US Dollar slides below critical support

The week started on a cautious note as European and US stocks eked out small gains, but appetite was limited appetite on news that the new capital requirements for the US banks would be tougher.

And mega caps didn’t give much support. Tesla lost up to 2% during the session, while Amazon closed the session more than 2% lower before its Prime Day – which now became an industrywide shopping day and will give us a hint on how much US consumers are ready to up their spending online. Meta, on the other hand, advanced 1.23%, as Threads already amassed 100 mio users since its launch last week, while internet traffic data from Cloudflare showed that Twitter use ‘tanked’.

Tougher rules

Michael Barr said yesterday that he will recommend tougher capital rules for banks with $100 billion or more in assets, as opposed to those that have $700bn and more so far concerned with the tough rules.

More importantly, unrealized losses (and gains) on security portfolios will be considered when calculating regulatory proposal, a thing that could’ve helped avoid Silicon Valley Bank’s (SVB) collapse, but that will also put a bigger pressure on banks that bought tons of US treasuries and that are now sitting on significantly discounted portfolios.

The good news is that big banks like JP Morgan and Citi didn’t react aggressively to the news, and even more reassuring news is that the smaller, regional bank stocks tempered the news quite well as well. PacWest for example lost only around 1% and Invesco’s KBW index even closed the session slightly higher.

What’s less reassuring, however, is the fact that the Federal Reserve (Fed) will continue pushing the interest rates higher, and that will put extra pressure on lenders, and the regional lenders are the most vulnerable to rate changes.

Other than that, it was a day of digesting and scaling back the recent rise in hawkish Fed expectations as used-car prices, which has been a good indication for inflation in this inflation cycle, fell 4.2% in June, the largest drop since the beginning of the pandemic. The prices came down by more than 10% in a year. Plus, according to the New York Fed’s latest survey, inflation expectations for the next 12 months fell to 3.8% in June, from 4.1% printed a month earlier, although the 3-year expectations ticked higher to 3%. The same survey also showed that consumers were more pessimistic about the job market outlook, and median expected spending growth over the next year declined to the lowest levels since September 2021.

Capital flew into treasuries yesterday, the US 2-year yield for example declined about 10bp, while the US dollar plunged below a long-term ascending channel base despite the hawkish Fed expectations. The dollar bears are now targeting the 100 level as their next destination.

The dollar-yen plunged below the 141 level and is preparing to test the 50-DMA, which stands near the 140 level, to the downside. The EURUSD rallied past the 1.10 mark despite a sentiment index that showed a faster deterioration for July in Eurozone. Today the German CPI will likely confirm the latest rebound in inflation – as the low-price train tickets that the government had distributed last year are creating a positive base effect for inflation in Germany, and the ZEW index is expected to warn of worsening mood. Higher German inflation is positive for the euro, but I am not sure that Christine Lagarde or her colleagues at the European Central Bank (ECB) care much about sentiment indicators. The softening US dollar despite the hawkish Fed expectations, and hawkish ECB expectations could support a further rise in the EURUSD toward the 1.12 mark. 

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