It was a dramatic week in the capital markets. Equities and commodities got hit hard while the dollar soared, especially against the major currencies typically seen as levered to world growth and whose central banks are perceived to be ahead of the Federal Reserve. 

These include the dollar-bloc currencies and the Norwegian krone. The RBNZ held off its rate hike amid a virus-induced lockdown. Nevertheless, Governor Orr made it clear a rate hike was still necessary, most likely for the next meeting on October 5.  On the other hand, Norway's central bank confirmed it was on track to hike next month.  Nevertheless, the Norwegian krone, Australian and New Zealand dollars fell over 2.5%-32% last week, the biggest decline so far this year.  

The greenback gained against nearly all the emerging market currencies. The Brazilian real and South African rand were the weakest, depreciating by about 2.5% and 3.7%, respectively. The JP Morgan Emerging Market Currency Index fell every day last week for a cumulative loss of nearly 1.2%, the largest in two months. It was the sixth decline in the past eight weeks.  

There seemed to be two overriding drivers. First, the Fed confirmed what many participants have long thought. Tapering will likely begin later this year, barring a fresh significant shock.  Although some observers may disagree that this has been the dominant view, the fact of the matter is that the short-end of the curve hardly changed in response to those FOMC minutes.  The implied yield of the June and December Fed funds futures were barely changed last week. The latter has a hike fully discounted and the former, nearly so.  

The second driver is the spread of the pathogen. Some observers mock New Zealand, which instituted a nationwide lockdown on discovering a single case, though several other cases have been reported. However, the "just live with it" mantra works if many people have been vaccinated. Unfortunately, this is not the case in New Zealand and many other countries outside of North America and Western Europe. That said, Japan is coming on strong and could surpass the US inoculations proportionately by the end of next month. However, the vaccine hesitancy in the US has eased in the face of the surge, which in a handful of states has seen ICU capacity nearly exhausted.  

Dollar Index: The Dollar Index reached its best level since early November last week, a little below 93.75.  The high was set ahead of the weekend before it succumbed to a bout of profit-taking that snapped the winning streak at four and put in a possible bearish shooting star candlestick. Still, the roughly1.0% gain was the best weeks of the year.  The high from around the US election last year was set near 94.30, and the (38.2%) retracement objective of the slide from the pandemic peak in March 2020 (~103.00) is found closer to 94.50.  Technically, it looks stretched, flirting with the upper Bollinger Band (~93.65). However, while the momentum indicators are elevated, they have not begun turning lower. That said, a break of 93.10-93.20 area would be the first sign that the bulls may be tiring (UUP, UDN).  

Euro: The euro fell below $1.1700 for the first time in nine months last week. The week's high was set on Monday just above $1.18, and it held above $1.17 until the middle of the week, and despite intraday penetration, it still closed back above that threshold. Nevertheless, it barely traded above it the following day, and ahead of the weekend, a new marginal low was made slightly below $1.1665. It finished the week slightly below $1.17. In the 12-weeks since the end of May, the euro has risen four times, and during this run, the euro has depreciated by around 5.5 cents (~4.5%). The MACD and Slow Stochastics are not flashing any strong signal that the euro has gone too far too quickly, but the lower Bollinger Band is nearby ($1.1650).  Below there, the next important technical area is $1.1600. Initial resistance extends toward $1.1720 (FXE). 

Japanese Yen: The dollar held the JPY109-level at the start of last week.  It has not closed below there in three months. The recovery stalled around JPY110.25 on August 19 before consolidating ahead of the weekend.  With only a few exceptions, the greenback has been in a JPY109-JPY111.00 trading range since the end of May. The momentum indicators are not particularly helpful presently. The lower Bollinger Band is found near JPY109, while the upper one is slightly below JPY110.70. If the US 10-year yield is key, it is important to note that it is at the lower end of its range, around 1.20% (though it has spiked lower, it has not closed below 1.17% since February). Provided it holds, the bias would be for a stronger dollar (FXY).  

British Pound: Sterling fell by about 1.75% last week, its largest decline in two months against the dollar, and it was the third weekly decline. It continued to trade heavily against the euro after rising to its best level since February 2020 on August 10. The MACD and Slow Stochastic are still moving lower, and the close was the lowest in six months even though cable held above last month's low (~$1.3570). Nearby support is extended to around $1.3550, and a convincing break could spur a move toward $1.3400.  A caveat comes from the Bollinger Band (~$1.3665), sterling closed below for the last two sessions. It probably takes a move above $1.3700 to boost the probability that a low is in place (FXB).  

Canadian Dollar: The US dollar spiked to almost CAD1.2950 ahead of the weekend, a new high for the year. A lethal cocktail of a Fed preparing to taper, a virus mutation again deterring a return to "normal" and raising questions over demand, and a sharp drop in commodities, including a 7.6% drop in WTI and nervous equity investors weighed on the Loonie. It looks overdone.  At its peak before the weekend, the greenback was more than three standard deviations above the 20-day moving average (~CAD1.2875).  Despite the paring of its earlier gains, it finished the week with two consecutive closes above the Bollinger Band (~CAD1.2775), set at two standard deviations above the 20-day moving average. The momentum indicators are still trending higher. Previous resistance around CAD1.28 may now offer support. Still, ahead of the weekend,  a bearish shooting star candlestick had been formed (FXC).  

Australian Dollar: The Aussie was the weakest of the major currencies, losing nearly 3.2% last week, dropping to its lowest level since last November.  It stabilized ahead of the weekend after falling to almost $0.7100.  The $0.7000-$0.7050 offer the next technical targets.  It, too, looks terribly oversold by some measures. It closed below its lower Bollinger Band for the past four consecutive sessions.  Both the MACD and Slow Stochastic are overextended, though neither is poised to turn higher in the near term. Much technical damage has been done.  Initial resistance is seen in the $0.7160-$0.7180 area. The New Zealand dollar also fell to its lowest level since last November ($0.6800) and closed for the fourth session below its lower Bollinger Band (~$0.6850). A break of $0.6800 could signal a move toward $0.6700. The Aussie has approached key support against the Kiwi near NZD1.0400 (FXA). 

Mexican Peso: The dollar rose against the peso every day last week, and the biggest push came before the weekend. The 1% gain pre-weekend advance accounted for a sizeable part of the week's 2.4% gain. The combination of poor risk appetites, Fed tapering, and broad weakness in emerging markets weighed on the peso. The MSCI Emerging Market Index fell 7% in July and is off by almost 4% here in August. The JP Emerging Market Currency Index fell by about 1.25% last week. The greenback briefly traded above MXN20.45 and closed above the 200-day moving average (MXN20.1150) for the first time in a couple of months. The June high, which is the next important technical area, was set near MXN20.75. Initial support may be encountered near MXN20.25.

Chinese Yuan: The greenback's strength proved too much for the redback, closing above CNY6.50 for the first time in a month. For the most part, since mid-June, the dollar has been in a CNY6.45-CNY6.50 range.  Yet, while the yuan is soft against the dollar, it is near five-year highs against its trade-weighted basket (CFETS). The PBOC's reference rate for the dollar has been set mostly in line with expectations. Given that the PBOC may cut reserve requirements again while the Fed moves toward tapering, under-performance of Chinese stocks, and the ongoing campaign to rein in Chinese businesses, one would have expected the yuan to weaken. Still, the bout of profit-taking seen in North America before the weekend saw the dollar slip against the offshore yuan back below CNY6.50 in late dealings (CYB).