The US dollar index (DXY) is currently hovering around 98.30 heading into the Labor Day weekend. The US dollar index is a broad indicator of dollar strength/weakness based on the performance of the USD against a basket of currencies. The six currencies include the CAD, EUR, GBP, JPY, CHF, and SEK. The 52-week range of the DXY is 93.81 on the low end and 98.93 on the high end. For the year-to-date, the USD is up 2.18%, bucking fears about the ongoing trade war between the US and China. Dollar optimism is evident across the board, with futures markets clearly bullish on the Dow Jones Industrial Average, the S&P 500, NASDAQ, gold, silver, and crude oil. Even cryptocurrency markets have reported relatively strong bullish sentiment heading into Q4.
This begs the question: What is driving optimism in such a volatile economy?
To better understand the interrelated components of market dynamics, leading trading brokerage Masonford offered some insights into the current economic conundrum. Trading expert, Hamish Rowbotham III believes there are many profitable trading opportunities remaining in 2019,
“…If we look at a snapshot of the global currency markets, it is clear that dollar strength abounds. Trading the USD/JPY, AUD/USD, USD/CHF, USD/HKD, and USD/KRW all reflect rising demand for the dollar. This bodes well for the performance of US equities markets, particularly at a time where escalating tensions between the superpowers threatened to tear markets apart. Fortunately, the world’s reserve currency – the USD – is holding its own amid a firestorm of geopolitical tensions including the imminent Brexit divorce settlement being drawn up in the UK, the environmental catastrophe in Brazil and across the Amazon, and trade tensions between the US and China.”
“Traders and investors are looking for safe-haven assets in financial instruments to shore up their financial portfolios. At times like this, traditional currencies like the JPY, CHF, and perhaps to a lesser degree the USD tend to enjoy surging levels of demand. But we are also seeing traders flocking to contrarian investment options in the form of cryptocurrency trading too. In 2019, Bitcoin has appreciated sharply from around $3800 per unit BTC in January, to its current level of $9455 per unit BTC heading into September. The Bitcoin futures market offered by the CME Group indicates bearish trends for the world’s premier cryptocurrency. Futures markets are effective ways to hedge against downturns, by offering the option to take an alternative position on the financial instrument and profit accordingly.”
How Volatility is Affecting Financial Markets and Trading Activity
Another important measure of general investor sentiment is known as the volatility index. The CBOE Volatility Index assumes the ticker of VIX. The higher the number, the greater the volatility. This measure indicates a level of ‘fear’ among traders, investors, and speculators which is evident in the stock markets. Currently, the VIX is hovering around 18.34 – markedly lower than the value on August 5, 2019 when it was over 24.
Given the decreasing likelihood of an escalation in the trade war between the US and China, market participants are eager to invest in stocks, commodities, currencies, indices, and even cryptocurrencies. Over the past 6 months, the highest level reached by the VIX was 24.59, and there has been a marked decline in volatility since then. This manifests in greater investment and trading activity in the DJIA, S&P 500 index, NASDAQ, Russell 2000, and other bourses around the world.
The Bull Run Continues
At the time of writing, the Dow Jones Industrial Average was hovering around 26,000, the S&P 500 around 2887, and the NASDAQ composite index at 7856. Across Europe, the Middle East, and Africa, markets are buoyant, with moderate gains on the EuroStoxx 50 PR, FTSE 100 index, DA X, CAC 40, and IBEX 35. In Asia concerns remain with geopolitical tensions between Japan, China and Hong Kong, and this is reflected in the performance of the Hang Seng index, the Shenzhen 300, and the Nikkei 225.
Yet, despite the economic uncertainties, even the Shanghai Shenzhen CSI 300 index has generated a return of 25.89% for the year-to-date, and a 1-year return of 14.51%. By contrast, the US-based Dow Jones has generated a year-to-date return of 12.88% with a 1-year return of just 3.16%. Clearly, there’s a lot more gas in the tank for global markets even if the profits come from derivatives trading to the downside with CFDs and futures markets.