The past week did not bring much volatility, and it did on many asset classes. We can say that it was quite calm, but perhaps a larger correction of the US dollar has already started, which will be a test for many markets.
It is usually the case that a weaker U.S. dollar could mean that there is room for increases in commodity prices, stock market indices, or so-called risky assets in general. A stronger dollar, on the other hand, as commodities are quoted in it in the main trading centers, could influence a drop in their prices along with a correction in stock market indices and other currencies, including emerging markets. This week, in a way, is the first test for many markets, but if the correction on the USD widens, the test would be more visible.
We are talking about the fact that in the past week the US dollar index seems to have gained almost 0.5 percent, which is the best performance among the major world currencies. Only the British pound managed to gain against the USD this week, mainly due to the fact that the Bank of England will not decide to introduce negative interest rates soon. The market had to push back the chances of such a move to December 2021. Other currencies seem to be losing to the USD, with the Euro recording the biggest downside movement. The EUR/USD is down more than 0.8 percent this week.
In this environment of a stronger USD, silver and gold seem to be doing well. Despite the 0.5 percent appreciation of the USD, silver seems to be gaining over 2.7 percent, while gold is gaining 0.6 percent. If this trend continues even as the USD strengthens in a correction, it could show the great relative strength of gold and silver. Then, any further weakening of the USD after the correction could support these markets.
Stock indices, on the other hand, seem to be correcting, following the theory of a stronger USD and falling stock prices. The Nasdaq 100 index seems to have lost the most during the week, falling by more than 1.5 percent, while the S&P 500 and the German DAX fell by more than 1 percent. It seems, therefore, that for the time being the correlation has been maintained here, but more detailed conclusions could be drawn when or if the correction on the USD accelerates.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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