USD Finishes Heavily, but Yields Continue to Rise, and CPI Lies Ahead

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjLDfGyA5wbw-sUrngUZ8iltDRzHnDdjog0myfepsUJby4dgN-cxDisWnrdEYDODt3pROtPv3Jjiu6-az0_8One72TVb7a-RXqiiGkb6SNOqdOKc50mLzNa59–oH1D8irq6MM1uFttegVpdzQEOyF1X9xLgmLcIjXL9W8Jz1EI7lrEMI0XtDFd0E9Xeg=s1500"><img alt="" border="0" data-original-height="844" data-original-width="1500" src="https://blogger.googleusercontent.com/img/a/AVvXsEjLDfGyA5wbw-sUrngUZ8iltDRzHnDdjog0myfepsUJby4dgN-cxDisWnrdEYDODt3pROtPv3Jjiu6-az0_8One72TVb7a-RXqiiGkb6SNOqdOKc50mLzNa59–oH1D8irq6MM1uFttegVpdzQEOyF1X9xLgmLcIjXL9W8Jz1EI7lrEMI0XtDFd0E9Xeg=s400" width="400" /></a></div><p><span><b>Last week's dollar gains were pared after the disappointing establishment job growth in December of 199k.&nbsp;</b>That was less than half of what was expected.&nbsp;&nbsp;The data continues to be distorted by the pandemic, for which the seasonally adjusted BLS applies, it is of dubious value now.&nbsp; The household survey has been significantly better in recent months than the establishment survey.&nbsp; In December, the household survey showed 651k more people were working.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>The unemployment rate slipped below 4%.</span></b><span>&nbsp; While this appears to be a healthy development, and bringing forward the achievement of full employment, the participation rate still is subdued compared to pre-Covid.&nbsp; The low participation rate of 61.9% means that it takes few people getting jobs to drive the unemployment rate down.&nbsp; In the current environment, it does not seem helpful to talk about the unemployment rate without integrating the participation rate.&nbsp; The debate among economists and policymakers is whether it can return to 2019 levels near 63.5%, let alone the pre-Global Financial Crisis (~66%).&nbsp;<o:p></o:p></span></p><p><b><span>Nevertheless, the key for Fed policy now is not the labor market but inflation, and next week's December CPI report is expected to show further acceleration.</span></b><span>&nbsp;Even after the employment report, the December Fed Funds contract showed increased wagers of four hikes this year.&nbsp; The probability of a fourth hike is now slightly over 50% compared with a 40% of a third hike after the November jobs report on December 3.&nbsp; &nbsp;Participants also appear to have taken on-board the likelihood that the Fed allows its balance sheet to shrink a few months after the first hike, rather than waiting a couple of years as it did after GFC.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>Dollar Index:</span></b><span>&nbsp; The Dollar Index rose about 0.20% last week after falling in the last two weeks of 2021.&nbsp; The momentum stalled and it finished last week on a soft note after the disappointing jobs report.&nbsp; Initial support is seen in the 95.50-95.55 area, and then 95.00-95.10.&nbsp; It probably requires a break of the 94.65 area to signal a more sustained corrective phase.&nbsp; The momentum indicators are generating conflicting signals and broadly speaking, DXY has gone broadly sideways since the second half of last November when it established the 95.50-97.00 trading range.&nbsp; The 2-year US yield continues to trend higher, and this can be expected to limit dollar pullbacks at this juncture.&nbsp;<o:p></o:p></span></p><p><b><span>Euro:</span></b><span>&nbsp;For its part, the euro has been in a $1.12-$1.14 trading range since the middle of November with a brief exception when it briefly traded to almost $1.1185 in late November.&nbsp; Last month's high, set on New Year's Eve was near $1.1385, and while the euro may test it, with the US two-year premium over Germany still widening, it is hard to see the euro breaking out of the trading range.&nbsp; The momentum indicators favor the downside.&nbsp; The MACD is elevated but flatlining, and the Slow Stochastic has already turned lower.&nbsp; The US midterm elections are not until November, but European politics will become a market force first.&nbsp; Already, Italian bonds have begun underperforming ahead of the beginning of the presidential selection process on January 24.&nbsp; Investors are nervous.&nbsp; Draghi could stay as Prime Minister, but without a political party, his days are numbered.&nbsp; Alternatively, he could become president, but investors fear this would open a vacuum in the managing the economy and the recovery funds.&nbsp; Also, next week’s discussions with Moscow are seen by many as a prelude to a Russian invasion of Ukraine.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>Japanese Yen:&nbsp;</span></b><span>&nbsp;Starting early last October, the dollar broke out of the JPY109-JPY111 trading range.&nbsp; The new range was JPY113-JPY115 +/- half a yen.&nbsp; With the surging US 10-year yield to start the year, the greenback jumped to roughly JPY116.35 on January 4.&nbsp; Despite the US yield still rising (seven-day streak to begin the new week), the dollar consolidated against the yen in the second half of last week.&nbsp; It finished the week on a soft note near the JPY115.50 breakout.&nbsp; We suspect that with US bond yields likely moving higher, that the dollar would enter a new and higher range against the yen.&nbsp; We have been thinking of JPY117-JPY120 range.&nbsp; The BOJ holds the first G7 central bank meeting this year.&nbsp; It is on January 18.&nbsp; Press reports highlight the risk that the BOJ downgrades its growth outlook and upgrades its inflation outlook.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>British Pound:&nbsp;</span></b><span>&nbsp;Sterling was the only major currency to gain on the dollar last week.&nbsp; The roughly 0.35% gain lifted it to almost $1.36.&nbsp; It had dipped below $1.32 at the beginning of Xmas week.&nbsp; Over the past month, the 2-year Gilt yield has risen a little more than 37 bp, twice the rise in the comparable US rate.&nbsp; Sterling finished the week near the (61.8%) retracement of the decline from the October 20 high near $1.3835, while approximates the halfway point of the losses since last year's high on June 1 around $1.4250.&nbsp; Both retracements are found in the $1.3575-$1.3580 area. Both the MACD and Slow Stochastic did not move up last week to confirm the move in prices, suggesting potential vulnerability.&nbsp; Still, a break of the $1.36 could signal a test on the 200-day moving average (~$1.3740).&nbsp; At the same time, sterling lost momentum against the euro after having risen to its best level since February 2020.&nbsp; The euro may need to resurface above GBP0.8400 to boost confidence that a low is in place.&nbsp;<o:p></o:p></span></p><p><b><span>Canadian Dollar:&nbsp;</span></b><span>&nbsp; The roughly 0.7% rise after the pre-weekend jobs report was enough to offset most of the Canadian dollar's losses last week.&nbsp; On December 3, it also reported robust employment data, but then the Canadian dollar lost about 0.25%.&nbsp; The December jobs data were stronger than expected.&nbsp; Canada filled 122.5k full-time position, blowing away median (Bloomberg) forecast for a 5k increase. The market now has a hike fully priced in for the March meeting and another hike in April.&nbsp; Back in early December, the market had about 3/4 of a hike discounted for March and about 35 bp of tightening by April.&nbsp; &nbsp;The greenback finished the week on its lows and poised to test the CAD1.26 area, which may be the neckline of a bearish head and shoulders pattern, whose measuring objective would be around CAD1.2240.&nbsp; The low from last October was around CAD1.2280, while last year's low (June 1) was a whisker above CAD1.20.&nbsp; On the other hand, a move above CAD1.2730 would negate the bearish chart pattern. The momentum indicators are mixed.&nbsp; &nbsp;The Slow Stochastic has been going sideways for the past several sessions in its trough and looks like it&nbsp;<i>wants</i>&nbsp;to turn up, while the MACD is still falling.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Australian Dollar:&nbsp;</span></b><span>&nbsp;The Aussie was the weakest of the major currencies in the first week of the New Year, losing a little more than 1%, and that is including the 0.35% bounce ahead of the weekend as the greenback pulled back broadly after the jobs’ disappointment.&nbsp; Shortly before the US report, the Aussie found support near the (50%) retracement of last month's advance.&nbsp; Assuming this area (~$0.7130) holds, it can work its way back to the upper end of the recent range found around $0.7280.&nbsp; The MACD and Slow Stochastic are moving lower and offer little credence to this more constructive scenario.&nbsp; A convincing break of $0.7000, would open up the downside.&nbsp; Australia's largest state, New South Wales imposed sharp social restrictions to contain the virus until at least January 27.&nbsp; Despite this and protestations from the central bank, the swaps market has a hike fully discounted in July.&nbsp; Australia reports November trade and retail sales figures in the week ahead.&nbsp; It has enjoyed a positive terms of trade shock.&nbsp; Retail sales will expected to be strong, but they have largely already recouped the losses in the June-August period.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Mexican Peso:</span></b><span>&nbsp; &nbsp;The peso made its highest close in two months against the dollar ahead of the weekend (~MXN20.37).&nbsp; It has appreciated for the past seven consecutive weeks.&nbsp; During this run, the peso has been the strongest currency in the world, appreciating by nearly 7.6%.&nbsp; &nbsp;It was helped by the more aggressive 50 bp rate hike last month.&nbsp; The market is pricing in almost 170 bp of tightening over the next six months, which seems rather aggressive, especially given unknowns surrounding the new central bank governor Rodriquez.&nbsp; The Slow Stochastic has turned up and the MACD has flatlined in over-extended territory.&nbsp; Nearby support is seen around MXN20.32, and then the 200-day moving average by MXN20.2750, which is also around where the lower Bollinger Band begins the new week.&nbsp;<o:p></o:p></span></p><p> </p><p><b><span>Chinese Yuan:</span></b><span>&nbsp; &nbsp;The dollar rose by about 0.33% against the Chinese yuan, matching the largest weekly gain since August.&nbsp; Ahead of the weekend, the PBOC also reported a $27.8 bln jump in reserves, well more than expected. For the year, the dollar value of reserves rose by $33.65 bln after rising by around $108 bln in 2020.&nbsp; Officials continue to warn market participants of more yuan-flexibility (volatility?) and that diverging monetary policy paths may lead to a weaker yuan.&nbsp; Yet, the dollar-yuan rate stays incredibly stable.&nbsp; The historic one-month volatility (actual or realized) has been less than 2%.&nbsp; &nbsp;Only the pegged Hong Kong dollar and the Argentine peso (currency board).&nbsp; Note that the premium China pays over 10-year US Treasuries slipped below 105 bp last week for the first time since July 2019.&nbsp; Only a break of the CNY6.35-CNY6.40 range is newsworthy.&nbsp; &nbsp;The greenback slipped below the lower end the range a couple times in December, but it proved to be false breaks.&nbsp; China reports December CPI and PPI figures on January 11.&nbsp; Both are expected to have moderated a little.&nbsp; This may help reinforce speculation that the PBOC will ease policy later this month ahead of Lunar New Year holiday that begins on January 1.&nbsp;<o:p></o:p></span></p><p><br /></p><p><span>Disclaimer</span></p><div>
<a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:yIl2AUoC8zA"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=yIl2AUoC8zA" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:qj6IDK7rITs"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=qj6IDK7rITs" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:V_sGLiPBpWU"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?i=yrRDPCMDTaA:_ky4B6X8kf4:V_sGLiPBpWU" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:gIN9vFwOqvQ"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?i=yrRDPCMDTaA:_ky4B6X8kf4:gIN9vFwOqvQ" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:63t7Ie-LG7Y"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=63t7Ie-LG7Y" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:F7zBnMyn0Lo"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?i=yrRDPCMDTaA:_ky4B6X8kf4:F7zBnMyn0Lo" border="0"></img></a> <a href="http://feeds.feedburner.com/~ff/MarcToMarket?a=yrRDPCMDTaA:_ky4B6X8kf4:7Q72WNTAKBA"><img src="http://feeds.feedburner.com/~ff/MarcToMarket?d=7Q72WNTAKBA" border="0"></img></a>
</div>