Can the Dollar Sell Off Much More Before the CPI?

by
Marc Chandler
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The apparent hawkishness of Fed Chair Powell's comments at the press conference following the FOMC's fourth consecutive rate hike extended the dollar's recovery, which had begun in late October. However, the inability of the greenback to rally after the stronger-than-expected jobs data suggests the bounce has ended. Still, participants may be cautious ahead of the October CPI report due November 10.

Although many may think Powell indicated that the Fed was finished with 75 bp moves, the Chair kept the door ajar. While acknowledging it may be appropriate to slow the pace of tightening, he said it could happen at the next meeting or the following one. The market is pricing in about a 30% chance of a 75 bp at the December 14 meeting. The September dot plot pointed to a 125 bp increase in Q4, suggesting that the base case was for 50 bp in December. Powell's comments that the "ultimate" (terminal) rate may be higher than expected seemed more about the median dot of 4.6% for next year. The Fed funds futures had been hovering near 5%. The market recognizes the risk of higher for longer, which operationally means that the terminal rate is seen between 5.0%-5.25%. And the risk is that the peak comes in Q2 23 rather than Q1.

Dollar Index: The extended gains after the FOMC meeting saw the Dollar Index rise through the (61.8%) retracement of the losses since the multiyear high in late September, near 114.75. The bounce stalled near 113.15 and made for the third consecutive lower high. Initial support is seen near 111.00. It likely will require a break of the October low (~109.55) to lend more credence to the idea that an important top is being forged. The daily momentum indicators are not very encouraging for the bears. The MACD is bouncing along its trough while the Slow Stochastic is trending higher.

Euro: The euro frayed support near $0.9750 as it appears to have completed a pullback from the October 27 high near $1.01. However, its resilience ahead of the weekend, and it made new highs after the US jobs data, was impressive and made new highs late in the session near $0.9660. The MACD pulled back from its highest level since June but is flatlining at elevated levels, and the Slow Stochastic is trending lower. The market may be reluctant to extend gains above $1.0000-$1.0040 ahead of what is expected to be a firm US CPI print on November 10. 

Japanese Yen: The dollar peaked against the yen on October 21, slightly below JPY152.00. On the same day, the US 10-year yield was near 4.33%. Both pulled back, and on October 27, both recorded the recent low (~3.89% and ~JPY145.10, respectively). However, while the US yield settled almost 10 bp higher last week, the dollar slipped nearly 2/3 of one percent against the yen. It was the third consecutive weekly fall. Still, the exchange rate appears to have entered a range between JPY145-JPY150. Conceptually, BOJ verbal and material intervention needs only buy time until US rates peak. The momentum indicators point in opposite directions. The MACD is drifting lower but is still elevated, while the Slow Stochastic is curling up. If the MOF/BOJ wanted to underscore their views and get street cred, either helping push the dollar through JPY145 or selling dollars after it breaks in an offered market could do the trick. The BOJ's intervention in September was when the dollar first pushed above JPY145.

British Pound:  With the help of dovish forward guidance by the Bank of England as it delivered a 75 bp rate hike, and in the aftermath of the FOMC meeting and press conference, sterling appears to have completed a down move near $1.1150. That corresponds to the (38.2%) retracement of the rally from the record low in late September. Sterling stalled in late October with several attempts at the $1.1650 area. The momentum indicators have only recently turned lower. This seems more consistent with a range-trading affair rather than a trending market. The $1.1400-50 area may cap it in this scenario. Sentiment seems fragile, and many are not persuaded that a significant low is in place. A break of $1.1150 targets $1.10. 

Canadian Dollar: The post-FOMC rally saw the greenback test CAD1.3800, but a combination of the strong equity market, the broad pullback in the US dollar, and the much stronger-than-expected Canadian employment report pushed it below CAD1.35 ahead of the weekend, which is also where the lower Bollinger Band is found. We see a large head and shoulders pattern, with a neckline at CAD1.35. The measuring objective would be CAD1.30. The MACD is falling, but the Slow Stochastic has turned higher. Ahead of the US CPI report, the pre-weekend low (~CAD1.3470) may hold, and the dollar can recover back into the CAD1.3600-40 area.

Australian Dollar: A bearish outside down day with the volatility around the FOMC meeting on November 2 saw the Aussie tank from almost $0.6500 to a low the following day just ahead of $0.6270. It shot up ahead of the weekend and poked slightly above $0.6475. Optimism about China, a surge in copper prices (~6%, the most since 2016), and the broad pullback in the US dollar seemed to be the main drivers. Here too, the MACD is constructive, while the Slow Stochastic has been turned down. A move above last month's highs near $0.6540 could spur another 1-2% gain and begin looking as if a low of some importance may be being carved. Yet, a break below $0.6350-75 would undermine this more optimistic scenario.

Mexican Peso: Last week, the peso was not the strongest of the emerging market currencies. That honor went to the Brazilian real, which appreciated by about 5% against the dollar. However, arguably the peso's 1.3% gain was more impressive in the sense that it reached its best level in six months, while the Brazilian real fell to its lows from late August. The peso was also one of the few currencies to post a modest gain when the dust settled after the FOMC meeting. It will take a four-day rally into the week ahead. The year's lows set in late May around MXN19.4135 (and the low since March 2020). The pre-weekend low was a little below MXN19.46. The MXN19.80 area that had served as support acted like resistance to the dollar's bounce stoked by Powell and the FOMC.

Chinese Yuan:  The PBOC has been raising the dollar's reference rate since the 20th Party Congress ended. This has allowed the dollar to continue to rise, albeit slowly, against the yuan. Yet, the reference rate was consistently well below the median forecasts based on changes in the currency market since the local trading ended the previous day. Moreover, Chinese data (PMI) disappointed, while US data were mostly better than expected, and the Fed was hawkish. However, another force has emerged that spurred the largest yuan rally in two years ahead of the weekend. There was new talk that China would end or dramatically change its zero-Covid policy. The talk had surfaced earlier but appeared denied by Party officials. Still, when the dust settled, the dollar, which had risen 10 of the past 12 weeks against the yuan, fell by a little more than 0.9%, the biggest weekly loss since May. The greenback settled near CNY7.1850, having peaked on November 1 around CNY7.3275. The yuan seems vulnerable if there is no confirmation of a change Beijing's Covid stance.