It was easy to see that the bullish dollar story was true. China and Russia, the main US rivals, have both suffered self-inflicted injury. The Dollar’s Pullbacks was driven by the Federal Reserve’s anticipated aggressive tightening. Market understood that the Fed would aggressively fight inflation, even though it was slightly slower than anticipated (though faster than other large central banks), regardless of whether there was a chance of an economic soft landing.
It appears that the market is using a different response function right now. The euro was remarkably resilient after the extraordinary job growth that exceeded all expectations. Due to US CPI being lower than anticipated, the dollar dropped sharply. This caused technical problems in charts.
While we aren’t willing to chase down the dollar lower, we were pleased that the 10-year yield closed just a few basis points higher after the US reported a decline in CPI/PPI. This was the first weekly rise in 2 weeks. It is now almost a month since the dollar pulled back and it seems like it is getting stretched. We will be looking for levels that confirm a lower level, which could indicate that the Dollar’s Pullbacks could recover.
Dollar Index The Dollar Index reached nearly 107.00 after the stronger than expected jobs data. However, it dropped to almost104.65 because of the lower than anticipated CPI. This was the lowest level recorded since June. The MACD is in decline but is not oversold. Slow Stochastic seems to be moving lower that the middle of its range. It will be higher in the coming days. We want it to be 106.30 and then 107.00. A move above 107.50 could signal a return to the mid-July highs of 109.30. A close below 105.00 could indicate a lower chance of another leg.
Euro: After the US CPI fell, the euro rose strongly. The new week begins close to $1.0375, however, the trendline that traces back to the February, June and March highs is still in place. We expect the euro will move lower over the coming days, despite momentum indicators suggesting further gains. If it wanted to give life, it would be unable to move above the trendline. There is a greater chance that the single currency will move initially towards $1.0180-$1.0200. To return to the $0.9950 level of mid-July 20 years ago, a $1.01 break might be necessary. The cumulative 11 basis point drop in the US premium to Germany over two years was close to 2.66%. Six basis points were removed from Italy’s premium to Germany. It was only the third week. However, it was nearly twice as high at 0.75 percent than in June.
Japanese Yuen After the CPI figures, the greenback fell to JPY135 from JPY135 and was purchased at JPY131.75. This price was higher than the August 2 low of JPY130.40. This week’s US rates were firmer despite the softening of three price reports (CPI, PPI) as well as lower import/export costs. The greenback seems to be ready for the JPY135.00-50 ceiling. The JPY137.50 area would be reached if the greenback crosses JPY136. We have already highlighted the strong correlation between changes in the exchange rate and the US 10-year yield and other factors. It is still very high, even though the correlation has dropped to 0.50. The correlation with the US 2-year yield is now 0.50, which is still high. This corresponds to the highest correlation in five years.
British Pound: Sterling rose $1.2275 in the broad-ranging US dollar selloff which took place in middle of last week. The August 2 high of $1.23 was just short of its stop. This could create a double top formation with a neckline at $1.20. Breaking would be at the July low of $1.1760 which was two years ago. Expect the MACD to fall. The Slow Stochastic has moved sideways in the middle of the range after pulling back earlier this month. It seems that the mood is low. The UK will report an easing in the labor market over the next week. This could increase consumer prices and lead to another drop in retail sales.
Canadian Dollar Last Wednesday’s US dollar dropped to CAD1.2730, a close to two-month low. The 200-day moving average intraday was broken for the first time since June 9. The (61.8%) retracement, which was at CAD1.2400 in April and CAD1.3225 in July, was found to be close to CAD1.2715. The US dollar quickly recovered and was back in the CAD1.2800 area before the weekend. We believe the momentum indicators are warning of further losses in USD. We expect a near-term bottom, and a correction towardsCAD1.2850-CAD1.2900. Canadian dollars have shifted as a result of the S&P 500 changes. This makes the Canadian currency more vulnerable to immediate risks. The correlation has been slightly higher than 0.60 over the past 30 sessions. The correlation was 0.80 in June. The correlation between oil prices and exchange rates (WTI) was close to 0.60 in early August. It hovers now just below 0.50.
Australian Dollar Although we expect the US to correct more, our bias is that Australia’s currency should not. It has remained above the $0.7050 level it hit at the start of the month. It slowed slightly at $0.7135, and settled at $0.7100 just before the weekend. There are positive momentum indicators. The 200-day moving mean is $0.7150. Close to $0.7170 can be found the (50%) retracement ($0.7660 mid-April and US$6680 July) of this year’s fall ($0.7660 by April and $6680 July). This area could be broken to bring $0.7285 back to the June high.
Mexican Peso.Latin American currency had a great week with the exception that the Argentine peso dropped by more than 1% to earn the dubious distinction as the weakest performer among emerging markets. Half of the top five performers were Latam currencies, with Chile (+3.9%) and the Colombian peso (33.3%). The peso’s 2.7% rise was the highest in five months. The MXN19.85 was the dollar’s exchange rate. This is the lowest level it has been since June, when it was close to MXN19.82. It seems that there is nothing that can stop the move towards MXN19.50. Fears that AMLO’s appointment as central bank governor would stop aggressive tightening of monetary policy must have vanished, as Banxico demonstrated a determination to increase rates and shadow the US.
Chinese Yuan From mid-April to middle May, the yuan dropped. Since then, it has traded in the same range as in the second half of May. CNY6.650 to CNY6.77 is the range for the dollar. CNY6.72 to CNY6.78, which is a narrowing in the upper range of the larger range during the last month, after the greenback surged significantly after US employment data. It was noted that policymakers are concerned about inflation, and that the monetary authorities have been reluctant to lower it. A strong yuan might be favored by domestic policy.