The dollar rate is determined by central-bank policy, and also by the oil and stock markets as they measure global and US economic health. Let’s discuss that and make a trading plan for AUDUSD, USDJPY, and USDNOK
Monthly fundamental forecast for G10 currencies
After the S&P 500‘s 45th record closing high and 18% growth in 2021, a correction by 5%-10% for the rest of the year isn’t surprising. Some bullish influence is already factored in stock prices, whereas the fiscal stimulus withdrawal and expectations of central-bank policy normalization and Treasury yield growth may lead to a pullback. According to the Bank of America, the stock market may remain weak for 6-12 months. How will that affect Forex?
I have already noted that the USD index became oversensitive to the S&P 500/WTI ratio, which is not surprising: the US stock market and oil measure the health of the US and the global economies, respectively. Their rally is bad news for the greenback. In such times, it’s important to know who assumes the role of global GDP growth driver. If that’s China, proxies for China — the Aussie and the NZ dollar — grow popular. If that’s the eurozone, European currencies hold high the banner, the euro being their leader.
USD rate and S&P 500/WTI ratio
Source: Investing, LiteForex’ calculations
US stock indexes’ fall and the WTI‘s rally are highly unlikely to be happening simultaneously as the US is most often the leader of the global economic growth, and its high demand for oil pushes oil quotes up. Conversely, the S&P 500‘s rally and an oil correction, which happened in August, are the reason for buying the greenback. It’s here that the US exclusivity factor comes in: when the US GDP growth exceeds its global counterpart, investors start buying out US securities like hot cakes.
How will the US stock market’s pullback and its subsequent move to medium-term consolidation combined with the WTI price stabilization affect USD pairs? That scenario is very likely to unfold in the next 1-3 months.
At the end of 2020, Bloomberg parsed G10 currencies’ sensitivity to changes in the USD index over the past 12 months. According to that analysis, Scandinavian currencies, the Australian dollar, and the NZ dollar will fall the fastest against the greenback. The loonie will be the least affected.
G10 currencies’ sensitivity to USD fluctuations
Source: Bloomberg.
Despite the slump in oil prices and Brexit aftershocks, the CAD and the pound sterling remain Forex favorites as their central banks intend to normalize policies.
Monthly trading plan for AUDUSD, USDJPY, and USDNOK
At the same time, a deteriorating COVID situation, lockdowns, and GDP slowdowns, including China’s one, give a reason for selling the AUDUSD in the direction of 0.72. The S&P 500‘s correction might not help the yen out as it will most likely result from growing bond yields. So, consider building up longs in the USDJPY after a breakout of resistance at 110.9. Long positions in the USDNOK look quite appealing as the party in power might lose the election in Norway in September.
Price chart of AUDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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