” said Gunter Seeger when speaking with CNBC. Seeger, senior vice president in investment-grade fixed income at New York asset manager PineBridge Investments, continued:
“People are very, very nervous. Everyone’s nervous about the virus, about oil prices, about their job, about everything.”
Wednesday’s dollar gains meant that the USDX index posted an eighth consecutive up day. The USD currency posted multi-year highs against both the Australian and New Zealand dollars, the move out of those Southern Hemisphere currencies demonstrating a flight from risk. Companies and investors, worried by the coronavirus outbreak, instead piled into the world’s most liquid currency. The British pound fell to its lowest level against the dollar since 1985. In the run-up to the European market open on Thursday, GBP was trading at $1.1515, which represents a fall of close to 5% in just one day.
The hourly candle chart for USDX with Tick Volume and Trade Volume Index (TVI) shows that the move is well supported. The TVI technical indicator moves significantly in the direction of a price trend during those times when a substantial price change and high volumes operate in conjunction.
USDX – Daily candles – 3rd December 2019-19th March 2020
In the same way that GBPUSD became the de facto measure of Brexit anxiety, the USDX index is becoming a barometer of the level of concern about COVID-19. The recent move could suggest that the markets are heading in the direction of a final sell-off.
Ranko Berich, head of market analysis at Monex Europe, said:
“This is about the US dollar, which is proving unstoppable as global financial markets stare into the abyss of crisis-like conditions.”
Source: BBC News
Equally important is that the rush into USD has continued despite central banks doing the best they can to address the problem. The concerted approach involved the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank all making access to US dollars cheaper and more secure. The move by the banks was announced on Sunday 15th March and was meant to calm the markets. It was a timely response by central bankers, who had noted during the previous week’s trading that short-term funding was drying up. Since the statement, the USDX index has instead rallied by 3.9%. The joint statement had some impact and USDX traded sideways for the first hours of the week, but by the end of Monday’s trading session, the flight to safety and dollar liquidity had picked up pace.
USDX – Five-day price chart – 11th-19th March
A lot of the demand for USDX stems from investors and individuals closing out positions in other assets and moving to cash. The price move in the USDX index is therefore not a leading indicator, but it is one that aggregates the selling activity across a wider range of other asset groups. USD buying strength has been financed by moves out of equities, but also gold, commodities and cryptocurrencies.
Bitcoin and gold have tumbled since 9th March despite being perceived as safe-haven assets. In these dire times, they are not ‘safe’ enough and certainly not liquid enough.
BTCUSD – 4H candles – 9th-19th March 2020
Gold – 4H candles – 9th-19th March 2020
Richard Steinberg, chief strategist at The Colony Group, operates an $11bn investment fund and is familiar with dealing with the high-net-worth individuals whose opinions often steer the markets. Speaking with Barron’s, he explained the role that the liquidity and security of US dollars plays in the minds of the market’s ‘rainmakers’.
Investors, including wealthy clients, like cash in their portfolio “as a psychological buffer”. Most high-net-worth and ultra-high-net-worth clients “have enough cash on the side lines to meet their one-to-two-year burn rate or spend policy”. This means that “they have the opportunity to remove some of the emotion [from trading decisions]”.
Something of a paradox is forming. The move into USD is a process that is all about finding security and enough cash money to weather the coronavirus storm. The exodus from risk has at the same time driven down prices to levels that are attractive to dip buyers. As and when there is more clarity about how long that storm will last, and how much cash is needed, we can expect surplus cash to come back into riskier assets.
You don’t have to look far to find market participants with the opinion that this is already a major buying opportunity. Speaking with CNBC on Wednesday, Bill Miller, chairman and chief investment officer of Miller Value Partners, said:
“There have been four great buying opportunities in my adult lifetime. The first was in 1973 and ’74, the second was in 1982, the third was in 1987 and the fourth was in 2008 and 2009. And this is the fifth one.”
USDX is currently a valuable indicator of risk appetite. At the extreme end of the scale, it represents individuals storing cash under their figurative mattresses. It also highlights the extent to which central bank policies have been ineffective. If governing bodies have little influence over the markets, then things can very quickly get out of hand.
On Wednesday evening, the Federal Reserve took another page out of its 2008 crisis-era playbook. The announcement that it was invoking its emergency authority to support prime money market mutual funds forms another attempt to prop up global liquidity. Dipping into the Treasury Department’s $10bn Exchange Stabilization Fund shouldn’t be an everyday occurrence, but it has now happened twice this week. Corporations and institutional depositors are drawing on their credit lines and only the Fed is willing to step in to facilitate the loans.
It remains to be seen if the efforts of the Fed will be enough to restore order. However, the USDX is a good way to find an answer to that question.
The extra volatility in the USDX index, of course, makes it a prime market for short-term traders. DailyFX has picked out both inner and outer support levels.
Majors-based US Dollar Index – Four-hour chart
In the special report on the market, analyst Daniel Dubrovsky said:
“Taking out the former may not necessarily spell the end of USD’s appreciation. Rather, it could place the focus on the latter which may keep the uptrend intact down the road.”