The US dollar turned in a solid week's performance, rising against most currencies and recording a marginal new high for the year against the euro. Sterling and the Australian dollar competed for the worst performer. Both central banks pushed against market expectations for aggressive near-term tightening.
The central banks triggered a short squeeze in the bond market, where 10-year benchmark yields from 10 bp in the US to 34 bp in Italy. UK 10-year Gilts and French Oats yields fell nearly 22 bp. Germany lagged with an almost 18 bp decline. The speculative market had its largest net short Treasury note futures position since March 2020. It has swung from its largest net long position in four years (~181k contracts) in early October to a net short position of almost 270k as of November 2.
The macro focus shifts back to inflation next week with American and Chinese reports. Rising inflation in the world's two largest economies may arrest the rally in the bond markets. We anticipated the dollar to move broadly higher this month, and the move we envision does not appear over. However, important support has been approached in a sharp thrust that has penetrated Bollinger Bands, suggesting some patience may be needed. The dollar did close relatively softly, especially given the stronger than expected employment report.
Dollar Index: A new high for the year was recorded after the employment report was slightly above 94.60. The momentum indicators are trending higher, and the five-day moving average crossed back above the 20-day moving average. Recall that the 94.50 area is (38.2%) retracement of the sell-off since the March 2020 peak (~103). The high from last September was closer to 94.75, but above there, nothing stands out until the 95.70-96.10 band. Yet ahead of the weekend, it finished poorly and formed a potential bearish shooting star candlestick. Initial support is seen around 93.80.
Euro: The single currency was virtually flat last week, but it does not hide the fact that a new low for the year (~$1.1515) was recorded. The MACD and Slow Stochastic are moving lower, and the price action has been poor. The $1.1490 area corresponds to the (50%) retracement objective of the rally from the March 2020 low (~$1.0635). The next retracement (61.8%) is found a little below $1.13. The euro finished on a firm note near session highs, suggesting scope for some corrective gains at the start of the new week. The new momentum shorts are frustrated with the lack of follow-through and maybe in weak hands. A close above $1.1620 would lift the technical tone.
Japanese Yen: The Japanese yen was the strongest of the major currencies, gaining an inconsequential 0.25% against the dollar. The decline in US rates helped drag the dollar lower against the yen. In terms of market positioning, short-yen carry trades had become momentum trades, too and the unwind was also supportive of the yen. The dollar-yen exchange rate continues to track US 10-year yields. The 10-year yield fell below 1.50% for the first time in a month ahead of the weekend, and the dollar made a new low for the week near JPY113.30. Recall that in the big picture, we have suggested a range-trading affair between around JPY113.00 and JPY114.50-JPY115.00. That still seems reasonable. However, we note the dollar's momentum is flagging, and the five-day moving average slipped below the 20-day for the first time since late September. The Slow Stochastic and MACD are trending lower. A break of JPY113.00 signals the next leg down into the JPY112.00-JPY112.50 band.
British Pound: After the Bank of England confounded market expectations, sterling was spanked, falling more than 1% for only the second time this year (the other was on September 28, which arguably was more of a dollar move). Expectations, partly facilitated by official comments, for tighter monetary policy spurred a roughly 4.3-cent rally in sterling last month. If the BOE is saying, "sorrow about the mate, you misunderstood the conditionality and our job," it seems only fitting that sterling return to the late-September low near $1.3400. It did so ahead of the weekend to $1.3425. Ahead of the weekend, it settled below the lower Bollinger Band for the second consecutive session. The momentum indicators are still falling. However, it managed to close near session highs, and a potential hammer candlestick may have been formed. However, if $1.34 does not hold, it is difficult to find much chart support ahead of the $1.3165-$1.3200 area should $1.3400 be convincingly broken.
Canadian Dollar: The Canadian dollar fared better than the other dollar-bloc currencies but still lost about 0.5% against the US dollar. Since meeting the head and shoulders objective near CAD1.23, the US dollar has been consolidating and forming a rounded bottom. The five-day moving average crossed back above the 20-day for the first time in a month. The greenback finished the week bumping against the 200-day moving average (CAD1.2480), while the momentum indicators suggest there is more to come. A retracement (38.2%) of the greenback's slide since September 20 high (~CAD1.29) is found near CAD1.2520, and the next retracement (50%) is slightly below the neckline of the head and shoulders pattern (~CAD1.2600).
Australian Dollar: The Australian dollar's pullback has been more profound than the other majors. It dropped almost 2.6% from the late October higher (~$0.7555), which was its best level since early July, and retraced half of last month's rally at the pre-weekend low (~$0.7360). The momentum indicators are still falling, and the five and 20-day moving averages have crossed for the first time in nearly a month. The next (61.8%) retracement target is closer to $0.7315. Still, it closed firmly and with a possible bullish hammer candlestick, suggesting a bounce early next week is likely. The $0.7430-$0.7450 area may be the first important hurdle. The Reserve Bank of Australia, like many other central banks, is emphasizing labor market developments in their forward guidance. Given the gap between what the RBA is saying (no hike likely until 2024) and what the market is saying (the swaps market implies nearly 70 bp of tightening over the next 12 months), next week's October jobs data may have greater impact. Australia lost almost 285k jobs in August and September amid the lockdown. A modest recovery is expected. In fact, the worst was probably in August. Full-time positions increased by almost 27k in September.
Mexican Peso: The peso staged a brilliant recovery last week, but only after first falling to its lowest level since March. The fall in US rates helped take pressure off the peso and emerging markets more broadly. The strong US employment report bolstered risk appetites and lifted the JP Morgan Emerging Market Currency Index, which had been lower on the week, ahead of the data. The dovish FOMC tapering announcement saw the dollar record a key downside reversal against the peso by reversing lower after making new highs and closing below the previous session's low. Modest follow-through selling pushed the dollar through the (61.8%) retracement objective (~MXN20.46) of the rally that had begun in late October (from ~MXN20.21), ahead of the FOMC meeting and jobs report. Before the weekend, it settled at the lows for the week (~MXN20.30). Initial support is seen near MXN20.20. The central bank meets next week (November 11). Most expect a 25 bp hike, but an acceleration in CPI last month ( to be reported on November 9) may boost the risk of a 50 bp move.
Chinese Yuan: The yuan's 2% gain this year puts it in third place globally, behind the Russian ruble (4.5%) and the Canadian dollar (2.3%). The yuan has drifted higher in recent weeks. It has risen for the past three months for a cumulative gain of a little less than 1%. For the past several weeks, the PBOC consistently set the dollar's reference rate above market expectations (median projection in Bloomberg's survey) but did not do so ahead of the weekend. Last week the dollar traded quietly within the range seen in the past two weeks. The dollar recorded four-month lows in October in front of CNY6.38. Given the official penchant for stability, the issue now is the upper end of the range, and it seems to be CNY6.40-CNY6.41. Since late September, the dollar has not settled above the 20-day moving average (~CNY6.4075), the middle of the Bollinger Bands. China's 10-year bond yields peaked in mid-October near 3.05% and last week finished below 2.90% for the first time in several weeks. It is the only country whose 10-year yield has fallen this year (~25 bp). The October inflation gauges are the market's focus, but trade and lending figures may generate more insight into the economic drivers.