Chop City, But Dollar Express Still On Track, Even If Slowly

The US dollar tended to broadly consolidate its recent gains over the past week. Data and officials mostly confirmed what most investors had already anticipated. The Federal Reserve is most likely to hike rates in the middle of December. The ECB will most likely ease policy further just shy of two weeks before the Fed meets. The Bank of Japan is in no hurry to step up its already aggressive asset purchase program.

The Chinese yuan will most likely be included in the next SDR basket that will be announced later this month, though it will not implemented until next September. Meanwhile, the PBOC continues to adjust its mechanisms and policy tools and is continuing to ease policy. The latest measures have been targeted instead of broad. At the same time, it has doubled the required margin for equity purchases, which in this context is a macro-prudential measure. However, its efforts to curtail banks from financing offshore activity and other soft capital control measures issued recently are disconcerting even if not impacting prices.

If there was a change in the market, it was the relative outperformance of the dollar-bloc currencies. This could simply be a function of the corrective forces. Most of the “major” emerging market currencies also advanced against the greenback in recent days. For all practical purposes, the dollar-bloc is bouncing along a trough carved earlier after sharp losses in recent quarters. It is still too early to be confident that the currencies have bottomed. The interest rate differential between them and the US has not peaked, even if the driver of the divergence shifts. The CRB index set fresh six-year lows in the middle of last week.

The Dollar Index fell through the steep uptrend drawn off the October 15 lows. While we often suggest respecting the price action, this may be an exception. We see the violation as part of what appears to be a shallow correction. We suspect it may have signaled the end of the correction, as some of the new longs were shaken out. At the start of the new week, the trendline comes in just below 100.00. The multi-year high was set in March near 100.40. While we expect to see new highs over the next term.