MUFG’s Lee Hardman notes that the US Dollar (USD) has extended its post-US mid-term election decline, with the US Dollar Index (DXY) down and US yields softer as Brent Oil drops back towards its 200-day moving average. Renewed optimism over a potential US-Iran deal is seen easing inflation risks and undermining Dollar support, while upcoming US nonfarm payrolls could offer some near-term relief.

Dollar softens with yields and Brent

“The US dollar has continued to weaken overnight extending the sell-off triggered by the US mid-term election results. The dollar index has now fallen by around 0.6% since the results were announced revealing a Blue wave as the Democrats decisively took control of Congress. The correction lower of the US dollar has also coincided with a further adjustment lower in US yields.”

“The weaker US dollar and lower US yields have been encouraged by the sharp decline in the price of oil which is helping to ease market concerns over upside inflation risks. The price of Brent has fallen by around USD10/barrel since the US mid-term elections results were announced dropping back towards support from the 200-day moving average at around USD93.60/barrel. The price of oil had already been falling sharply at the start of this week and the mid-term election results have reinforced the sell-off.”

“Overall, the latest developments have clearly boosted investor optimism over the prospect of a deal to end the US-Iran conflict. A less prolonged energy price shock would help to dampen the case for a stronger US dollar.”

“Market attention at the end of this week will shift to the release of the last nonfarm payrolls report on Friday. Leading indicators of labour demand including yesterday’s ADP survey are signalling strengthening US employment growth which is confirmed on Friday could help to provide some support for the US dollar after the recent setback.”