We think the US dollar has put in a
significant high. However, the near-term technical readings are stretched. The
dollar's bounce from November 15 to November 21 met or approached minimum
retracement targets, but the momentum indicators did not correct. These
conflicting impulses need to be navigated in the days ahead. On balance, we
look for a firmer greenback, which we see as corrective. That is the
prism through which we look at the price action.
At the same time, we look for US 10-year yield
to recover from the seven-week low slightly below 3.65% seen before the weekend.
The two-year yield slipped below 4.42% briefly ahead of the weekend. It, too, looks poised to recover in the days ahead. We are not persuaded that the FOMC
minutes revealed anything the market did not already know or assumed. The
effort by the media and some analysts to play up some kind of tension between
Fed Chair Powell, on the one hand, and Vice Chair Brainard, on the other hand,
seems exaggerated. A 50 bp hike in December, after four three-quarter-point
moves, is hardly a dovish pivot. The September dot plot (Summary
of Economic Projections) had anticipated this base case, which the market
has more or less accepted after flirting briefly with another 75 bp hike, which
some Fed presidents refuse to rule out. Ahead of the next batch of key data
(jobs on December 2 and CPI on December 13, the Fed funds futures market has
about a 12% chance of a 75 bp hike discounted.
Dollar Index: We have suggested
that the move being corrected is the greenback's decline from November 10,
which was inspired by the softer-than-expected US CPI. Last week's bounce
stopped a little shy of the (50%) retracement objective near 108.15. It was
sold back down but held the November 15 low and the 200-day moving average
(~105.35). The MACD is stuck in its trough in oversold territory, while the
Slow Stochastic has recovered slightly. The risk-reward, we think, does not
favor new dollar shorts yet. While the 108.00-15 may be the first hurdle, we are looking for a move toward 108.80 or so.
Euro: The euro ran from
about $0.9935 to a little above $1.0220 on November 10 on the back of the
softer US CPI. The rally was extended to almost $1.0480 on November 15. The
pullback bottomed slightly below $1.0225 on November 21. The (50%) retracement
objective was closer to $1.0205. The subsequent bounce, which was more than we
anticipated, reached nearly $1.0450. The momentum indicators remain stretched,
warning of the risk of further corrective action. Support ahead of the weekend
was seen by $1.0355. A break of $1.03 may be needed to confirm that the
corrective phase continues. While we see potential toward the $1.0150-70 area,
a break of $1.0225 could spur talk of a double-top that projects closer to
parity. We note that non-commercial positions (speculators) in the futures
market have the largest net long euro position since the middle of last year. It
presents a nearly threefold increase since mid-October. On the upside, above
$1.0480, the $1.0515-$1.0615 band would seem to be the next target.
Japanese Yen: The greenback fell from
about JPY146.60 before the November 10 CPI to a low near JPY137.70 on November
15. Last week's bounce stalled at JPY142.25, slightly above the (50%)
retracement target. The subsequent pullback found support ahead of JPY138. The
MACD is at its lows for the year, while the Slow Stochastic has barely emerged
from oversold territory. A move above JPY140.15 may boost confidence a low is
in place. The key is still US rates, and a recovery in US yields could help
lift the dollar back into the JPY143-JPY144 area. The rolling 30-day
correlation between the change in the exchange rate and the 10-year US yield
reached new highs for the year last week (~0.71).
British Pound: Sterling reached
a new three-month high last week near $1.2155. The MACD is at highest level in
more than four years. The Slow Stochastic has been overbought since the middle
of the month. Sterling stalled in front of the 200-day moving average
(~$1.2185). It has not traded above the 200-day moving average since early January
and has not closed above it since September 2021. If the move continues,
the next target is in the $1.22-$1.23 area. A break now of $1.20 may be the
first sign of the correction we anticipated. A move below $1.1965 could spur a
1-2-cent decline. Despite the nearly 17.5% rally in sterling since the record-low
in late September, the speculators in the futures market are net short around
30k futures contracts as of November 22.
Canadian Dollar: The US dollar's
bounce against the Canadian dollar was a bit stronger than we expected. Indeed,
it surpassed the (61.8%) retracement of the drop from November 10 (found
~CAD1.3440) and tested the neckline of the head and shoulders pattern
(~CAD1.35) that we have been monitoring. The neckline held, and the greenback
was turned lower. It found support ahead of CAD1.3300. The MACD has flatlined
in oversold territory, and the Slow Stochastic has turned up. A move above
CAD1.3440 would likely spur another run at CAD1.3500. Above CAD1.3520 we would see
the greenback approach CAD1.3600. On the downside, a break of CAD1.3200-25
would renew the focus on the head and shoulder's measuring objective near
CAD1.30. The rolling 60-day correlation of changes in the exchange rate and
changes in the S&P 500 (~0.77) is the strongest in a decade.
Australian Dollar: The pullback
in the Australian dollar retraced (50%) of the rally began on November 10 (near
$0.6385) and peaked on November 15 (slightly shy of $0.6800). That retracement was
near $0.6590, and the Aussie bounced back to $0.6780 ahead of the weekend. The
MACD is at seven-month highs. The Slow Stochastic has pulled back slightly below
the overbought threshold but has moved sideways recently. A push above
$0.6800 could spur a test on the September high (~$0.6915) and the 200-day
moving average (~$0.6935). A break of the $0.6590 and the 20-day moving average
(~$0.6585) could signal a double top that would project back to $0.6400.
Mexican Peso: The dollar was
sold to almost MXN19.25 on November 15, its lowest level since March 2020. The
bounce carried it to nearly MXN19.60 on November 21, the upper end of the range
since November 10. The 20-day moving average was also found there, and the
greenback has not closed above this moving average since October 19. The dollar
settled on its lows for the week and looks set to retest the low from
mid-November. The MACD moving sideways a little above its trough, while the
Slow Stochastic is stalling near where it peaked in late October. The carry
remains attracted. Mexico's one-month cetes yield nearly 10%. The 4-week US
T-bill pays about 3.9%. If we are correct, and US yields firm, long peso and
short yen positions look attractive again.
Chinese Yuan: Surging
infections to new highs lays to rest ideas that Beijing was, in any meaningful
way, moving away from its zero-Covid policy. At the same time, more measures
have been announced for the property market, which seems like a tacit
acknowledgment recently, 20 measures were not sufficient. We had thought it
possible last month, but the PBOC announced a 25 bp cut in reserve requirements
effective December 5. It frees up an estimated CNY500 bln (~$70 bln). The yuan
fell for the second week against the dollar. Its nearly 0.65% loss was the
largest in five weeks. The dollar briefly poked above CNY7.18 ahead of the
weekend, its best level since November 11 and where the 20-day moving average
is found. The dollar has retraced slightly more than half of this month's
decline (~CNY7.1765). If we are correct that the yuan now is trading closely with
the yen and euro against the dollar and that the dollar still has the technical
potential to correct higher, then the greenback may test the
CNY7.2100-CNY7.2500 band.
Disclaimer
Reviewed by Marc Chandler
on
November 27, 2022
Rating:
