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The Greenback Has Abruptly Fallen Out Of Favor

By Marc ChandlerForexJan 13, 2022 06:13AM ET
The Greenback Has Abruptly Fallen Out Of Favor
By Marc Chandler   |  Jan 13, 2022 06:13AM ET
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The 7% December CPI print did not prevent the dollar from weakening broadly. The Dollar Index fell by 0.65%, the largest decline since late November. The 10-year yield rose by less than a basis point to poke above 1.74%.

The S&P 500 spent most of the session chopping in a 15-point range. The greenback is still offered broadly, with the dollar-bloc and sterling leading. Emerging market currencies narrowly mixed, with the Turkish lira's 2%+ slide being the chief outlier. The JP Morgan Emerging Market Currency Index was heavier after rising around 1.2% in the past two sessions.

Equities were faltering. Japan, China, and South Korea were a drag on the MSCI Asia Pacific Index, while the Stoxx 600 turned higher after a softer opening, after rising by about 0.65% yesterday. US futures were trading with a slightly firmer bias.

Benchmark 10-year European yields were narrowly mixed, while the US yield was near 1.75%. Gold snapped a  four-day advance after approaching $1830. Oil prices were also paring yesterday's gains, which had lifted the February WTI contract above $83. It was consolidating in a narrow range.

Nickel reached a 10-year high yesterday as Indonesia said could introduce an export tax but was softer today. Other industrial metals that we track were softer too. Iron ore was off a little more than 3% after rallying more than 5% over the past couple of sessions. Copper was pulling back around 1% after a similar two-day advance. US natural gas prices were off a little more than 2% today after a four-day ~25% rally. Europe's natgas benchmark was off for a third session and was off about 12.4% this week.

Asia Pacific

Tokyo raised its COVID alert amid the surging pandemic. It stands at the second highest of four levels. Cases in the capital were the highest in four months. Japan had seemed more resilient in the face of the Omicron variant, but it now looked like the contagion was simply delayed. Three of Japan's worst areas were in a quasi-emergency posture, allowing local authorities to impose restrictions on bars and restaurants. Tokyo will also re-impose restrictions if the hospital bed utilization reaches 20%. It was near 14% yesterday. 

Japan no longer will require medical workers who have had close contract with Omicron cases to quarantine due to stress on the health care system. Australia made similar allowances for transport and freight workers in a bid to address the supermarket shortages. Prime Minister Morrison said that 10% of the workforce was on leave at any time due to the virus, while some media outlets reported the absenteeism is near 50% in the transport sector. Australia was in a zero-COVID policy, but as of Wednesday, it reported more than a million cases. The general election is likely in Q2, and the government's handling of the virus will be a key issue.

The dollar was sold a little through JPY114.40 yesterday, nearly two yen off its multi-year high set on Jan. 4. There was no follow-through selling to speak of, but it made little headway above yesterday's JPY114.65 settlement. Last month's uptrend line came in today around JPY114.30, and technically, a break of it could see a push toward JPY113.50.

The Australian dollar rose above last month's highs yesterday (~$0.7280) and was pushing above $0.7300 today. It was trading near the upper Bollinger® Band (~$0.7315). The $0.7345 area was the (61.8%) retracement objective of the fall from the late October high (~$0.7555).

After gapping lower against the Chinese yuan yesterday, the greenback stabilized today. It edged back above CNY6.36. The PBOC stepped up its protest of the yuan's strength by setting the dollar's reference rate about 60 pips weaker than expected (Bloomberg survey) at CNY6.3542. The median bank projection was CNY6.3482.


The UK had two sets of negotiations today. First, Foreign Secretary Truss was to meet with the EU's Sefcovic to discuss the Northern Ireland protocol. Truss was seen as a possible successor to the beleaguered Prime Minister Johnson. Brexit derailed the previous two UK Prime Minister, Cameron (referendum) and May (Brexit proper).

Although polls show most voters were not pleased with how Brexit had been implemented, Johnson's main problems stemmed from a petty corruption scandal and the handling of COVID (not by example).

Second, the UK and India launched free-trade negotiations today. This was the start of what will be protracted talks. On the one hand, the UK had been trying to secure free-trade agreements now that it was outside of the EU and the old Commonwealth was fertile ground. On the other hand, the Indian economy was one that's moving up the ranking table and not as integrated into global trade and finance as much as the other economies its size.

Italy's presidential selection process begins in earnest on Jan. 24. While Draghi indicated interest in the post, he seemed to think he could pick a caretaker replacement that could lead the country into next year's election. However, Berlusconi was threatening to force an election if Draghi was chosen over him for president.

