The dollar surged last week. Sure, the push of the Fed was notable, but the larger move from Sweden’s Riksbank failed to impress. In fact, the Swedish krona was the poorest performer among the G10 currencies, tumbling 5% last week. Sterling was pummeled to $1.0860 even as the market moved to discount the likelihood of a 100 bp hike at the next Bank of England meeting on November 3. It cannot be entirely laid at the Fed’s feet. Sterling’s biggest drop (~3.5%) was recorded in reaction to the new government’s fiscal package.
Emerging market countries in the Asia-Pacific have been slower than other regions in raising interest rates. Banks seem to still be lowering their projections for China’s growth, Yet, the Fed is blamed for their challenges. The drag on central European currencies seems more regional than global, which is to say more about Europe and the euro than the US and Federal Reserve. Of the top four emerging market currencies this year, three (Brazil, Peru, and Mexico) are in Latam. The 30% appreciation of the rouble is an outlier due to its unique situation.
As the following review finds, the dollar’s move in the last few days has been extreme, and several pairs are outside of their Bollinger Bands, set at two standard deviations from the 20-day moving average. The Dollar Index, the euro, and sterling closed beyond three standard deviations. Momentum indicators, for the most part, were not as extreme. The dollar will likely rise further, though it may consolidate as interest rates stabilize. A non-linear moment occurred between Russia’s (partial?) mobilization and the Fed guidance that saw the market raise its expected terminal rate. As the market wrestles with it possibly being above 4.75% in Q2 ’23, the next key data point is likely the September jobs data in a couple of weeks. The early call is for around a 250k increase, which, while slower than August, will still be seen by the policymakers as a solid number. In the meantime, the Fed’s pre-meeting silence period has ended, and more color is likely.
Let’s turn to the price action.
Dollar Index: The Dollar Index screamed above 113.00 ahead of the weekend to record a new 20-year high. There is little on the charts until the 2000-2001 highs between roughly 120.50 and 121.00. While the Bollinger Band is set at two standard deviations around the 20-day moving average, the DXY finished more than three standard deviations higher. The upper Bollinger Band is about 111.80, while the third standard deviation from the 20-day moving average is closer to 112.80. The MACD is racing higher but is not overextended, and the Slow Stochastic is also rising and slightly below the overextended mark. Initial support is seen near 112.50.
Euro: The single currency took another leg down ahead of the weekend. Its 3.4% loss last week was the most since that dreadful third week of March 2020. It sunk to almost $0.9665, a new 20-year low. The preliminary September composite PMI, released at the end of last week, fell to 48.2 from 48.9. It is the third consecutive month below the 50 boom/bust level. Yet, the market is confident (85%) of another 75 bp hike by the ECB next month. Like the Dollar Index, of which it is the most significant component, the euro fell beyond three standard deviations from its 20-day moving average. That marker is found slightly below $0.9690, while the Bollinger Band (two standard deviations from the 20-day moving average) finished the week near $0.9780. The momentum indicators are falling and are not yet overextended. The $0.9600 area that we thought would be the bottom looks too optimistic. Talk of $0.8500-0.9000 is circulating. Initial resistance may be found in the $0.9720-35 area.
Japanese Yen: After confirming no intention to change monetary policy, the Bank of Japan intervened last week as the dollar approached JPY146.00. It drove the greenback to almost JPY140 before tentative buyers emerged. That range is likely to prove important now. The JPY143.15 area is the middle of the range, and the (61.8%) retracement is close to JPY143.80. The US 10-year yield rose to almost 3.83% before the weekend and reversed lower to nearly 3.65%. It settled slightly below 3.70%. The two-year yield finished strong near 4.20%, almost a 35 bp increase on the week. If that is going to take pressure off the yen, it was not evident ahead of the weekend. The dollar closed near its session highs (~JPY143.45), around its best levels since the intervention. The market may gingerly fish for the BOJ’s pain threshold.
British Pound: What it took the euro a week to lose, ~3.5%, sterling lost ahead of the weekend and as the market took a dim view of the next government’s fiscal plans. It had been on the defensive, and the Bank of England’s 50 bp rate hike on September 22. The high after the hike was about $1.1350, and almost 36 hours later, it traded $1.0840 before the week ended. Sterling finished over three standard deviations (~$1.0935) below its 20-day moving average. The MACD and Slow Stochastic oversold. The $1.10 target we suggest turned out to be around the midpoint of the pre-weekend range in North America. There is little on the charts ahead of the February 1985 low, near $1.0520. For its part, the euro surged through the GBP0.8850 area, the halfway point range since the March 2020 peak near GBP0.9500 and the low set earlier this year by GBP0.8200. The next retracement (61.8%) is found at GBP0.9000.
Canadian Dollar: The US dollar brings a four-day advance into the week ahead. Since the low on September 13 (~CAD1.2955) to the pre-weekend…
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