Dollar Bears have the Upper Hand

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Marc Chandler
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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%.