Hi, dear traders! Since early 2022, the S&P 500 has lost more than 20%. Apart from Wall Street, stock markets in other regions have been hit by turbulence. Experts are mulling over the crucial question. Is the global economy on the verge of a severe downturn? Monetary tightening by major central banks overshadows the prospects of the global economy. Notably, trading sentiment in Asian market does not always coincide with Wall Street. Here is a recap of the Asian trade.
Yesterday, Jerome Powell made the first testimony to Congress. He expanded on two pillars. The first item on his agenda is price stability that seems like a long-distant future on the back of high interest rates, rampant inflation, and recession fears. The second item is a looming recession which seems more realistic. When the Fed’s leader says that a recession is highly probable, the market believes this comment more than his assurance of the intention to achieve price stability. The thing is that fine-tuning this process is very complicated due to a variety of global headwinds.
Judging by sell-offs of risky assets like stocks, investors are worried that the Fed’s measures against soaring inflation might unleash recession. At the same time, recession is unwanted for the US dollar. A national currency depreciates in any ailing economy. Thus, if the fears turn into a panic, the US dollar will lose ground in tandem with yields of US Treasuries. A decline in the US dollar index to 104 could be a precursor of further market jitters. The index has inched down 0.1% this week but has advanced 8% since the beginning of the year. Nevertheless, it is too early to acknowledge the downtrend. The greenback might be taking a breather, having shed 0.46% since Friday. The market is hesitant and hopes for the better. The US dollar index was growing in the Asian trade in the corridor between 104.06 and 104.68.
As investors stoke fears about a recession in the US, the yen will benefit from such prospects. The yen could strengthen against the US dollar in case the US Fed will decrease interest rates. Importantly, commodity prices went down in light of Powell’s testimony. In fact, a recession cripples production and in turn reduces demand for commodities. This situation is favorable for Japan’s economy that mainly buys commodities.
he yen is expected to trade in the corridor between 130 and 138.5. Historically, the Japanese yen flourishes amid the global risk. We see that the safe haven yen rebounded off 136.71, the 24-year low printed on Wednesday. The yen settled at about 135.59. The dollar/yen pair was trading lower in the corridor between 135.1000 and 136.27.
Unlike the yen, the Australian dollar is sensitive to its American peer with the exception of those days when the US dollar trading is subdued. Today, the AUD/USD pair is trading lower at about 0.6881.
All in all, the greenback is holding the upper hand amid the risk-off mood, rising yields of US Treasuries, and the Fed’s hawkishness. The aussie is weighed down by risk aversion, mounting problems in China due to the COVID resurgence, and a slower pace of rate hikes by the Reserve Bank of Australia. In this context, the downward bias comes as no surprise.
The market is alert to the second testimony by Jerome Powell at Capitol Hill. Will he be able to change market sentiment? Apparently, not. We will find out tomorrow. Stay tuned!