Verbal intervention proved enough to keep JPY145 below, but the greenback largely gained. It hit new two-year highs against the dollar bloc and before the weekend and at levels not seen since 1985. High price pressures, as the labor market remains tight ( fell for the fifth week in a row and hit a four-month low), prompted the market to seek a higher federal funds terminal rate. At the end of August, the peak of the key rate was 3.75% to 4.00%. We now see it closer to 4.50%.
We expected the dollar to trade higher through the conclusion of the September 21 FOMC meeting, but last week’s gains were particularly strong against currencies, such as the dollar bloc and the US dollar, which are associated with risk and have a leverage effect on global growth. They were down 1.75% to 2.65%. The , the , and were the worst performers among the majors, losing around 0.33%.
Only Peruvian sol and Peruvian sol in the emerging market space rose against the dollar. The JP Morgan Emerging Market Currency Index fell 1.0%, its third consecutive weekly decline. It is at a modest 5.7% this year. The Dollar Index, which measures the US dollar against a weighted basket of major currencies, has risen about 15% this year. The Bannockburn World Currency Index, a GDP-weighted index of the 12 major economies (half of which are emerging markets), is down around 5.25%. Contrary to the general impression, this review of relative performance shows that major currencies have generally fallen more than emerging market currencies, with some notable exceptions of course.
The erosion of the economic outlook, while the effort to tighten financial conditions will continue next year, warns of the scarcity of risk appetite. US stock indices could retest June lows, as could those in Europe. Earlier this month, the index fell to new two-year lows. The trajectory of weaker growth impulses and tighter financial conditions is weighing on sentiment, and it’s hard to see what can turn it around soon. The new projections from the Federal Reserve can be expected to ratify the market’s judgment that the likely terminal rate has risen from what it thought (midpoint) in June. The Bank of England is expected to deliver another 50 basis point hike. While complaining about yen volatility, the BOJ is likely to insist that its monetary framework is appropriate, highlighting the significant policy divergence.
The dollar index fell to a 2.5-week low ahead of the August release. It climbed and closed at a three-day high, recording a bullish day outside. After consolidating in narrow ranges for the next two sessions, it recorded the high of the week before the weekend, slightly above 110.25. There is little to prevent a move up to the 20 year high set on September 7th near 110.80. Momentum indicators turn higher from the middle of their ranges. The next target could be around 111.30, but overall the risk could extend towards 117.50-120.00. Still overall, we are inclined to see some consolidation in the near term and this could see the Dollar Index fall back into the 108.60-80 range.
The Euro was down near $1.02 at the start of the week and the US CPI took it back below $1.00. It hasn’t been able to close over there since. However, the selling pressure on the Euro has been relatively modest compared to most other major currencies. With the 0.75% loss last week, it’s little changed since the September 2 US jobs report (when it settled around $0.9955). The MACD looks set to turn lower, while the Slow Stochastic has already done so. Still, there is room for corrective pressures that could pull the Euro back towards $1.0070-1.0100. The Euro’s 20-year low, set on September 6, was $0.9865 and that’s obviously what the Euro bears want to see next.
Japan’s threat to intervene in the foreign exchange market does not seem particularly credible. Hours after officials raised the ante, the BOJ announced an increase in its regular purchases of Japanese government bonds. That is, while the market was pricing in the risk of a 100 basis point Fed hike, the BOJ accelerated the pace of balance sheet expansion, albeit marginally. Three conditions seem to increase the chances of a successful intervention: if it is a surprise, multilateral, and signals a change in policy. None of these conditions is met. We understand that the BOJ is in frequent contact with banks in Tokyo. That the media reported that the BOJ was checking prices is a hoax. Still, the jaw managed to keep the greenback in range last week between around 141.50 JPY and 145.00 JPY. It mostly traded between 142.80 JPY and 143.80 JPY over the past two sessions. Momentum indicators are stretched and a continued sideways movement in the exchange rate can push them down. A breakout of JPY141.50 could stimulate a deeper correction. The key is US rates, and here there could be some relief if the 2-year yield stabilizes around 4% and the 10-year near 3.50%.
The British Pound posted a big day of declines off the back of the US CPI and took another leg up ahead of the weekend in response to a disastrous retail sales report. It was beaten to $1.1350, a level not seen since 1985. It seems a striking way to commemorate the 30th anniversary of Black Wednesday and the dramatic exit from the European Exchange Rate Mechanism. The pound’s decline also coincided with the market’s downgrading of the likelihood of a 75 basis point hike next week. Swap market bets on a 75 basis point rise peaked at around 82% on September 5 and were still close to 70% as recently as September 14. However, they fell about 15% before the weekend. Momentum indicators did not confirm new lows for the British Pound. However, it might suggest the possibility of a more stable tone, perhaps from the BOE meeting. $1.1450 offers the initial high, but corrective forces could prompt a test of the $1.1500-50 zone, which previously provided support.
The strong sell-off in US stocks proved too much for the , which fell to new two-year lows ahead of the weekend. The US dollar had absorbed offers around CAD 1.32 but was unable to close above until September 15th. Follow-up buying took it slightly above CAD 1.33 heading into the weekend. The 1.3340 CAD zone corresponds to the retracement (50%) of the downtrend of the greenback since the panic peak of March 2002 (~1.4670 CAD). The next major chart area above is CAD1.3400-20. Momentum indicators have room for more gains. The caveat comes from the upper Bollinger Band which will start the new week near CAD 1.3275. CAD1.3200-20 will likely offer support, then CAD1.3150. Next week, Canada will likely report that the headlines slowed in August, but not the core metrics. Canada could also see the biggest drop in retail sales (July) since April 2021 and the first drop this year. This will add to growing indications of a slowdown in economic activity.
Outside the low days of Tuesday and Thursday last week paved the way for a new two-year low set ahead of the weekend near $0.6670. Incidentally, it was slightly above the lower Bollinger Band (~$0.6665). However, the downward momentum was not sustained and support moved back above previous support near $0.6695-$0.6700. Daily momentum indicators are pointing down, but corrective pressure could see a recovery towards $0.6770-$0.6800. On the downside, the target for the head and shoulders pattern (forged mostly in August) is around $0.6600. The retracement target (61.8%) of the Australian Dollar’s rally from the March 2020 low ($0.5510) lies near $0.6515.
For more than a month, the US Dollar has been moving in a trading range of 19.80-20.20 MXN with a few exceptions, but not closing. The lower end of the spectrum was discarded early last week. The Dollar rose above 20.16 MXN before the weekend and encountered a wall of sellers that brought it back almost to the middle of the range (~20.20 MXN). The MACD does not generate a strong signal. The Slow Stochastic has become higher. Still, we believe the dollar may retest the lower end of its range ahead of the FOMC meeting in the coming days. Mexico paper may still be attractive to fund managers. Consider that a three-month cetes yields about 9.5% versus 3.15% on a 3-month US note, or almost 6.5%. Mexico’s 5-year note denominated in dollars pays about 110 basis points more than US Treasuries, and the 10-year note pays about 125 basis points more than the United States.
The Chinese Yuan
The dollar initially widened above CNY 7.0 ahead of the weekend, but came under pressure later in the session and returned to the previous day’s range and stabilized below CNY 6.99 . Still, this is the first time the greenback has traded above CNY 7.0 since July 2020. Recall that the dollar peaked three years ago near CNY 7.1850. It retreated to near CNY 6.8400 and then rose again to reach a high near CNY 7.18 in early 2020. The double top was confirmed with a breakout of CNY 6.84 in September 2020. It had a measurement target of CNY 6.50. , seen in January 2021, but the dollar only bottomed in March this year, near CNY 6.30. Since then, it first rallied above CNY 6.80 in May and then consolidated at a lower level until around mid-August. The dollar has risen around 4.5% over the past month, and Chinese officials would likely welcome short-term support and filling. The PBOC tried to manage the exchange rate. Setting the benchmark dollar rate significantly lower (for that sort of thing) is seen as moderating the pace of its rise (falling yuan). This is also consistent with the reduction in reserve requirements for foreign currency deposits.