The apparent hawkishness of Fed Chair
Powell's comments at the press conference following the FOMC's fourth
consecutive rate hike extended the dollar's recovery, which had begun in late
October. However, the inability of the greenback to rally after the
stronger-than-expected jobs data suggests the bounce has ended. Still,
participants may be cautious ahead of the October CPI report due November 10.
Although many may think Powell indicated that
the Fed was finished with 75 bp moves, the Chair kept the door ajar. While
acknowledging it may be appropriate to slow the pace of tightening, he said it
could happen at the next meeting or the following one. The
market is pricing in about a 30% chance of a 75 bp at the December 14 meeting. The
September dot plot pointed to a 125 bp increase in Q4, suggesting that the
base case was for 50 bp in December. Powell's comments that the
"ultimate" (terminal) rate may be higher than expected seemed more
about the median dot of 4.6% for next year. The Fed funds futures had been
hovering near 5%. The market recognizes the risk of higher for longer, which
operationally means that the terminal rate is seen between 5.0%-5.25%. And the
risk is that the peak comes in Q2 23 rather than Q1.
Dollar Index: The extended gains after the FOMC meeting saw the Dollar Index rise through the (61.8%) retracement of the losses since the multiyear high in late September, near 114.75. The bounce stalled near 113.15 and made for the third consecutive lower high. Initial support is seen near 111.00. It likely will require a break of the October low (~109.55) to lend more credence to the idea that an important top is being forged. The daily momentum indicators are not very encouraging for the bears. The MACD is bouncing along its trough while the Slow Stochastic is trending higher.
Euro: The euro frayed support near
$0.9750 as it appears to have completed a pullback from the October 27 high
near $1.01. However, its resilience ahead of the weekend, and it made new highs
after the US jobs data, was impressive and made new highs late in the session near $0.9660. The
MACD pulled back from its highest level since June but is flatlining at
elevated levels, and the Slow Stochastic is trending lower. The market may be
reluctant to extend gains above $1.0000-$1.0040 ahead of what is expected to
be a firm US CPI print on November 10.
Japanese Yen: The dollar peaked
against the yen on October 21, slightly below JPY152.00. On the same day, the US
10-year yield was near 4.33%. Both pulled back, and on October 27, both recorded the
recent low (~3.89% and ~JPY145.10, respectively). However, while the US yield
settled almost 10 bp higher last week, the dollar slipped nearly 2/3 of one
percent against the yen. It was the third consecutive weekly fall. Still, the
exchange rate appears to have entered a range between JPY145-JPY150. Conceptually,
BOJ verbal and material intervention needs only buy time until US rates peak. The
momentum indicators point in opposite directions. The MACD is
drifting lower but is still elevated, while the Slow Stochastic is curling up. If the MOF/BOJ wanted to underscore their views and get street cred, either
helping push the dollar through JPY145 or selling dollars after it breaks in an
offered market could do the trick. The BOJ's intervention in September was when the dollar first pushed above JPY145.
British Pound: With the help of
dovish forward guidance by the Bank of England as it delivered a 75 bp rate
hike, and in the aftermath of the FOMC meeting and press conference, sterling
appears to have completed a down move near $1.1150. That corresponds to the (38.2%)
retracement of the rally from the record low in late September. Sterling
stalled in late October with several attempts at the $1.1650 area. The momentum
indicators have only recently turned lower. This seems more consistent
with a range-trading affair rather than a trending market. The $1.1400-50 area
may cap it in this scenario. Sentiment seems fragile, and many are not persuaded
that a significant low is in place. A break of $1.1150 targets $1.10.
Canadian Dollar: The post-FOMC rally
saw the greenback test CAD1.3800, but a combination of the strong equity
market, the broad pullback in the US dollar, and the much stronger-than-expected
Canadian employment report pushed it below CAD1.35 ahead of the weekend, which
is also where the lower Bollinger Band is found. We see a large head and shoulders pattern, with a neckline at
CAD1.35. The measuring objective would be CAD1.30. The MACD is falling, but the
Slow Stochastic has turned higher. Ahead of the US CPI report, the pre-weekend
low (~CAD1.3470) may hold, and the dollar can recover back into the CAD1.3600-40
area.
Australian Dollar: A bearish outside
down day with the volatility around the FOMC meeting on November 2 saw the
Aussie tank from almost $0.6500 to a low the following day just ahead of
$0.6270. It shot up ahead of the weekend and poked slightly above $0.6475. Optimism
about China, a surge in copper prices (~6%, the most since 2016), and the broad
pullback in the US dollar seemed to be the main drivers. Here too, the MACD is
constructive, while the Slow Stochastic has been turned down. A move above last
month's highs near $0.6540 could spur another 1-2% gain and begin looking as if
a low of some importance may be being carved. Yet, a break below $0.6350-75
would undermine this more optimistic scenario.
Mexican Peso: Last week, the peso was not the
strongest of the emerging market currencies. That honor went to the
Brazilian real, which appreciated by about 5% against the dollar. However,
arguably the peso's 1.3% gain was more impressive in the sense that it reached
its best level in six months, while the Brazilian real fell to its lows from
late August. The peso was also one of the few currencies to post a
modest gain when the dust settled after the FOMC meeting. It will take a
four-day rally into the week ahead. The year's lows set in late May around
MXN19.4135 (and the low since March 2020). The pre-weekend low was a little
below MXN19.46. The MXN19.80 area that had served as support acted like
resistance to the dollar's bounce stoked by Powell and the FOMC.
Chinese Yuan: The PBOC has been
raising the dollar's reference rate since the 20th Party Congress ended. This
has allowed the dollar to continue to rise, albeit slowly, against the yuan. Yet,
the reference rate was consistently well below the median forecasts based on
changes in the currency market since the local trading ended the previous day. Moreover, Chinese
data (PMI) disappointed, while US data were mostly better than
expected, and the Fed was hawkish. However, another force has emerged that
spurred the largest yuan rally in two years ahead of the weekend. There was new
talk that China would end or dramatically change its zero-Covid policy. The
talk had surfaced earlier but appeared denied by Party officials. Still,
when the dust settled, the dollar, which had risen 10 of the past 12 weeks
against the yuan, fell by a little more than 0.9%, the biggest weekly loss
since May. The greenback settled near CNY7.1850, having peaked on November 1
around CNY7.3275. The yuan seems vulnerable if there is no confirmation of a change Beijing's Covid stance.
Disclaimer
Reviewed by Marc Chandler
on
November 06, 2022
Rating:
