The US dollar rose against all the major currencies last week and the Dollar Index rose to it sits highest level since May 2020. The relative strength of the US economy and the aggressive course the Fed appears to be signaling appears to be the main driver. The US 10-year yield rose more than 30 bp last week to 2.70%. Of the G7 bond markets, only Italy's yield rose more (32 bp).
The US 2-10-year yield curve steepened by 26 and is now positively sloped by around 19 bp. The steepening, which appeared linked to the quicker pace that the Fed's balance sheet will shrink beginning as early as next month snapped a six-week flattening trend that had briefly inverted the curve.
What stands out is the reversal of the dollar bloc's fortunes. A less dovish Reserve Bank of Australia lifted the Australian dollar to its best level since June 2021 (~$0.7660), but it proceeded to sell-off and closed below the previous week's low. The New Zealand dollar set a new four-month high near 0.7035 but also reversed lower, which was also below the previous week's lows. The market is pricing in about a 66% chance that the RBNZ hikes by 50 bp next week. The greenback bounced smartly off CAD1.24, its lowest level since last November and reversed higher. Even with a strong jobs report and aggressive tightening priced into the swaps market (the 65 bp discounted, show is consistent with a little more than a 50% chance of a 75 bp hike by the Bank of Canada when it meets next week), the US dollar rose to almost CAD1.2620 ahead of the weekend, its best level in 2 1/2 weeks.
The euro could not get out of its own way. After posting a key downside, reversal on March 31, it has not been able to sustain even the most modest of upticks. It takes a seven-day slide into next week and looks poised to re-challenge the $1.08 low seen last months. Sterling took out the $1.30 low seen in mid-March to trade at its lowest level since November 2020. Rising US yields have kept the yen on the defensive. It has fallen for six consecutive sessions and looks set to re-challenge the JPY125 area.
Dollar Index: The Dollar Index has risen for seven consecutive sessions through the end of last week. It moved above 100.00 for the first time since May 2020. The momentum indicators are trending higher. There is near-term potential into the 100.50 area and then the high from April 2020 around 100.85. The high reached during the panic in March 2020 was almost 103.00. A word of caution comes from the Bollinger® Band. The Dollar Index has been flirting with the upper band most of the week and settled above it (~99.97). Initial support is seen near 99.60.
Euro: Sentiment toward the euro is poor. Ahead of the weekend, the Bank of Italy warned that its economy may have contracted in Q1. That follows the Bundesbank and the German wise men (economic think tanks that advise the government) cuts to their growth forecasts. The euro is set to test the March low slightly above $1.08 next week. There is little meaningful support below there until the March 2020 low around $1.0635. The momentum indicator are headed lower, though the Slow Stochastic is getting stretched. The lower Bollinger Band, slightly below $1.0845 is getting frayed. A move above the five-day average (~$1.09) might be an early sign that this leg down is over. The tightening of the French presidential contest may have weighed on the euro. A strong showing by Le Pen or weaker than expected support for Macron would likely spur euro sales initially.
Japanese Yen: The 60-day correlation of the change in the exchange rate and the change in the 10-year US yield is rising and is now a little 0.50. Over the same period, the correlation with the S&P 500 is less than 0.1. The dollar has risen for six consecutive sessions, rising to almost JPY124.70 ahead of the weekend. Not coincidentally, the US 10-year yield has also risen for the last six sessions. We have suggested the JPY125.00-JPY125.50 may be the upper end of a new range for the greenback. Recall that the high from 2015 was closer to JPY125.85. Before that, the last significant high was in 2002 a little above JPY135.00. The MACD is terribly stretched, but the Slow Stochastic is turning back up after pulling back since late March. The higher volatility environment means that the upper Bollinger Band (two standard deviations above the 20-day moving average) will begin the new week close to JPY125.60.
British Pound: The broad US dollar gains proved too much for sterling, which fell below $1.30 for the first in nearly a year and a half. The Bank of England is not seen likely to keep up with the tightening envisioned for the US or Canada. The market sees little likelihood that the BOE hikes rates by 50 bp at all this year, while the market is debating whether the Fed will hike by 50 bp two or three times this year, for example. Russia's invasion of Ukraine has kept UK politics out of focus, but next month's local elections may change that. We have been anticipating a break of the $1.30 area to signal a push toward $1.2830, the halfway mark of the rally from the pandemic-panic low near $1.14 to last year's high around $1.4250. The momentum indicators are headed lower and the Slow Stochastic is a little above oversold territory. The lower Bollinger Band will begin the new week by $1.2990. It may take a move above $1.3075-$1.3100 to stabilize the tone.
Canadian Dollar: The US dollar fell to a five-month low on April 5 to almost CAD1.24. It reversed higher that day, leaving a bullish hammer candlestick in its wake. It has not looked back and made a high after the strong jobs report to nearly CAD1.2620. The momentum indicators have turned up and give scope for further greenback gains. Even though the Bank of Canada meets on April 13, it still looks vulnerable. The swaps market has nearly 65 bp of tightening priced in for the meeting. The way to understand that is that the market is divided between a 50 bp and a 75 bp hike. That seems a bit rich, given that a week ago the swaps market did even have a 50 bp hike full discounted. The US dollar approached the (50%) retracement of the decline since the March 15 high near CAD1.2870 found near CAD1.2635. The 200-day moving average is found slightly lower, around CAD1.2620. Above these levels, the next important chart point is closer to CAD1.2690, the (61.8%) retracement target. The market may be cautious about taking the greenback higher immediately. A pullback toward CAD1.2500-CAD1.2520 would not be surprising. In the bigger picture, the US dollar recorded an outside up week against the Canadian dollar by trading on both sides of the previous week's range and settling above it high. It looks like a broad range between CAD1.24-CAD1.29 has been forged.
Australian dollar: After rising to its best level since last June (~$0.7660) on the back of a slightly less dovish central bank, the Australian dollar was sold down to almost $0.7425 ahead of the weekend. The conservative assumption is that it is retracing the last leg up that began in mid-March near $0.7165 rather than the year's low set last January closer to $0.6970. The (50%) retracement objective is a little below $0.7415. The next retracement target (61.8%) is near $0.7355. The momentum indicators have turned lower but remain at elevated levels. A strong March jobs data on April 14 may spur rate hike talk, but a 25 bp hike is fully discounted for the June 7 meeting and around 190 bp of tightening is seen this year. This seems aggressive and seems to imply a 50 bp hike along the way.
Mexican Peso: The US dollar extended its losses against the Mexican peso at the start of last week. It fell to MXN19.7275, its lowest level since June 2021. It bounced strongly over the next two sessions for the first time in a month. The squeeze higher ran into sellers near MXN20.1950. Subsequently, it consolidated in a range that extended to around MXN20.07. The downside can be extended toward MXN20.00, challenging what we suspect to be a more sustained recovery for the greenback. The momentum indicators have turned higher from oversold territory. Our initial target is in the MXN20.35-MXN20.40 area. Mexico reported stronger than expected March CPI (7.45% vs. 7.28% in February). The central bank does not meet until after the Fed next month. A 50 bp is widely expected to 7.0% is widely expected. However, Banxico is ahead of the US in the cycle, and it is not clear that it can keep up with the Fed as the year progresses.
Chinese Yuan: For the fourth consecutive week, the dollar settled little changed between about CNY6.3610 and CNY6.3660. Macro considerations arguable favor a stronger dollar. China's 10-year premium over the US was over 100 bp as recently as early March. At the end of last week, it slipped below five basis points. The narrowing spread may have been behind the record divestment of Chinese bonds in March (~CNY52 bln, ~$8 bln), according to Bloomberg estimates based on Chinabond and PBOC data. It was the second consecutive month that foreign investors were sellers for a cumulate liquidation of CNY87 bln. The weakening of the Chinese economy as officials respond to the rising COVID cases, is very disruptive. More policy stimulus is necessary, but there is a significant risk that the COVID outbreaks will increase. Not only are portfolio flows less supportive and the policy divergence, and the trade surplus is likely to have fallen dramatically in March. Officials seem content for the time being with the dollar in range between roughly CN6.34 and CNY6.38. We like the dollar higher, and suspect if it were to appreciate now, it would not be seen as manipulative move. The dollar may have scope to move into the CNY6.40-CNY6.44 area in the coming weeks.