Forex Traders Weekly Outlook – Currency Bears Crushed with Accelerated US Dollar Selling

The overcrowded long dollar trade continued to sell off the wave of mutilation topping pattern that started last Friday. Currency bears were crushed this week. The DXY decline was the largest % fall since March 2009, down 4.1% for the week, down -5.96% in the last 7 trading days. The cooler than expected CPI on Thursday was a catalyst for this thrust lower over the last 2 trading days. The U.S. Dollar Index dropped another 1.7% to 106.38 Friday almost mirroring last Friday’s fall of 1.6% which was the biggest one-day decline since March 2020.

This move reversed the completive impulsive move higher last week following Chairman Powell’s comments at the FOMC press conference. A shift in interest rates forward projections spurred the sell off after Fed Speak from Collins and Evans.

Forex Weekly Analysis and Outlook – US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate.

The US dollar this week collapsed against the major currencies

Currency bears were crushed this week.

  • -5.46% vs the JPY
  • -5.37% vs the CHF
  • -4.07% vs the GBP
  • -3.97% vs the EUR
  • -3.65% vs the AUD
  • -3.19% vs the NZD
  • -1.67% vs the CAD

For the week in emerging markets, the South Korean won 7.6%, the Swedish krona 5.1%, the Colombian peso surged 6.5%, the Thai Baht 4.5%, the Czech Koruna 4.4%, and the Bulgarian lev 4.1%.

For 2022, the DXY is still up 11.22% but well off the gain of 19.97% at the index high on September 28.

The strong dollar has negatively affected multinational earnings and the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.

The fall in the USD and interest rates this week led to a sharp rise in US stocks as investor as the lower dollar is seen as a positive for earnings. The Nasdaq index was up of 8% for the week led by the tech stocks recovery. The S&P rose 5.9% and the Dow rose 4.15% this week. 

Geopolitically the landscape is changing fast also with the Russian invasion of Ukraine, China’s Xi’s power grab, a move to the right in Italy, the rapid referendums and Russia’s annexation in eastern Ukraine of territories, after taking Crimea in 2014 and a divisive election in Brazil and the US midterms.

To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.

Weekly Recap and Outlook

How Foreign Exchange Prices Finished November 11, 2022

  • For the week, the U.S. Dollar Index dropped another 1.7% to 106.38, leaving it down 4.1% for the week.
  • For the week on the upside, the South Korean won increased 7.6%, the Swiss franc 5.7%, the Japanese yen 5.6%, the Swedish krona 5.1%, the British pound 4.0%, the euro 3.9%, the South African rand 3.9%, the Australian dollar 3.6%, the Norwegian krone 3.2%, the New Zealand dollar 2.9%, the Singapore dollar 2.6%, the Canadian dollar 1.5% and the Mexican peso 0.1%. On the downside, the Brazilian real declined 5.0%. and the Chinese (onshore) renminbi gained 1.24% versus the dollar (down 10.36% y-t-d).
  • On the downside the Brazilian real declined 5.0%.
Major and Minor FX Rates

The Strong US Dollar Effect on US Economy and Rates

The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.

The survey of 40 economists was conducted Oct. 21-26.

  • 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
  • 38% said the policy makers would be forced to cut rates earlier than expected and
  • 18% said the Fed would not be able to raise rates as much as planned.
  • Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.

The Fed as expected raised another 75 basis-points Wednesday. Their last forecast showed rates reaching 4.4% by year end from a current target range of 3% to 3.25% and to 4.6% in 2023. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.

“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”

Anna Wong (Bloomberg chief US economist)

The surge in interest rates and the de-risking of the world is one factor but there are other particular influences. With regards to volatility in currency markets, these huge moves act like rubber bands when its crowded. The more stretched an exchange rate is, the bigger, faster and more painful the eventual correction. What is the catalyst? There is the obvious, a peace deal in Ukraine or a dovish Fed, which after Chairman Powell’s speech at Jakson Hole that appears to need a dramatic change.

“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Jerome Powell’s Jackson Hole speech

However, it is usually something not expected that creates major shifts

The reality is the recovery from the pandemic is not yet complete and we have the specter of a US recession darkening the scene. The strong dollar adds to the pressure to tighten as weak currencies exacerbate imported inflation.

John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”

US Yield Watch:

U.S. Treasuries of all tenors charged higher on Thursday in reaction to a cooler than expected CPI report for October. The market saw the report as a strong argument in favor of a slower rate hike pace while 2023 FOMC voters Harker and Logan also said that a slower pace may be appropriate soon. The fed funds futures market now sees just a 14.6% implied likelihood of a 75-bps hike in December, down from 43.2% Wednesday.

Yields on the 5-yr note and the 10-yr note saw their lowest levels in over a month with the 5-yr yield falling below its 50-day moving average (3.990%), the 10-yr yield stopped three basis points above the 50-day average of its own (3.799%). This week’s action widened the 2s10s spread by three basis points to -48 bps. The bond market was closed in observance of Veterans Day tomorrow.

Yield Watch

  • 2-yr: -33 bps to 4.31% (-36 bps for the week)
  • 3-yr: -33 bps to 4.19% (-38 bps for the week)
  • 5-yr: -34 bps to 3.94% (-39 bps for the week)
  • 10-yr: -32 bps to 3.83% (-33 bps for the week)
  • 30-yr: -24 bps to 4.08% (-17 bps for the week)

Highlights – European Bonds last week

  • Greek 10-year yields jumped 23 bps to 4.71% (up 339bps y-t-d).
  • Italian yields surged 29 bps to 4.46% (up 329bps).
  • Spain’s 10-year yields rose 20 bps to 3.35% (up 279bps).
  • German bund yields jumped 19 bps to 2.30% (up 247bps).
  • French yields rose 22 bps to 2.83% (up 263bps).
  • The French to German 10-year bond spread widened about three to 53 bps.
  • U.K. 10-year gilt yields increased six bps to 3.54% (up 257bps).

Highlights – Asian Bonds last week

  • Japanese 10-year “JGB” yields added a basis point to 0.26% (up 19bps y-t-d).

Europe

Euro – EURUSD

EURUSD continued its recovery and with 1-2 energy burst back over parity and the initial median line after holding the tenkan retest. Completive following the throwover to the 20-year low at $0.9535. The 61.8% retracement objective of the move since September 20 ~$0.9890 where it spat the Tenkan energized the move to power through the Kijun with the EURUSD up 3.97% on the week. Resistance the outer channel and June break.

EURUSD has been submerged since June 2021 from a high of 1.2280. Support comes from 1/8 and parity. A cluster of old lows around the 0.9600, then -1/8. Euro had been cascading in what seems like eternal flags in the channel as it spat the Tenkan. The power was seen with Kijun (pink) reflecting Tenkan (orange) creating impulse as EURUSD developed in the channel. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility

Keep in mind recoveries have all lead to failure, the July attempt at a bullish breakout above previous resistance at 1.0270 failed and from there the Euro tumbled. EUR/USD bulls were unable to push the pair meaningfully above the long-term previous-support-turned-resistance level at 1.0350. That comes in from the low set at the start of 2017 and overlaps the 50-day EMA which has defined the downtrend over the last six months within the downtrend channel.

The Euro’s attempts to rally have disappointed all year and have been impacted by surging inflation. Record-breaking natural gas prices have plunged Europe into a crisis with energy rationing this winter. In Germany, the cost of imports relative to exports has jumped to levels last seen in the 1980s. The weak euro in turn exacerbates a surge in energy costs. The EURUSD has depreciated over 12% since the start of the year and is currently trading below parity.

“We can be gradual, but we should not be slow and delay normalization until higher inflation expectations force us into aggressive interest-rate hikes,” ECB’s Villeroy said Saturday. “What remains essential, however, is to be orderly, in order to avoid undue market volatility and ultimately economic volatility.”

The Euro did finally breach parity in July, if you recall the first attempt recovered off lows earlier this year after Dutch central bank chief Klaas Knot said if inflation continues to climb then rates may need to be raised 50bp, this was the first time such an aggressive shift has been suggested. However, it gave all those gains back. The low just over 1.5% away from reaching parity with the dollar.  It was all the way back in 2002 that the euro and dollar last reached parity. The Euro reversed off the lowest closing rate since 2017 at the outer channel extended gains to above $1.07 before settling back lower again. The short covering rally enabling a reloading of US dollars. From there we got the sharp lows below parity which we are now correcting.

Bloomberg reported Goldman Sachs Group Inc strategists see the euro falling to $0.95 in the event of a deeper and more prolonged cut to gas flows. A prolonged adjustment to the region’s terms-of-trade is not yet in the euro’s price, according to Karen Fishman, strategist at Goldman Sachs. The currency is trading at levels that are in line with the investment bank’s base case scenario of a mild euro-area recession later this year.

The European Central Bank continues to lag behind the Fed in tightening monetary policy, ECB President Christine Lagarde said earlier this month, noting that the euro area’s economy is likely to absorb a greater blow from the war in Ukraine.

In a nutshell the Euro have been undermined by crisis after crisis, the energy crisis is devastating Germany in particular. German reports like trade, GDP and the Ifo business climate underscore who difficult the situation is. The Ukraine war and Russia threats with Nord stream 1 pipeline continue to cruel growth prospects.

Another headwind is the higher energy prices and supply disruptions stemming from the war to depress growth in Europe. Any kind of weakening demand in China for European goods could also weigh heavily on the region.

“The European Central Bank is determined to nip ‘in the bud’ any fragmentation in borrowing costs between eurozone countries, its president Christine Lagarde said…, warning anyone doubting this was ‘making a big mistake’. Appearing before EU lawmakers in Brussels, Lagarde defended the ECB’s decision, made at an emergency meeting last week, to accelerate work on a new policy tool to counter a recent surge in the borrowing costs of more vulnerable countries. ‘You have to kill it in the bud,’ the ECB president said… ‘Fragmentation will be addressed if the risk of it arises; and it will be done so with the appropriate instruments, with the adequate flexibility; it will be effective; it will be proportionate; it will be within our mandate and anybody who doubts that determination will be making a big mistake.’”

June 20 – Financial Times (Martin Arnold)

British Pound – GBPUSD

British pound has responded to its vicious move down in July to blast out of the sphere of influence towards the median rising +4.07% vs the USD. Cable’s Chikou remains unbalanced at week’s end. GBPUSD reversed after 1985 lows & spat fib extension 1.618 level 1.1432 with previous low & -1/8. Above channel Tenkan confluence & sliding Kijun. Use ABS and MM

The pound against the dollar fell to its lowest level since the end of Bretton Woods, reaching $1.0350. The BOE’s measures to address the threat to systemic stability helped spur the initial short-covering rally in sterling that lifted to a high at the end of the week of about $1.1835. The move met and broke a technical retracement objective ~61.8% of the leg lower that began on September 13 from almost $1.1740. Sterling overcame resistance in the $1.1275-$1.1300 area to signal a deeper recovery.

Euro Pound – EURGBP

EURGBP screams false breaks. After exploding higher to 8/8 at .90 it reversed to back test the 50wma and cloud break to the outer median line where it advanced significantly through the top of the channel back through 86. EURGBP support in the sphere of influence.


Asia

The yen has been the worst performing major currency in 2022, sliding against the US dollar though it has corrected some in recent weeks. Relative to a basket of trading partner currencies and adjusted for inflation, the yen fell to levels last seen before the 1985 Plaza Accord.

Asian currencies have had a dismal year. The Japanese Yen and South Korean won have been falling sharply lower in 2022. The won has weakened more than 8% this year, following an 8.6% drop in 2021, which was the fastest annual fall since 2008. The Won fell below the much talked about psychological threshold of 1,300 per U.S. dollar for the first time in 13 years

Also factor in that Asia is the epicenter of technology manufacturing – with the global “tech” Bubble in grave jeopardy. The confluence of China’s bursting Bubble, Japan’s foolhardy monetary policy gambit, and highly levered systems puts Asia today on a Collision Course with rapidly deteriorating macro and micro fundamentals. I’ll assume mounting hedge fund and derivative issues.

Japanese Yen – USDJPY

The yen was the strongest of the major currencies after the softening of the CPI prompted heavy selling in the US dollar and buying of bonds and a surge in US stocks. That led to a multi decade single day move lower of -3.5% in the USDJPY Thursday and another -2% Friday, losing 5.7% on the week

The USDJPY was one of the most overcrowded trades with heavy BOJ intervention over the past few months. Intervention doesn’t always work, it’s a matter of timing and teamwork. Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said. Following the FOMC meeting the Yen was also the strongest currency in the rebound.

The USDJPY power move has been clinical, it pushed to a new high at levels last seen in 1998. Prices confirmed a breakout above 139.391, the previous 2022 peak from July. This week we closed under that level. The move higher was fueled after it corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. USDJPY traded to 145.89 above the 78.6% Fibonacci extension at 140.636 and 100% level at 143.425. Above here was the 1998 peak at 147.65. Key support is the Kijun and 6/8.

USDJPY spat 8/8 with a 151.94 high back to the Tenkan. Chikou rebalanced on the 600-pip move last Friday. Next support is recent highs and the tenkan below that the rectangle confluence. Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.

The impulsive leg higher earlier in the year came from The Bank of Japan reinforcing its commitment to low interest rates despite the rising inflation. The BoJ said it would purchase 10-year Japanese government bonds at a yield of 0.25% every business day to ensure that the yield doesn’t exceed that level. That sent the yen weakening to more than 130 to the dollar for the first time since April 2002.

“Japan’s currency interventions have been stealth operations in order to maximise the effects of its forays into the market, Finance Minister Shunichi Suzuki said…, after the government spent a record $43 billion supporting the yen last month. Bank of Japan Governor Haruhiko Kuroda, however, reiterated the central bank’s resolve to keep interest rates ultra-low, indicating that the yen’s broad downtrend could continue… ‘There are times when we announce intervention right after we do it and there are times when we don’t,’ Suzuki told a news conference… ‘We are doing this to maximise effects to smooth sharp currency fluctuations.’ The finance minister repeated his warning that authorities are closely watching market moves and will not tolerate ‘excessive currency moves driven by speculative trading’.”

November 1 – Reuters (Tetsushi Kajimoto and Leika Kihara):

“Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”

October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki)

The yen on track for its worst year on record falling to 144.99 per dollar, a 24 year low, fueled by the selloff in Treasuries widening the yield gap between the US and Japan.

Where it all started for the Yen

The BoJ has said Japan’s cyclical position with low core inflation and a more limited rebound in economic output warrants an easier monetary policy stance compared with its G10 peers. A strengthening dollar also tends to weigh heavily on emerging markets currencies, a rising dollar makes dollar-denominated debt more expensive for emerging nations to repay. The Bank of Japan chief Kuroda speaking at the G7 said BOJ will patiently continue with powerful easing announcing no change to monetary policy.

On the way up the price accelerated after the close above the Tenkan over 114 hence the pull for it to correct to the Tenkan which it did to ignite this rally a month ago. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel.

Yen weakness places Chinese manufactures at a competitive disadvantage, which has emboldened Beijing to play the currency devaluation card in an attempt to mitigate mounting economic woes and dumping of Chinese assets. Higher-yielding Chinese debt securities are losing their relative appeal (in a rising yield world), and now even the perceived stability of the Chinese currency is in question.

A slump of that to 150 may convince China to intervene in the currency market to protect its own flagging economy and it would be perfectly rational for it to do so, former Chief currency economist at Goldman Sachs Jim O’Neill said:

‘If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,’ ‘China would not want this devaluing of currencies to threaten their economy.’”

China

  • USD/CNY is the onshore yuan and is permitted to trade plus or minus 2% from the daily reference rate.
  • CNH is the offshore yuan. USD/CNH has no restrictions on its trading range.
  • A significantly stronger or weaker rate than expected is typically considered a signal from the PBOC.
  • The IMF lifted the yuan’s weighting in its Special Drawing Rights currency basket in May

The USDCNH spat +2/8, to test the April Highs and recalculated. It finally caught the impulse power of USDJPY last Friday and followed through this week. The Chinese Renminbi had its best day “in decades’ jumping 1.62%, the Offshore Renminbi ripped 2.02% versus the dollar last Friday and continued this week. Resistance is MM levels and the Tenkan and 8/8 for now. Support the Kijun. China’s renminbi had hit its weakest level against the dollar since 2007 as concerns over President Xi Jinping’s appointment of a harder line leadership team and a struggling economy spread from equities to currency markets

China’s Yuan, Japanese Yen, the British Pound and the Euro have seen significant moves given their geopolitical dynamics.

“After a months-long effort to prop up the yuan, the People’s Bank of China has cycled through most of its policy tools, leaving it with some tough choices. As the currency hovers near the weak end of a daily 2% trading band against the dollar, the specter of extreme measures — however unlikely — is growing. Already, there are signs that China is intervening in foreign-exchange markets, like Japan has done. A one-time revaluation and restricting the yuan’s range are other major tools.”

October 27 – Bloomberg:

During July the PBOC cut the 5-year loan prime rate to 4.45% from 4.6% to boost the economy and cut short term rates further this past week. Beijing has warned against criticism of its dynamic zero-COVID policy. The zero-tolerance approach, which depends on strictest lockdowns and mass testing, has weighed heavily on the already slowing economy and raised the need for further policy easing.

On Aug. 19, the central bank also signaled its preference for a weaker yuan by setting its daily midpoint fix for onshore trading at more than 6.80 against the dollar. This was the first time it had crossed that level in 23 months. The PBOC allows the currency to trade within a daily range of 2% up or down against the dollar from its target level. The market is asking where the upper band is now?

“China’s central bank stepped up its defense of the falling yuan with a strongly-worded statement to warn against speculation, after the currency dropped to its lowest versus the dollar since 2008. ‘Do not bet on one-way appreciation or depreciation of the yuan, as losses will definitely be incurred in the long term,’ the People’s Bank of China said… Key market participants need to ‘voluntarily safeguard the stability of the market and be firm when they need to iron out big rallies or declines in the exchange rate.’ The central bank added that it has ‘plenty of experience’ to fend off external shocks and effectively guide market expectations.” September 28 – Bloomberg

The forward margin between the Yuan and the USD has widened as the PBoC’s rate cuts have been made it less attractive to hold the yuan against the dollar because the U.S. Federal Reserve has gone in the opposite direction.

 April 28 – Bloomberg (Sofia Horta e Costa and Tania Chen): “When China’s tightly managed currency depreciates dramatically against the dollar, it can be hard to stop. More than six years after China’s shock 2015 devaluation roiled global markets and spurred an estimated $1 trillion in capital flight, the yuan is weakening at a similar pace. Onshore it’s lost nearly 4% in eight days, while the offshore rate is heading for its worst month relative to the greenback in history. Selling momentum is the strongest since the height of Donald Trump’s trade war in 2018.”

China Foreign Exchange Trading System

While the yuan has tumbled about 8% versus the USD this year, it has strengthened against the currencies of major China’s export rivals such as Japan and South Korea. The yuan’s trade-weighted basket is just about where it was at the end of December.

China Foreign Exchange Trading System August 2022

The Fed’s tightening cycle has triggered a widespread selloff in Asian currencies this year, including more than 10% declines for the Japanese yen and the Korean won. China’s central bank last let the yuan depreciate past 7 to the dollar in August 2019, during the trade war between Beijing and Washington.

The yuan however has held up better against other currencies this year. China Foreign Exchange Trading System, an arm of the central bank, measures the performance of the currency against a basket of 24 currencies, including the dollar, yen and euro and lesser-traded currencies such as Polish zloty and Russian ruble the WSJ reported. That yuan index was roughly at the same level it was at the start of 2022, according to the most recent data published on Aug. 19.

Australian Dollar – AUDUSD

The AUDUSD bounced from its sphere of influence with some help from a rebound in iron ore prices last week. This week the Aussie accelerated with the heavy selling in the USD to the Kijun. The Aussie has reversed after sliding off an eight-week high, trading over US71¢ with the revitalized hawkish Fed. Keep an eye on the effect on bonds and the dollar here. In essence at this time, it is all about the USD.

To reflect potential upside, we look at the way down AUDUSD with cloud, Kijun and channel confluence over $0.6760 with 4/8 and 50% is now the pivotal resistance. This week we closed back over the channel. Since completing a 5 at the psychological 80 level it had fallen & corrected under the weekly cloud in emotive fashion. Overcoming the $0.6575-$0.6600 area now lifted the tone.

China lockdown fears overhang and AUDUSD forwards support with bonds and RBA raising. Support is the Murrey Math Levels. Resistance the Cloud and Kijun like many commodities. It was the strongest major currency against the USD in July after the Yen correction so keep an eye on the basket should a bounce come into effect.

New Zealand Dollar – NZDUSD

The Kiwi bounced off its sphere of influence at -1/8 after it hit a two year low with the dollar soaring. On the way down it outrun the Aussie lower after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there. The NZDUSD broke the yearly low (0.6061) after failing to test the June high (0.6576) the flood gates opened. The Kiwi has recovered to those levels quickly testing the negative slope breaking the string of failed attempts to push through Kijun resistance.

Canadian Dollar – USDCAD

The USDCAD closed back at the Kijun after the shift in the Canadian/US rate curve after making a new two-and-a-half-year high a month ago. The psychological level at the 61.6 fib at 1.3659 at 4/8 confluence gave way. The USDCAD broke the Tenkan led by the AUD and NZD as it spat 5/8 and the previous break. Watch flat Kijun and Tenkan. Use Fibs for support and resistance. Eyes are on Canadian CPI, the recent decline in energy prices should help alleviate some of the broader pricing pressures.

Emerging Market Currencies

Key EM currencies reversed with the additional USD losses this past week

Since the depths of July, we saw a dramatic squeeze. Emerging and developing nations’ foreign reserves have shrunk by $379 billion this year through June, according to data from the International Monetary Fund. Excluding the effects of exchange-rate fluctuations and the large foreign-exchange holdings of China and Gulf oil exporters, emerging markets are seeing the biggest drawdowns since 2008 according to JPMorgan Chase & Co.

The run-on EM markets is unleashing a dangerous dynamic. When global liquidity flows abundantly, financial flows originating from U.S. trade deficits and leveraged speculation often find their way into higher-yielding EM securities. These flows end up at EM central banks, where they are conveniently “recycled” back into U.S. markets through (chiefly) purchases of Treasuries, agencies and other debt securities.

EM tightening cycle fragility (aka “taper tantrum”) is not a new phenomenon. This is, however, the first episode of highly levered (securities markets and real economies) EM systems facing global de-risking/deleveraging without a clear Fed and central banking community “put.” With the global liquidity backstop now nebulous, there is every reason for the leveraged speculators to move more aggressively in exiting levered EM “carry trades.” And resulting outflows lead to only weaker currencies, more EM central bank Treasury (and sovereign debt) sales, and greater stress on global financial stability.

Mexican Peso USDMXN

The USDMXN rate broke its triple bottom after rallying back to the Tenkan as rates rose in the US. The big move on US rates down helped it penetrate the long sideways pattern and consolidation despite outside uncertainty from oil and high rates. The recent high near 19.5 per USD was the highest level since March of 2020 and tracked general strength in Latin American currencies. Use the Gann octave and the extension fibs to help measure the noise.

Turkish Lire USDTRY

The Turkish Lira slow decline continued after the recent with another surprise 150 bps rate cut in Turkey. USDTRY rides the median in the corrective channel tier spitting 17 against the dollar. USDTRY barely took strength from other emerging markets big reversals. Since we broke the all-time Lira low of 18.4 hit in December it has stepped headed towards +4/8 near 18.80. Turkey’s recent monetary policy decisions have not been based on economic fundamentals, since late 2021 seeing a cumulative 850bps cut in rates in a matter of months to current levels.

To recap the wild 18-10 USDTRY swing last year reversed after falling in 3 waves to explode over the Tenkan, weekly cloud Kijun and 50wma below. The Murrey Math and Fib targets with last year’s Lire all-time lows in a hyper inflating collapse. So far this year the lira is the worst performer in emerging markets, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year.

The background is the same with President Recep Tayyip Erdoğan vowing to cut interest rates despite spiraling inflation. In December last year, the Turkish Central Bank introduced a “Lira deposit scheme” to stem the decline in the currency. The Turkish president said that the country had ‘wasted years’ with the misguided view that prices should be controlled by using higher borrowing costs to suppress consumption. Such policies, he said, benefited only ‘those living a charmed existence and filling their pockets with [the proceeds of] high interest’, including foreign investors.”

Central Bank Rate Watch:

There are only three central banks on next week and none of them are likely to deliver decisions that will be impactful to global markets.

Fed Reserve’s speakers return. Multiple regional Fed district bank Presidents will give their interpretations of the Fed’s recent actions.

Monday, Nov. 14

  • Fed Brainard speaks
  • Fed’s Williams moderates a panel at the Economic Club of New York
  • ECB’s Fabio Panetta speaks in Florence
  • ECB’s de Guindos speaks in Frankfurt.
  • BOJ announces the outright purchase amount of Japanese government securities

Tuesday, Nov. 15

  • ECB’s Elderson speaks
  • Fed’s Harker speaks at GIC Annual Monetary & Trade Conference
  • Fed speeches by Cook, and Barr.
  • RBA releases minutes of its November interest rate meeting
  • The People’s Bank of China is widely expected to keep its 1-year Medium-Term Lending Facility Rate unchanged at 2.75% on Tuesday. There is some speculation that another cut to required reserve ratios may be delivered given that cutting rates would further destabilize the yuan as the Fed continues to tighten and given cash drain in China’s banking system.

Wednesday, Nov. 16

  • Barr and Waller speeches
  • Fed’s Williams and Brainard, SEC’s Gensler speak at the 2022 Treasury Market conference
  • ECB Financial Stability Review
  • ECB President Lagarde speaks
  • ECB’s Fabio Panetta speaks

Thursday, Nov. 17

  • Bank Indonesia is expected to raise its 7-day reverse repo rate by 50bs on Thursday amid rising inflation.
  • Bangko Sentral ng Pilipinas is expected to deliver another hike that could lift its overnight borrowing rate by 50–75bps on Thursday.
  • Fed from Bullard, Bowman,
  • Fed’s Kashkari and Jefferson speak at the Federal Reserve Bank of Minneapolis Fall Institute Research Conference
  • Fed’s Mester speaks at the Federal Reserve Bank of Cleveland and the Office of Financial Research Annual Financial Stability Conference
  • Fed’s Evans speaks ahead of his retirement
  • BOE’s Silvana Tenreyro speaks
  • SNB’s Maechler speaks at Money Market Event in Geneva
  • BOE’s Huw Pill speaks at the Bristol Festival of Economics on ‘What Next for Central Banks’

Friday, Nov. 18

  • ECB President Lagarde, Nagel, and Knot speak alongside BOE’s Mann Fed’s Collins speaks at the Federal Reserve Bank of Boston Economic Conference
  • BOE’s Jonathan Haskel speaks

Sovereign Rating Updates

  • Italy (Fitch)
  • Sweden (Fitch)
  • Turkey (Fitch)
  • Ireland (S&P)
  • South Africa (S&P)
  • Portugal (Moody’s)
  • South Africa (Moody’s)
  • Denmark (DBRS)

Key Central Bank Decisions, Reports

For a Complete Macro and Micro Market Overview Visit Our Traders Market Weekly

Sources: TC WSJ Bloomberg

Trade Smart

From The TradersCommunity Research Desk