The US dollar rose against all the major currencies last week and the Dollar Index rose to it sits highest level since May 2020. The relative strength of the US economy and the aggressive course the Fed appears to be signaling appears to be the main driver. The US 10-year yield rose more than 30 bp last week to 2.70%. Of the G7 bond markets, only Italy's yield rose more (32 bp).
The US 2-10-year yield curve
steepened by 26 and is now positively sloped by around 19 bp. The steepening, which appeared linked to
the quicker pace that the Fed's balance sheet will shrink beginning as early as
next month snapped a six-week flattening trend that had briefly inverted the
curve.
What stands out is the
reversal of the dollar blocs fortunes. A less dovish Reserve Bank of Australia
lifted the Australian dollar to its best level since June 2021 (~$0.7660), but it
proceeded to sell-off and closed below the previous week's low. The New
Zealand dollar set a new four-month high near 0.7035 but also reversed lower, which
was also below the previous week's lows. The market is pricing in about a
66% chance that the RBNZ hikes by 50 bp next week. The greenback bounced
smartly off CAD1.24, its lowest level since last November and reversed
higher. Even with a strong jobs report and aggressive tightening priced
into the swaps market (the 65 bp discounted, show is consistent with a little
more than a 50% chance of a 75 bp hike by the Bank of Canada when it meets
next week), the US dollar rose to almost CAD1.2620 ahead of the weekend, its
best level in 2 1/2 weeks.
The euro could not get out
of its own way. After
posting a key downside reversal on March 31, it has not been able to sustain
even the most modest of upticks. It takes a seven-day slide into next
week and looks poised to re-challenge the $1.08 low seen last month. Sterling took out the $1.30 low seen in mid-March to trade at its lowest level
since November 2020. Rising US yields have kept the yen on the
defensive. It has fallen for six consecutive sessions and looks set to rechallenge
the JPY125 area.
Dollar Index: The Dollar Index has risen for seven
consecutive sessions through the end of last week. It moved above 100.00
for the first time since May 2020. The momentum indicators are trending
higher. There is near-term potential into the 100.50 area and then the high
from April 2020 around 100.85. The high reached during the panic in March
2020 was almost 103.00. A word of caution comes from the Bollinger
Band. The Dollar Index has been flirting with the upper band most of the
week and settled above it (~99.97). Initial support is seen near
99.60.
Euro: Sentiment toward the euro is poor.
Ahead of the weekend, the Bank of Italy warned that its economy may have
contracted in Q1. That follows the Bundesbank and the German wisemen
(economic think tanks that advise the government) cuts to their growth
forecasts. The euro is set to test the March low slightly above $1.08
next week. There is little meaningful support below there until the March
2020 low around $1.0635. The momentum indicators are headed lower,
though the Slow Stochastic is getting stretched. The lower Bollinger
Band, slightly below $1.0845 is getting frayed. A move above the five-day
average (~$1.09) might be an early sign that this leg down is over. The
tightening of the French presidential contest may have weighed on the
euro. A strong showing by Le Pen or weaker than expected support for
Macron would likely spur euro sales initially.
Japanese Yen: The 60-day correlation of the change in
the exchange rate and the change in the 10-year US yield is rising and is now a
little 0.50. Over the same period, the correlation with the S&P 500 is
less than 0.1. The dollar has risen for six consecutive sessions, rising
to almost JPY124.70 ahead of the weekend. Not coincidentally, the US
10-year yield has also risen for the last six sessions. We have suggested
the JPY125.00-JPY125.50 may be the upper end of a new range for the
greenback. Recall that the high from 2015 was closer to JPY125.85.
Before that, the last significant high was in 2002 a little above
JPY135.00. The MACD is terribly stretched, but the Slow Stochastic is
turning back up after pulling back since late March. The higher volatility
environment means that the upper Bollinger Band (two standard deviations above
the 20-day moving average) will begin the new week close to
JPY125.60.
British Pound: The broad US dollar gains proved too
much for sterling, which fell below $1.30 for the first in nearly a year and a
half. The Bank of England is not seen likely to keep up with the
tightening envisioned for the US or Canada. The market sees little
likelihood that the BOE hikes rates by 50 bp at all this year, while the market
is debating whether the Fed will hike by 50 bp two or three times this year,
for example. Russia's invasion of Ukraine has kept UK politics out of focus,
but next month's local elections may change that. We have been
anticipating a break of the $1.30 area to signal a push toward $1.2830, the
halfway mark of the rally from the pandemic-panic low near $1.14 to last year's
high around $1.4250. The momentum indicators are headed lower and the
Slow Stochastic is a little above oversold territory. The lower Bollinger
Band will begin the new week by $1.2990. It may take a move above
$1.3075-$1.3100 to stabilize the tone.
Canadian Dollar: The US dollar fell to a five-month
low on April 5 to almost CAD1.24. It reversed higher that day, leaving a
bullish hammer candlestick in its wake. It has not looked back and made a
high after the strong jobs report to nearly CAD1.2620. The momentum
indicators have turned up and give scope for further greenback gains.
Even though the Bank of Canada meets on April 13, it still looks vulnerable.
The swaps market has nearly 65 bp of tightening priced in for the
meeting. The way to understand that is that the market is divided between
a 50 bp and a 75 bp hike. That seems a bit rich, given that a week ago
the swaps market did even have a 50 bp hike full discounted. The US
dollar approached the (50%) retracement of the decline since the March 15 high
near CAD1.2870 found near CAD1.2635. The 200-day moving average is found
slightly lower, around CAD1.2620. Above these levels, the next important
chart point is closer to CAD1.2690, the (61.8%) retracement target. The market may be cautious about taking the greenback higher immediately. A pullback toward CAD1.2500-CAD1.2520 would not be surprising. In the
bigger picture, the US dollar recorded an outside up week against the Canadian
dollar by trading on both sides of the previous week's range and settling above
it high. It looks like a broad range between CAD1.24-CAD1.29 has been
forged.
Australian
Dollar: After
rising to its best level since last June (~$0.7660) on the back of a slightly
less dovish central bank, the Australian dollar was sold down to almost $0.7425
ahead of the weekend. The conservative assumption is that it is retracing
the last leg up that began in mid-March near $0.7165 rather than the year's low
set last January closer to $0.6970. The (50%) retracement objective is a
little below $0.7415. The next retracement target (61.8%) is near
$0.7355. The momentum indicators have turned lower but remain at elevated
levels. A strong March jobs data on April 14 may spur rate hike
talk, but a 25 bp hike is fully discounted for the June 7 meeting and around
190 bp of tightening is seen this year. This seems aggressive and seems
to imply a 50 bp hike along the way.
Mexican Peso: The US dollar extended its losses against
the Mexican peso at the start of last week. It fell to MXN19.7275, its
lowest level since June 2021. It bounced strongly over the next two
sessions for the first time in a month. The squeeze higher ran into
sellers near MXN20.1950. Subsequently, it consolidated in a range that
extended to around MXN20.07. The downside can be extended toward MXN20.00
with challenging what we suspect to be a more sustained recovery for the greenback.
The momentum indicators have turned higher from oversold territory. Our
initial target is in the MXN20.35-MXN20.40 area. Mexico reported stronger
than expected March CPI (7.45% vs. 7.28% in February). The central bank
does not until after the Fed next month. A 50 bp is widely expected to
7.0% is widely expected. However, Banxico is ahead of the US in the
cycle, and it is not clear that it can keep up with the Fed as the year
progresses.
Chinese Yuan: For the fourth consecutive week, the dollar
settled little changed between about CNY6.3610 and CNY6.3660. Macro
considerations arguable favor a stronger dollar. China's 10-year premium
over the US was over 100 bp as recently as early March. At the end of
last week, it slipped below five basis points. The narrowing spread may
have been behind the record divestment of Chinese bonds in March (~CNY52 bln,
~$8 bln), according to Bloomberg estimates based on Chinabond and PBOC data. It
was the second consecutive month that foreign investors were sellers for a
cumulate liquidation of CNY87 bln. The weakening of the Chinese economy
as officials respond to the rising Covid cases, is very disruptive. More
policy stimulus is necessary, but there is a significant risk that the Covid
outbreaks will increase. Not only are portfolio flows less
supportive and the policy divergence, and the trade surplus is likely to have
fallen dramatically in March. Officials seem content for the time being
with the dollar in range between roughly CN6.34 and CNY6.38. We like the
dollar higher, and suspect if it were to appreciate now, it would not be seen
as manipulative move. The dollar may have scope to move into the
CNY6.40-CNY6.44 area in the coming weeks.
Disclaimer
Reviewed by Marc Chandler
on
April 10, 2022
Rating:
