Once again, the dollar was
sold into a shallow bounce as the bears maintained the upper hand. There is a growing conviction that the peak in the
Fed's tightening cycle is within view, despite more robust than expected jobs
growth and an unexpectedly strong rise in average weekly earnings.
After rallying through
September, the US dollar's pullback was extended last week. Despite the oversold momentum
indicators, dollar bounces have proved short and shallow. Falling US yields
provide a more full explanation of the yen's surge than changes in Japan
proper. The euro and sterling reached their highest levels since June.
The Australian dollar moved
above $0.6800 for the first time in two-and-a-half months, while the New
Zealand dollar rose to its highest level since mid-August. The dollar slumped to 3.5-month lows
against the Scandis and flirted with the 200-day moving averages. The Canadian
dollar continued to be the laggard. HSBC's sale of its Canadian banking unit to
the Royal Bank of Canada did the Loonie no favors.
The underlying issue we
have been wrestling with has yet to be alleviated. The momentum indicators continue to show
the dollar is oversold. Yet, at the same time, the structural long dollar
positions built for the better part of the past two years are
unwinding. For example, Japanese insurers and pensions appear to be boosting
hedge ratios. Dollar-functional exporters who had been allowing the USD balance
grow are being forced to act. The magnitude of the greenback's decline here in
Q4 is breathtaking. Of the G10 currencies, only the Canadian dollar has not
risen by at least 5%.
Dollar Index: DXY finished last week at its lowest level
since the end of June, near 104.55. The bounce after the employment report
stalled at the 200-day moving average (~105.55). It took the three-day loss
from Fed Chair Powell's to about 2.65%. The MACD is at its lowest since 2003. The
Slow Stochastic has flatlined slightly into oversold territory. With the latest
losses, the Dollar Index has met the (38.2%) retracement objective since
bottoming on January 6, 2021 (yes, ironic, huh?), found at 105.00. The next
retracement (50%) is near 102.00. Since the peak, marked by the key reversal on
September 28, bounces have been mainly between 200 and 400 points. That said,
initial resistance may be seen in the 105.50-106.00 band.
Euro: The euro had fallen to s six-day low
before Powell spoke on November 30 of nearly $1.0290 before reversing higher
and closing above the November 29 high (outside up day) and preceded to rally
to almost $1.0550 ahead of the weekend. It settled at its highest level since
June 27. The pullback in the kneejerk response to the jump in US earnings and
initial surge in US rates saw the euro hold the five-day moving average near
$1.0425 before rallying to new session highs. The MACD is at its highest since
August 2020, while the Slow Stochastic hovers around overbought territory. On
the upside, the next important technical area is the $1.0600-20 area, which
holds the (38.2%) retracement target of the euro's losses since January 6, 2021,
and highs from this past June. The Bollinger Band starts the new week slightly
below there. The $1.0480-$1.0500 area may offer initial support, but buying on euros on modest dips with more enthusiasm than selling rallies as it
had been doing for the better part of two years marks a new phase. Also, many
note the regularity by which the euro generally appreciates in the month of
December. It has risen in 18 of the past 29 Decembers.
Japanese Yen: In contrast, the yen has fallen in 17 of
the past 29 Decembers. However, it is off to a strong start this month. It will
take a five-day advancing streak into next week. It matches the April 2021
advance, which was the longest since November 2020. The US 10-year yield, which
we think expresses the major driving force on the exchange rate, tumbled 19 bp
last week after 15 bp the week before. Since the close after the November 2
FOMC meeting, the 10-year US yield dropped 60 bp. The yen has appreciated by
10.1% to lead the G10 currencies, squeaking just ahead of the New Zealand
dollar, where the RBNZ accelerated its rate hikes as others prepare to
downshift. The dollar closed below its 200-day moving average (~JPY134.50) for
the first time since February 2021. The low before the weekend was slightly
below JPY133.65. It broke below its lower Bollinger Band (~JPY134.00) ahead of
the weekend but settled above it. The JPY135.00-50 offers initial resistance,
while the JPY133.00 area is important support. A break could signal a test on
JPY130.
British Pound: Sterling traded at a five-day low
near $1.19 before Powell spoke on November 30 and, by the end of the next
session, had pushed above the 200-day moving average (~$1.2155) for the first
time in more than a year and above $1.23 for the first time since June 27. After
the US employment data, sterling found support around the 200-day moving
average and rallied back to $1.2300. This $1.23 area is important from a
technical perspective. It catches the highs from June and August and
corresponds to the (50%) retracement of sterling's decline from June 1, 2021,
high near $1.4250. The MACD is stretched and has been at its highest level since
early 2018. The Slow Stochastic has drifted slightly lower recently but is still over-extended. The $1.25 area may be of psychological importance, but the
important chart resistance is more like $1.2600-50. Support now may be around
$1.2150.
Canadian Dollar: The Canadian dollar was the only G10
currency to weaken against the dollar. It is the third consecutive weekly loss.
When the US dollar is strong, the Canadian dollar often shines, but when the
greenback weakens, the Canadian dollar often seems to underperform. Canada
reported another strong employment report ahead of the weekend. It gained
nearly 51k full-time positions. Proportionately it would be as if the US
created 560k jobs. The market marginally upgraded the risk of a 50 bp hike on
December 7 from about 15% to a little more than 25%. And still, the Canadian
dollar could not sustain even the most modest upticks. It has fallen in five of the past
six sessions. Early last week, the greenback's five-day moving average crossed
above the 20-day for the first time since October 21. The MACD is rising but is
still near the recent trough, and the Slow Stochastic is trending higher, just
entering the upper half of the range. The US dollar found support near CAD1.34,
which is also where the 20-day moving average is found. The CAD1.36 area, which
held on a closing basis last week, corresponds to the (50%) retracement of the
US dollar losses since the mid-October high (~CAD1.3975). The next retracement
(61.8%) is a little below CAD1.3700.
Australian Dollar: Softer-than-expected October CPI and
the central bank's assessment that inflation expectations are anchored slightly reduced the chances of a rate hike on December 6. It is nearly a 50/50
proposition in the futures market. The Australian dollar underperformed ahead
of the weekend, rising by almost 0.6% against the weaker US dollar. After the US employment data, the spike down saw the Aussie find support near the
five-day moving average (~$0.6745) and recovered to trade above $0.6800 before
settling at $0.6790. The day before, the high was about $0.6845, the best since mid-September. The next technical targets are the $0.6870 area, the
(38.2%) retracement of the decline since late February 2021 (~$0.8000), and
around $0.6925, the 200-day moving average. The September high was also in that
area (~$0.6915). The MACD is the highest in eight months. The Slow Stochastic
is flat, slightly above 80, the threshold for overextension.
Mexican Peso: The peso underperformed all but a
few emerging market currencies last week. Its 0.35% loss put it ahead of the
Argentine peso (-1.5%), the South African rand (-2.4%), and the Russian rouble
(-2.6%). It was the first weekly loss in seven weeks. The peso strength had
waned in the second half of November, then it surged, and the dollar fell
MXN19.40, which seemed to have exhausted the peso bulls. While the US dollar's
bounce against the major currencies was sold, against the peso, it was trading
near session highs before the data (~MXN19.16) and did not really look back. It
made it to nearly MXN19.45 before steadying. Still, the dollar closed above the
20-day moving average for the first time since October 19. The momentum
indicators are curling up. Initial resistance is seen in the MXN19.50-MXN19.60
band. Mexico's underperformance was not about the region. Last week, the Chilean peso
(~4.5%) and the Brazilian real (~3.4%) were the top EM performers.
Chinese Yuan: Ahead of the weekend, the dollar fell to its lowest level against the Chinese yuan since September 20 (~CNY7.0170) before recovering and settling at CNY7.0535. The offshore yuan recovered after the mainland market closed. The dollar finished at CNH7.0210. Interestingly, the dollar tested the lower Bollinger Band (~CNY7.0220) ahead of the weekend. The rolling 60-day correlation of the changes in the dollar-yuan and euro-dollar exchange rates reached a Covid-era high of slightly more than 0.6 in mid-November. It now stands slightly below there now. The 60-day rolling correlation of the changes in the dollar-yuan and dollar-yen exchange rates reached a Covid-era high of 0.50 in mid-November and now is around 0.47. The yuan has become more volatile. Consider that the benchmark three-month implied volatility has been at least 7% since mid-October. For the past few years, it never sustained such high levels. Recall that at the beginning of the year it was around 4%.
Disclaimer
Reviewed by Marc Chandler
on
December 04, 2022
Rating:
