The most important development last week was the swaps market lifting the terminal rate of the Fed funds rate toward 3.75% from around 3.25% at the end of April. The knock-on effect sent the US 10-year yield above 3% and underpinned the greenback.
The Bank of England's 25 bp rate hike, and 1/3 of the MPC wanted a 50 bp hike despite economic forecasts a contraction in Q4 and next year as well. The Volcker-moment sent sterling spiraling lower. It is trading at levels not seen since July 2020 and was the weakest of the major currencies last week, losing about 1.9%.
Technically, the dollar looks stretched and may need a trigger to encourage position adjustments. Consolidation can ease momentum indicators, while a review of the price action can help identify levels that could spur a more meaningful upside correction. The trigger could be some evidence that gives credence to talk that the US could be near an inflation peak. As we note in the macro commentary, April CPI and PPI may have declined last month for the first in two years.
Dollar Index: Ahead of the weekend, the Dollar Index briefly traded above 104.00 for first time since December 2002. While nonfarm payroll growth was a little better than expected, the details, including a decline in the participation rate and aggregate hours worked were disappointing, and this seemed to deter another run at the highs. The momentum indicators remain stretched and the Slow Stochastic has been softening slightly. The post-FOMC low was around 102.35 and a break of it would bolster the chances that the correction is at hand. The 20-day moving average, which the Dollar Index has not closed below in a month will begin the new week near 101.75. For the correction scenario to unfold, this would need to be taken out as well.
Euro: The single currency is forged a base around $1.0480. The initial attempt higher faltered in the $1.0630-$1.0640 area, which nearly met the (38.2%) retracement objective of the last leg down that began on April 21 (from ~$1.0935). The momentum indicators are turning up, but it could still be consistent with a flattish consolidation. The April trendline begins near week near $1.0735 and the (61.8%) retracement is closer to $1.0760. Perhaps, the combination of the disappointing details of the US jobs report and what we anticipate being the first decline in both US CPI and PPI in two years may help spur the corrective forces.
Japanese Yen: With the US 10-year yield pushing above 3%, the yen is on the defensive. Still, when everything is said and done, the dollar remains within the range set on April 28 (~JPY128.35-JPY131.25). The momentum indicators are mixed. The MACD is drifting lower. The Slow Stochastic has flatlined and a modest (dollar) bearish divergence has emerged. The jump in Tokyo's April CPI was not the result of wage growth and hence the signals from the Bank of Japan that is not sufficient to change monetary policy. Japanese officials seemed most concerned about the pace of the move, while implied volatility remains elevated, it is not accelerating. We continue to believe the risk of material intervention is low as the yen's weakness reflects the fundamental monetary policy divergence and neither the Federal Reserve nor the Bank of Japan are prepared to change the trajectory. It is also a reflection of broadly stronger dollar and not simply a function of a weak yen. With the dollar trading near its best level in two decades, it is difficult to talk about resistance, but talk of a move to JPY135 is widespread.
British Pound: Sterling fell from about $1.2635 to $1.2275 in the past two sessions. The Bank of England's 25 bp rate hike was shrugged off and the market focused on the forecasts for a contraction in Q4 22 and all of next year before stagnation in 2024. A break of $1.2240-$1.2250 area would target $1.20. Many participants seem to accept that the BOE is having a so-called Volcker moment, i.e., willing to drive the economy into a hard landing if necessary to bring inflation, which officials warned could reach 10% in Q4, under control. The peak base rate in the swaps market is now around 2.80%, up roughly 30 bp over the past week to new highs. It stands at 1% now. Sterling's upticks after the US jobs was capped near $1.23 70. Above there, the $1.2400-$1.2415 area be offer resistance. The MACD is falling still though it is overextended. The Slow Stochastic has drift higher over the past week, and it is seen a bullish divergence that it did not confirm the low in prices.
Canadian Dollar: The Canadian dollar fell for the sixth consecutive week. The 2-year interest rate differential moved a few basis points in Canada's direction. The price of WTI surged 5.5% and commodity prices more generally (CRB Index) rose. The Canadian dollar's weakness seemed largely a function of the risk-off mood reflected in the dramatic swings of equities. The Canadian dollar looked good in the first half of the week and sold-off sharply in the second half. The US dollar recorded a seven-day low in the aftermath of the FOMC meeting near CAD1.2715 before rebounding sharply (1.1%) in the next two sessions. This has become an important support area. The greenback finished the week on strong footing against the Canadian dollar as the S&P 500 approach the low for year and the NASDAQ set a new one. Last year, the greenback did not spend much time above CAD1.29, though the high was around CAD1.2965. Assuming that equities have not bottomed, the US dollar could test the CAD1.3000-CAD1.3050 area that holds that (38.2%) retracement objective of the greenback's decline from the COVID-inspired high in March 2020 and the 200-day moving average.
Australian Dollar: The somewhat more hawkish than expected Reserve Bank of Australia helped send the Australian dollar up a little more than a cent to $0.7265. It ran into a wall of sellers in front of the 200-day moving average (-$0.7280) and the (61.8%) retracement objective of the push lower that began from the April 20 high near $0.7460. It gave it all up plus some to test the $0.7060 area before the weekend. Last week's low was $0.7030, and a break signal a retest on the January low closer to $0.6970. The Slow Stochastic is turning up from oversold territory. The MACD is turning down again having not made it out of the oversold readings by the RBA-inspired bounce. A move above the $0.7140-$0.7160 would help stabilize the technical tone.
Mexican Peso: Leaving aside the vagaries of the Russian ruble and the capital control distortions, the Mexican peso was the strongest currency in the world last week. It appreciated by 1.3% against the US dollar. The strength was most evident at the start of the week. The sharp deterioration in risk-appetites in the last two sessions saw the greenback rise to MXN20.3160 to meet the (61.8%) of the losses seen in the first three days of the week. The MACD is gradually drifting lower, while the Slow Stochastic has turned lower decisively. A break of the MXN19.95 area would be important technically and opens the door to another 1% decline. On the upside, initial resistance is seen around MXN20.3050.
Chinese Yuan: The onshore yuan traded only the last two days of the week. It fell both days for total of almost 0.9%. It is not much but to appreciate what is happening, know that it is the fifth consecutive weekly decline and the ninth time in the past 10 weeks. The greenback has advanced by 5.5% over this run. The implied three-month volatility has more than doubled since the year's low set in mid-February near 3.2%. Leaving aside for a moment that the yuan is closely managed, the dollar is retracing its losses since the COVID-inspired high. Against the yuan that was set in May 2020 around CNY7.1780. The first retracement (38.2%) near CNY6.66 was met before the weekend. The next retracement objective is by CNY6.74, and the 200-day moving average is a slightly below there at CNY6.73. The surge in the 10-year US yield means it is at a nearly 30 bp premium over Chinese bonds. It is the most since 2010.
