The aggressiveness that the market
now sees in Fed tightening underpinned the dollar, while the 2–10-year yield curve
flattened to levels last seen in November 2020. The market has about a
one-in-five chance that the initial move in March is 50 bp. The swaps
market has about 135 bp of tightening discounted for this year.
With a Fed move in March as
done of a deal as these things gets, the US employment report may lose some of
its market-moving ability. The same can be said of Canada. Weakness will be attributed to the virus. The
focus turns to the Reserve Bank of Australia, the Bank of England, and the
ECB. The RBA's dovishness may be curbed, but a decline in the eurozone's
January CPI, as the German VAT increase drops out of the year-over-year
comparison, will keep the ECB on the sidelines. The BOE can be aggressive,
with a rate hike, and first G7 central bank to allow its balance sheet to
shrink.
The greenback punched through
some key technical levels, and after the false breaks earlier this month in the
yen and euro, some short-term players and momentum traders may be trying to
pick a top. Several of the pairs that we discuss below are beyond their
Bollinger Bands (two standard deviations around the 20-day moving average). However, for medium-term participants, we expect the US dollar to rise
further.
Dollar Index: Since bottoming on January 14 (~94.60),
the Dollar Index has jumped nearly 3% and took out last year's highs. In
the consolidation ahead of the weekend the 97.00 area offer support. The
upper Bollinger Band begins the new week near 97.15. The MACD is moving
higher but the Slow Stochastic is on the verge of becoming stretched.
Still, the last time the Slow Stochastic entered over extended territory, the
Dollar Index rose by almost another 200 points before peaking. The next
technical objective is the 97.70 area, which is the (61.8%) retracement of the
decline since the March 2020 high (~103.00). A break of the 96.35-96.50
area would warn of a false break.
Euro: The euro recovered from the initial
pre-weekend push to a new low around $1.1120. The minor gain snapped a
four-day drop. The upticks were not sufficient to lift the single
currency much above the lower Bollinger Band, which finished the week slightly
above $1.1165. The week's decline of around 1.6% was the largest loss
since last June and pushed the Slow Stochastic into oversold territory.
The MACD is falling at near the middle of its range. There appears to be
little meaningful chart support until closer to the $1.1000-$1.1050 area.
We suspect that some of the fuel of the euro's recent drop was late longs that
played the upside break earlier this month were forced to liquidate.
While there may be scope for some near-term consolidation, the divergence
between the ECB and the Fed may be underscored by what will likely be a decline in January EMU
CPI and Lagarde’s patience.
Japanese Yen: The yen is torn between rising US yields
and falling equities. After briefly dipping below JPY113.50 at the start
of last week, the dollar rose to almost JPY115.70 before the weekend.
However, equity market volatility seemed to have deterred new dollar
buying. The momentum indicators have turned higher, and the five-day
moving average looks poised to cross above the 20-day moving average in the
coming days. We peg initial support for the dollar in the
JPY114.85-JPY115.00 band. The dollar rose to its highest level in five years
at the start of the month (~JPY116.35). It can be retested in the coming days
if equities steady.
British Pound: Sterling's 1% loss last week
made it the second strongest major performer against the dollar after the
Norwegian krone. Political uncertainty continues to hang over 10 Downing
Street, even though what appears to have happened in broad terms does not
appear out of character for the Prime Minister. The Bank of
England is expected to deliver its second hike in the cycle and reach the
threshold (50 bp) to begin allowing a passive reduction of its balance
sheet. The market has four hikes discounted and 75% chance of a fifth
hike. With the recent decline, sterling has met the (61.8%) retracement
objective (~$1.3395) of the rally that began a little before Xmas near $1.3175
and peaked on January 13 at almost $1.3750. It closed below the lower
Bollinger Band on last Thursday but closed above it (~$1.3385) ahead of the
weekend. The MACD is trending lower and the Slow Stochastic is about to
enter oversold territory. The $1.3470-$1.3500 area offers a nearby cap.
Separately, but related, the euro has been sold to almost GBP0.8300. The
low from the February 2020 is near GBP0.8280. It was slightly lower in
December 2019, this is the weaker end of where the euro has been since the June
2016 referendum.
Canadian Dollar: Despite the Bank of Canada also
signaling what Governor Macklem repeatedly call a "significant" shift
in policy, the Canadian dollar suffered in the wake of the greenback's
surge. In fact, the market sees the Bank of Canada as the most aggressive
of the G7 central banks this year. The swaps market has nearly 160 bp of
tightening discounted. The Bank of Canada's balance sheet will also
likely begin falling this year. The greenback's gains negated the head
and shoulders pattern we've been monitoring. It bottomed near CAD1.2450,
well above the CAD1.2250 measuring objective. The dollar's assault
stopped shy of CAD1.28 ahead of the weekend. It met the (61.8%)
retracement objective of the recent decline (from ~CAD1.2965 on December 20 to
CAD1.2450 on January 19), which came in near CAD1.2770. The upper
Bollinger Band begins the news week near CAD1.2810. Neither momentum
indicator is stretched, and both are moving higher. The CAD1.2900 area
becomes the immediate target when CAD1.28 is paid. The
CAD1.2950-CAD1.2965 area capped the greenback last year.
Australian Dollar: The Aussie's 2.5% decline last week
was the biggest since last August. The conjoined risk-off and Fed
hawkishness proved too much. Before the weekend, it was sold below
$0.6970 for the first time since July 2020. The greenback's ascent slowed
broadly in North America, but the Australian dollar still struggled to regain a
foothold above $0.7000, a key technical area. Given the nearly three-cent
slide in two weeks, the momentum indicators are moving lower and the Slow
Stochastic is more advanced in the move than the MACD. There are two
relevant caveats. First, the Australian dollar settled the last two
sessions below the lower Bollinger Band. The last time this happened, it
marked the end of a down move and a nearly four-cent rally in two-and-a-half weeks.
Second, the speculators in the futures market have been all over this, with
having amassed the largest net short position on record in the middle of
January.
Mexican Peso: The dollar rose against the peso
every session last week. Its 2% gain was the most in a couple of
months. The peso's weakness was partly a function of the risk-off
shift. It delivered a 1% loss to the JP Morgan Emerging Market Currency
Index, which snapped a three-week advance, large enough to offset nearly the full gain of the past two weeks. Part of the peso's weakness may also be a
result of shifting short-term funds. Brazil has become a favored
destination and the real was the only currency in the region to appreciate last
week. Other central banks are raising rates more aggressively than
Banxico, and Brazil is going to deliver 150 bp rate hike on February 2.
However, last week, the only Latam currency that did worse than the Mexican
peso was the Chilean peso, even though the Chilean central bank delivered a
larger than expected rate hike. The momentum indicators are constructive,
suggesting the greenback has potential to run further against the Mexican
peso. The MXN21.00 area is the next obvious technical level. Above
there, potential extends into the MXN21.20-MXN21.45 range.
Chinese Yuan: The dollar fell to almost four-year
lows against the Chinese yuan in the middle of last week to hold barely above
CNY6.32. It rebounded by 0.75% on January 27, the largest single day
advance in six months to approach CNY6.37. The greenback consolidated
ahead of the week-long holiday in China. It appears that
Chinese bonds and stocks are less attractive now for many international asset
managers and it looks like Brazil may have replaced it as a favored overweight.
The dollar is trading a little stronger against the offshore yuan (CNH) and
settled a little above CNH6.36. Like the yen and euro, the yuan's apparent
breakout may not be sustained. The CNY/CNH6.40 area is the top of the
recent range.
Disclaimer
Reviewed by Marc Chandler
on
January 30, 2022
Rating:
