Aussie Falls Below $ 0.7000, Loonie Can’t Hold Hikes Despite Monster Jobs Report

The US dollar hit new highs for the year last week against the British pound, Australian dollar, New Zealand dollar and Norwegian krone. At the end of November, the greenback recorded its highest of the year against the euro, the yen and the Swedish krona. The highest of the year was recorded in April against the Swiss franc and in August against the Canadian dollar.

The greenback remained resilient in the face of some disappointing elements in the jobs report. The establishment survey found that only 210,000 people were added to the payroll, less than half of the expected 550,000 (median forecast in the Bloomberg survey) and the least this year. The September and October series have been revised upwards by 82,000, most of it in September (+ 67,000), not October (+ 15,000). The economic impact is probably mitigated by two considerations. First, the six-minute increase in hours worked is significant when you consider the number of workers. In addition, the household survey was considerably more robust. It showed that the number of unemployed had fallen by 542,000. The unemployment rate fell to 4.2% from 4.6% while the participation rate fell from 61.6% to 61.8%. At the end of 2019, the unemployment rate stood at 3.6% and the activity rate at 63.3%.

The Federal Reserve has changed its position to prevent inflation from taking hold. He is confident that the economy is recovering from the downturn in the third quarter which saw 2.1% growth on an annualized basis. The labor market continues to recover and the jobs report was strong enough, although nonfarm payrolls disappointed, to prop up the Fed’s pivot. Employment growth averaged 555,000 through November and an average of 590,000 through October. Inflation (CPI and PCE deflator) probably accelerated in November. Despite the new uncertainties surrounding Covid, we continue to expect the Fed to step up its tapering to give itself more freedom to respond to economic developments.

Dollar index: The Dollar Index found support near the retracement (38.2%) (~ 95.55) of the rise that began in late October. It was also slightly above the 20-day moving average, which DXY has not closed below for a month. The range set on November 30 (~ 95.50-96.65) continues to limit the price action. We are inclined to respect the direction of the breakout of this range and expect it to be higher. Having said that, the MACD and Slow Stochastics have moved lower.

Euro: The euro rebound also stopped at the retracement (38.2%) of the decline that began in late October and near the 20-day moving average, which the euro has not closed above since. the 3rd of October. The 20-day moving average starts the new week near $ 1.1350. Over the past three sessions, it has consolidated within the range set on November 30 (~ $ 1.1235 – 1.1385) and registered lower highs and lows. Momentum indicators are on the rise, and some may see recent price action as a flag or pennant formation, which tend to be continuation patterns, and in this case, bullish. The end-of-year considerations and our anticipation of an acceleration in US inflation last month make us more skeptical about the rise of the euro. The euro fell to a new six-year low against the Swiss franc ahead of the weekend (CHF1.0375). There is an old congestion between CHF1.0235 and CHF1.03 from Q2-15 that could come into play.

Japanese Yen: The dollar fell from 115.50 JPY, a four-year high, to nearly 112.50 JPY, a nearly two-month low, in five sessions. The heavy tone in stocks and US 10-year yield seemed to help cap the dollar’s rally towards the 113.60 JPY area. The 10-year Treasury yield fell 1.40% before the weekend for the first time since September 23 after disappointing job growth and the sell-off in US stocks. The 30-year yield fell below 1.70% for the first time since January 5. This pushed the dollar to lows near 112.55 JPY. The range of November 30 is also important with this pair (~ JPYJPY112.55-JPY113.90). The MACD is about to rise, but the Slow Stochastic continues to fall and is not yet in oversold territory. For almost two months since the dollar rose above JPY112.00, we have suggested that it is in a JPY113-JPY115.00 trading range. While this has confined most of the price action, the volatility is higher. Three-month implied volatility hit year highs above 8% in late November and ended last week near 7.2%. It was mainly below 6% from mid-May to mid-October. So far the JPY112.50-JPY115.50 range holds. A breakout of JPY112.50 risks a test on JPY112.00.

Pound sterling: While the Federal Reserve doesn’t seem daunted by the Omicron variant, the Bank of England appears less inclined to hike rates at its December 16 meeting. Ahead of the weekend, the implied yield on this month’s short sterling futures contract fell to its lowest level in nearly three months. The British pound ended the week smoothly, close to the low of the year set on November 30, slightly below $ 1.3200. The $ 1.3165 area is the retracement (38.2%) of the British Pound rally from the March 2020 low (~ $ 1.14). The Slow Stochastic has recovered, but the MACD continues to decline to hit new lows for the year. A convincing breakout might prompt a quick test on the $ 1.3100-1.3130 area, but the strongest support is around $ 1.30. Some pressure on the cable may come from the cross. The euro had bottomed out below 0.8400 GBP (the lowest since February 2020) in the second half of November. It peaked last week near 0.8540 GBP and retested it before the weekend. A downtrend line through the late September high and early November highs starts next week near 0.8545 GBP. The 200 day moving average is a bit higher, around 0.8560 GBP. Last month’s high was around 0.8600 GBP.

Canadian dollar: A surprisingly strong jobs report did not provide much support for the Canadian dollar, which appears to be a testament to the overall strength of the greenback. Prior to the jobs report, the Canadian dollar was trading at its lowest level since late September. Canada said it created nearly 154,000 jobs in November, including nearly 80,000 for full-time positions. Remember, proportionately, the Canadian economy is about 1/11 the size of the US economy. The participation rate remained stable at 65.3%, but the unemployment rate fell from 6.7% to 6.0%. The Bank of Canada is meeting next week and the jobs report can only boost confidence in the economic recovery. The implied return on March BA futures rose seven basis points to its highest level since Omicron sequencing. Canada’s two-year premium over the United States declined further (slightly) last week. It was the fifth week in a row that the premium was reduced. The US dollar was trading at CAD1.2845 ahead of the jobs report. After dropping to around CAD 1.2745, it recovered to around CAD 1.2820. The MACD and Slow Stochastic are stretched but show little sign of a reversal, but the bullish momentum appeared to be faltering as further dollar gains were marginal and difficult to secure. The high for the second half of September was close to 1.2900 CAD, while the high for August, and the high for the year, is near 1.2950 CAD. A breakout of CAD1.2700 is required to signal something important.

Australian dollar: The Australian dollar fell 1.7% for the second week in a row as part of the five-week decline that saw it lose more than a nickel (~ 6.7%). It broke the rally’s retracement target (38.2%) from the March 2020 low (~ $ 0.5500) around $ 0.7055 and slipped to $ 0.7000 before the weekend. Below the $ 0.7000 area, some congestion extends to around $ 0.6960. The big moe retracement target (50%) is near $ 0.6760. Australia’s two-year premium to the US peaked at the end of October, at nearly 27.5bp. It has tended to decline over the past five weeks and ended the week slightly above seven basis points. Momentum indicators are mixed. The Slow Stochastic seemed to be trying to buckle higher. The MACD is stretched but still heading south. A note of caution comes from the lower Bollinger Band (~ $ 0.7020), which the Aussie closed below. Initial resistance is probably around $ 0.7050.

Mexican Peso: The US dollar ended its seven-day advance on Monday. It fell just over 1% on Monday and again on Tuesday. He cut in the second half of the week between around MXN21.12 to MXN21.50. He finished the week near MXN 21.28, about 2.9% lower, and the first in four weekly loss. The momentum indicators are trending lower, but we appreciate the greenback’s rise, and a move through MXN21.50 would be constructive. It is advancing either on the basis of the risk aversion impulses generated by the fall in stocks, or on the back of the Fed’s accelerated cut. On the other hand, a break below MXN21.00 would weaken the greenback’s technical outlook. The JP Morgan Emerging Market Currency Index fell for the fourth week in a row. It has increased in just two weeks since the September FOMC meeting which clearly put tapering on the table. Mexico’s CPI will be released on December 9 and is expected to accelerate above 7%. With a weak economy, lack of budget support and year-to-date inflation of 5.6% through October, the central bank is unlikely to accelerate its hikes. It raised its rates four times from June by 100bp but does not seem inclined to go any faster.

Chinese yuan: The dollar fell about 0.25% against the Chinese yuan last week. This was the first drop in three weeks and fully offset the previous two. Ahead of the weekend, there was another unusual event in which the PBOC set the benchmark dollar rate lower (albeit slightly) compared to the Bloomberg survey’s median forecast. The dollar posted its lowest close in three years on November 30, near 6.3645 CNY. However, the intraday low was set in late May around CNY 6.3570. It is important to try to determine what is going on. On the one hand, the idea that the dollar is falling has raised concerns about how Beijing would react with memories of 2018 when it sought to devalue. On the other hand, if the dollar-yuan exchange rate really moves globally, the story may have a different ending. Consider that from the end of June to the end of August, it was trading roughly between 6.45 CNY and 6.50 CNY. In September, it began its transition to a new range. It appears to be around CNY 6.36 to CNY 6.41, although it only closed once last month above CNY 6.40. Authorities have warned banks and investors to be wary of a one-sided market. Premier Li suggested that a reduction in reserve requirements to help small and medium-sized enterprises is likely. The divergence in monetary policies could weigh on the yuan. The strength of the yuan is particularly pronounced on a trade-weighted basis, and this is where the challenge for the PBOC lies is a strong dollar environment. Shading the dollar, it appreciates on a trade-weighted basis, where it hit multi-year highs in late November.

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