Meanwhile, Draghi was maneuvering to block proposals from the center-right for a large spending package to help households and businesses impacted by the surge in COVID. They sought a package of around 20 bln euro, which would require a change in the budget that was just passed a couple of weeks ago. Instead, Draghi was seeking a 2 bln euro package that would help the tourist industry and would help fund the furlough program for employees. His plan seemed to repurpose some existing funds and would not require changes to the budget. 

Hungary's central bank left the one-week deposit rate at 4.00% for the third consecutive week. It ratcheted the rate up from 1.8% in mid-November to 4.0% at the end of last year. December CPI is due out tomorrow and is expected to have eased to 7.2% from 7.4%. Note that in an attempt to ease price pressures on households, the government capped fuel prices and fixed mortgage rates. Starting next month, the prices for six commodities (sugar, flour, sunflower oil, chicken breast, pork leg, and most milk) will be at mid-October prices.

The euro has been in a $1.12-$1.14 trading range since around the middle of November. It broke out to the top side yesterday and reached almost $1.1480 today. It closed above a downtrend line going back to last April/May. It was near $1.1435 yesterday and a little lower today. The last leg lower began in late October near $1.1690. The $1.1440 area corresponded with the (50%) retracement objective and the next one (61.8%) was near $1.1500. The euro closed above its upper Bollinger® Band yesterday (~$1.1405) and was still above it (~$1.1430) today.

Sterling was pushing above its 200-day moving average (~$1.3735) for the first time since last September. Yesterday, it met the (50%) retracement objective of the slide since last year's high on June 1 (~$1.4250) that was found a little above $1.37. The next retracement (61.8%) was closer to $1.3835. It was holding a little below its upper Bollinger Band (~$1.3760). 


Many outspoken critics of the Fed argue that the central bank has not given up on the idea that inflation will fall on its own accord. Their rationale was that when the supply chain disruptions have been resolved and base effects unwound, and the fiscally induced consumer spending eased, inflation would fall.

The critics argued that unemployment was below the natural rate and that this would contribute to the persistence of inflation. Without drawing attention to it, or resolving some of the critical problems, the critics were ultimately angry that the Fed eschew the Phillips Curve, which posited a stable inverse relationship between unemployment and inflation.

Used vehicle prices rose 3.5% in December, for a 37.3% year-over-year gain. Only some parts of the energy complex, like gasoline prices (almost 50% year-over-year increase) rose by more. Monetary policy is not suited to address the issues that have been lifting used car and truck prices and energy.

In effect, then, the critics were saying, that to cope with those drivers, the Fed must squeeze those other parts of the economy that they can. Chair Powell and noted hawk, St. Louis Fed Bullard both expressed the desire "to bring inflation under control in a way that does not disrupt the real economy."  Who doesn't want that?  

They know the tools they have and insist on defining the problem in a way that lets them use it. Maslow's observation stated that if all one has is a hammer, the problems will look like nails. Their tools here compress demand until it falls back to the supply curve. As an aside, in an interview with the Dow Jones, Bullard said he thinks four rate hikes may be appropriate this year. Many market participants have come around to this view, and the Fed funds futures were pricing in around a 60% chance of four hikes instead of three.

Yet, last month's Summary of Economic Projections (dot plot) showed two Fed officials who thought four hikes would be appropriate this year. If one of those dots wasn't Bullard, who many regarded as the most hawkish member (and voting this year), it suggested another dimension of the hawkish turn of the Fed. 

The US PPI and weekly jobless claims are unlikely to drive the dollar, which appeared to be caught in a powerful position adjustment. Many observers recognize that the greenback often has weakened after the start of the monetary tightening cycle. However, that still seemed to be a couple months away (a consensus among Fed officials of a March move seemed to be solidifying).

While we had expected the twin deficit issue to reemerge as a key driver, we did not expect it to begin with Russian troops poised to invade Ukraine and while Italian politics threatened to inject a new element of instability. 

The head and shoulder US dollar top we identified against the Canadian dollar was unfolding. The neckline at CAD1.26 was taken out on Tuesday and yesterday's push saw the greenback test the 200-day moving average near CAD1.25. Today it was sold to almost CAD1.2465. It closed below its lower Bollinger Band yesterday (~CAD1.2540) and remained below it (~CAD1.2495) today. Nearby support was seen near CAD1.2450.

The greenback was pinned near its recent trough against the Mexican peso, though it made a marginal new low a little below MXN20.32 yesterday. It has not closed above MXN20.40 so far this week, and had not been above there today, so far. The week's high was set next at MXN20.5230 and there was an option for $600 mln at MXN20.50 that expires today.

The Greenback Has Abruptly Fallen Out Of Favor

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The Greenback Has Abruptly Fallen Out Of Favor

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