The US dollar has remained at stronger levels during the Asian trading session following another correction lower for risk assets yesterday. The S&P 500 index closed down by 2.6% as it fell back towards its 200-day moving average at 3,050. After hitting a high of 3,233 on 8th June, the S&P 500 has lost upward momentum reflecting more challenging conditions for risks assets. The strong negative correlation between the performance of risk assets and the US dollar remains in place.
Since the 8th June, the US dollar has been the third best performing currency behind only the safe haven currencies of the Swiss franc and
The more challenging environment for risk assets/ supportive environment for the US dollar in part reflects fears over the ongoing spread of COVID-19 particularly in the US states of California, Florida, Texas and Arizona.
Those fears were reinforced yesterday by the announcement that New York, New Jersey and Connecticut have imposed 14-day quarantines for incoming travellers from a number of southern/Sun Belt states which highlights the risk that the resurgence in COVID-19 poses to the functioning of US internal market.
At the same time, investor risk sentiment has been challenged by a fresh bout of trade tensions. It was reported yesterday that the US is weighing up imposing new tariffs on USD3.1 billion of imports from the EU including products like olives, beer, gin and trucks while increasing tariff rates on other products like aircrafts, cheese and yoghurt.
It is therefore clear that risk appetite will be somewhat subdued due to the covid-19 outbreaks in addition heightening trade tensions between the US and EU. Low risk appetite typically leads to less flows into Risk FX (AUD, NZD, CAD), Equity Bourses, Risk Commodities (Oil).