January 2017 is proving to be a mixed bag for investors. Now that the New Year is well underway, some interesting trends are developing. For starters, the USD is struggling to maintain momentum against the JPY. The greenback was trading 0.3% lower against the JPY, at 115.64. Even the beleaguered EUR made some gains against the greenback as it rallied to $1.0626, before it dropped towards $1.0559. The heavily bearish GBP has also been gaining on the greenback, trading at $1.2167, from $1.2190 earlier.
The US dollar index is currently at 102.72, up 0.67%, or 0.68 points. The index has a 52-week high of 103.82. Simply put, this means that the US dollar is fractionally off its 52-week high, and well above its 52-week low of 91.92. The DXY measures the performance of the greenback against major global currencies including the JPY, EUR, GBP, CHF, CAD and the SEK. The most heavily weighted components of the DXY include the EUR at 57.6% and the JPY at 13.6%. The trading market cycles in January tend to reflect a rebalancing or repositioning of financial portfolios to accommodate the likely changes in the year ahead.
What’s Happening on Wall Street and Beyond?
Investors and traders are equally concerned about how high Wall Street markets can rally before correcting. Right now, we are seeing US stocks struggling to maintain their current levels. That the USD has come under fresh assault by leading currencies like the JPY and EUR is not to be taken lightly. Of course, a lot depends on what will happen once President-elect Trump is officially inaugurated on January 20, 2017. Traders remain highly bullish about a Trump presidency, and the massive fiscal stimulus that he has promised. Nonetheless, the mood of the moment is pensive. All major US indices are up, albeit modestly over the past 1 month. The Dow Jones Industrial Average has gained 0.88% and is now at 19,929.85, the S&P 500 index is up 0.55% at 2,272.05 and the NASDAQ composite index is up 2.06% at 5,556.80.
All major US indices have defied gravity, especially the Dow Jones which is moving ever-closer towards the critical 20,000 level. Across the pond, the all-share index in the UK – the FTSE 100 – racked up yet another consecutive day of gains. The FTSE 100 tends to perform strongly when the GBP is faltering. At last count, the FTSE 100 was at 7,310.32, up 5.12% over 1 month. The 1-year performance of the FTSE 100 index is extraordinary at +24.50%. The closest performing index is the DAX, with a 1-year return of 18.68%. For speculators, the 1-year performance of European bourses has been unprecedented. The Euro Stocks 50 PR has gained 9.57%, while the CAC 40 is up 13.77%
Factors Driving the USD Lower
Naturally, the positive performance of indices across the board is concerning. Any time an index rallies uncontrollably, the question has to be asked: Is this level fundamentally sound or is it driven by speculation? It is important to watch the performance of crude oil when trading equities. Brent crude oil reversed course and is now trading at $53.64 per barrel, after reaching $55.36 per barrel earlier on in the day. The reason oil prices are plummeting is news out of the latest US Baker Hughes Report that the rig count is increasing. As more WTI crude oil producers enter the fold, they undermine gains made by production cuts with OPEC members.
On Monday, 9 January, oil prices plunged 3.8%, raising concern that inflation expectations should be lowered. This had a negative effect on the USD which rallied on the back of its latest December jobs report. The USD is also being affected by inflation differentials in China. The PPI in China increased to 5.5% year-on-year, up from 3.3%, 2 months ago. This is being fueled by higher commodity prices (crude oil, natural gas, iron ore, copper etcetera) on a worldwide basis. Dollar-denominated commodities like iron ore, crude oil, and the like are negatively affected by a strong USD, and positively impacted by increased demand.