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We suggested that the US jobs data and the CPI would be a 1-2 punch that would strengthen the greenback after it pulled back from extremes seen in late September. The US employment data were sufficiently strong, and the unemployment rate fell back to cyclical lows (3.5%), which prodded the market to again toy with the idea that the Fed funds terminal rate may be 4.75% rather than 4.50% and in Q2 next year rather than Q1.  

The dollar rose against most G10 currencies last week, helped by the gains after the employment data. The Norwegian krone was the strongest (1.7%), helped by rising oil prices and a rally in equities (risk-on). The Canadian dollar was the second strongest  (~0.9%). Rising stocks and hawkish comments by the central bank governor supported the Loonie. The New Zealand dollar was the third G10 currency to appreciate against the greenback (~0.30%). The RBNZ hiked by 50 bp after Australia only delivered a quarter-point move. The Australian dollar fell by about 0.35% last week.  

Dollar Index

The Dollar Index posted a key downside reversal on September 28, perhaps encouraged by the Bank of England's actions. After making new multi-year highs above 114.75, it turned tail and closed below the previous session's low. The retreat carried into the start of last week before DXY found support near 110.00. It held above the trendline drawn off the mid-August and mid-September lows. The momentum indicators pulled back from overbought territory but have not turned up, despite the 2.5% bounce in the second half of last week. That bounce saw the Dollar Index approaches the (61.8%) retracement objective of the pullback, which is found slightly below 113.00. The high after the employment data was almost 112.85. Tactically, the dollar may be vulnerable to "buy the rumor, sell the fact" type of activity after the October 13 CPI.  

Euro

The euro recovered from 20-year lows near $0.9535 on September 28, with a critical upside reversal, and rallied into almost $1.0000 in the first part of last week. The upside stalled, and the short-term momentum players had to move to the sidelines. We note that the euro's recovery was insufficient to lift the five-day moving average above the 20-day moving average. The euro's push lower in the second half of last week brought to almost the (61.8%) retracement of the bounce. That is found near $0.9715. The MACD looks poised to turn lower from the middle of its range. The Slow Stochastic is still rising. While the price action reinforces the significance of par, the $0.9800-30 may offer a nearby cap ahead of it. 

Japanese Yen

Intervention helped steady the dollar-yen exchange rate, which is reflected in the lower implied and historical (actual) volatility. However, with increases in US rates, the yen is offered again. The greenback closed above JPY145 in the last two sessions. The 22-year high set on September 22, the day of BOJ intervention, was closer to JPY145.90. The dollar rose by about 0.45% against the yen last week and reached its best level since the intervention. It was the eighth consecutive weekly advance. It had a nine-week advance from mid-March through early May. The nearly $20 bln of intervention did not really break the one-way market. The jump in global yields and oil prices (December WTI up 16%% last week) lifted the 10-year JGB yield to almost the 0.25% cap. Japanese official rhetoric will likely ratchet back up, and another bout of intervention cannot be ruled out. 

British Pound

Sterling's recovery from the record low near $1.0350 extended to almost $1.15 in the middle of last week. It proceeded to pull back and slipped slightly through $1.11 before the weekend. The GBP1.1060 area corresponds to the (38.2%) retracement of the recovery, and the next retracement (50%) is around $1.0920. The MACD may be stalling around the middle of its range while the Slow Stochastic is nearing overbought territory. The BOE's Gilt purchases (less than GBP5 bln) helped sterling more than Japan's $20 bln intervention helped the yen. However, gilt yields are a different story. The purchases were at the long end of the curve, and the 30-year yield rose every day last week. After pushing above 5% and spurring BOE action, it finished September near 3.82% and ended last week around 4.33%. The market stabilization operation is to end on October 14, and it would be surprising if there weren't an announcement of either a new facility to be able to inject liquidity or some guidance, perhaps from the Financial Policy Committee on October 12.  

Canadian Dollar

Canada's snapped a three-month drop in full-time employment in September, but what lent the Canadian dollar support ahead of the weekend in the face of sharp falls in US equities was arguably Bank of Canada Governor Macklem's comments the day before. After the Reserve Bank of Australia delivered a 25 bp cut, some pundits suggested it could signal a smaller move. This pushed on an open door as the market had second thoughts about a 50 bp rate hike at the October 26 Bank of Canada meeting. In fact, the odds of a half-point hike fell to their lowest level the same day the RBA made its move. However, Macklem's comments put the market on notice that officials did not see any sign that domestic price pressures were easing and further hikes were warranted. He suggested that the depreciation of the Canadian dollar was offsetting the improvement in global supply chains. The market understood, and the pendulum of sentiment swung from about a 60% chance of a 50 bp hike to around a 30% chance of a 75 bp move. The MACD has moved sideways recently, but the Slow Stochastic has turned lower. The challenge remains the broad risk appetite. Still, a break of the CAD1.35 area, last week's low (20-day moving average is slightly below CAD1.3490 could signal a move toward CAD1.3400 and maybe to CAD1.3300.  

Australian Dollar

The upper end of the Australian dollar's range is straightforward. Over the past two weeks, the Aussie consistently found strong sellers in the $0.6440-50 area. Support is a bit less obvious. The two-year low set on September 28 near $0.6365 was approached before the weekend (~$0.6370) after an outside down day on October 6. The MACD is bouncing along its trough. The Slow Stochastic has moved out of oversold territory (barely) and stalled. We suspect the Aussie will make new lows. Our next target is the $0.6250-$0.6300 band. The New Zealand dollar has not done much better despite the central bank hiking 50 bp. It, too, remains near its trough around $0.5600. It spiked to a two-and-a-half-year low in late September (~$0.5565) but has not closed below $0.5600. We suspect it will and look for a test on the March 2020 low around $0.5470.

Mexican Peso

The peso's resilience continues to be impressive. After spiking to around MXN20.58 in late September, the greenback traded in an MXN19.95-MXN20.16 range last week. For the better part of the past two months, the dollar has been mostly in an MXN19.80-MXN20.20 band. Many economists look for Mexico's inflation to be near its peak. It was unchanged at 8.70% in September. The core rate is slightly below 8.3%. Still, Banixco is expected to match the Fed's next 75 bp move. That would lift the target rate to 10%. It is seen peaking in late Q1 23 or early Q2 23 around 10.50%-10.75%. The relative currency stability is conducive to carry trades. The MACD has flatlined, while the Slow Stochastic is falling. Broad sideways trading may be the best the peso can deliver in this strong dollar environment. Last week four of the top six emerging market currencies were from Latam:  Brazil (~4%), Chile (~3.3%), South Korea (~1.30%), Thailand (~0.9%), Mexico (~0.65%), and Peru (~0.35%).  

Chinese Yuan

The mainland markets re-open from the week-long holiday. During the past week, despite some volatility, the dollar slipped against the offshore yuan by slightly less than 0.2%, a little shy of CNH7.13. This ended a seven-week dollar advance. Against the onshore yuan, the dollar settled at CNY7.1160 before the holiday.   The Federal Reserve is tightening policy. Fiscal policy is also tightening. China is the opposite. It is easing policy. All things being equal (which they are not), one would expect the yuan to fall (regardless of its trade surplus). Before the holiday, the PBOC was persistently setting the dollar's reference rate below market projections. The dollar is allowed to move 2% away from the reference rate. It rarely has been close to the band, but in late September, its proximity was sufficient to trigger a warning from officials. The offshore market had respected the band, too but pushed through it in late September.   

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