We think the US dollar has put in a significant high. However, the near-term technical readings are stretched. The dollar's bounce from Nov. 15 - Nov. 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 Nov. 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 Nov. 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 Nov. 10 on the back of the softer US CPI. The rally was extended to almost $1.0480 on Nov. 15. The pullback bottomed slightly below $1.0225 on Nov. 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 Nov. 10 CPI to a low near JPY137.70 on Nov. 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 Nov. 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 Nov. 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.