News & Analysis

As we laid out in our October forecasts earlier this week, we thought the dollar will continue to run higher, though the journey would look be increasingly choppy. This dynamic has played out almost exactly as predicted over the course of the last week. Coming out of the weekend, rising yields, particularly at the back end of the Treasury curve, saw the DXY index climb higher at the expense of other G10 currencies. Then, with traders taking stock of the DXY above 107, a sharp fall in oil prices that previously looked to threaten $100 dollars per barrel saw inflation concerns ease and a relief rally ensue. Whilst notable oil sensitive currencies such as NOK and CAD also found themselves under pressure this week as a consequence, the Swiss franc and the British pound led against the dollar heading into Friday’s jobs numbers, as did the Japanese yen. This last currency in particular has had an interesting week, with USDJPY pushing through the significant 150 resistance threshold following a hot JOLTS print on Tuesday, before a sharp drop in the pair raised suspicions of BoJ intervention. In the absence of confirmation from the BoJ, however, the size and timing of the move means we are inclined to think this was most likely a positioning washout on breaching a key technical level rather than FX intervention. Having given up almost all it’s of the week’s gains by the time Friday came around, nonfarm payrolls put a rocket under the dollar with a monstrous 336k print, reinvigorating the climb in Treasury yields and leading the DXY index towards its twelfth successive week of gains.

Next week, Monday is set to be a session of varying liquidity conditions. Overnight, the reopening of China’s onshore markets is likely to lead to a surge in activity, especially as traders watch to see if the PBoC has changed its stance on CNY depreciation. Later in the day, whilst markets remain open for Columbus Day, the Federal holiday means that activity to begin the week may be lighter than usual in the US session. In terms of economic events, the calendar provides plenty to excite markets. CPI data out of the US could see the pressure for a final Fed rate hike build yet further. A similar story could well play out in Scandinavia too, with inflation prints unlikely to cool sufficiently to convince either the Norges Bank or Riksbank they are finished with policy tightening. Exactly how the incoming data is being viewed by central banks remains an important consideration for markets too. Therefore, the release of meeting minutes for Banxico, the ECB and the Fed are likely to be pored over in some detail. So too will GDP data out of the UK. Having effectively declared an end to policy tightening, the performance of sterling over the next few months will hang on whether or not the BoE has triggered a recession, an outcome we think as unlikely. Finally, an important leg of the US exceptionalism story that has seen the dollar outperform is set to get an update next Friday with Chinese CPI and trade figures. Signs that China’s growth maybe about to turn around would give investors an alternative to the US capital markets, potentially slowing the dollar’s recent ascent and making the thirteenth week of gains the most difficult one yet.

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Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

 

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