Dollar Mixed Despite Bet on Fed Peaking at 6%

While the economic calendar was relatively light, the week was full of surprise. The biggest one was the big wagers that put on Fed interest rate peaking at 6%. Rumors and speculations about the next BoJ Governor triggered some volatility. Meanwhile, the blockbuster Canadian job data came in and blew everyone away.

Canadian Dollar eventually ended as the best performer, followed by Sterling and Swiss Franc. The latter two were clearly helped by selloff in Euro, which ended as the worst performer. Kiwi were the second worst, followed by Yen. Aussie was just mixed after hawkish RBA hike. Dollar was also mixed, and need some inspirations from the upcoming CPI report.

Market expecting Fed to peak at 5.00-5.25%, despite big wagers on 6%

The juiciest news last week was probably the big wagers in the US on betting Fed interest rate hitting 6% this year, comparing to Fed’s own projection of 5.10%. The move came after prior week’s stellar non-farm payroll data, as well as hawkish comments from Fed officials, including Chair Jerome Powell.

In short, for one of the traders, they would make as much as USD 135m if Fed continues tightening until September. That is, there will by five more 25 bps hike in March, May, June, July, and September, to bring interest rate target from current 4.50-4.75% to 4.75-6.0%. The trade will break even at if Fed hikes to 5.6%, and USD 60m at 5.8%.

But after all, speculations of some traders are not the whole of the markets. Fed funds futures are now pricing in a pause after two more 25bps hikes in March and May, to 5.00-5.25%. The majority seemed finally giving a nod to Fed officials’ views. Nevertheless, they’re still seeing more than 50% of a cut in December. Let’s see when the markets will change their mind.

More upside in 10-year yield after completing correction

In the US stock markets, sentiment was a little bit “off” but the pullback was so far shallow. Further rally is expected in S&P 500 as long as 55 day EMA (now at 3982.54) holds. Current rise form 3491.58 should still extend higher, even as a corrective move, to 4325.28 cluster resistance (61.8% retracement of 4818.62 to 3491.58 at 4311.69).

The development in 10-year yield is worth much attention in the coming weeks. Strong support from 55 day EMA (now at 3.607) is certainly a bullish sign. Correction from 4.333 has likely completed with three waves down to 3.373, after hitting medium term channel support. Further rise should be seen to 3.905 resistance first. Decisive break there could set the stage to 4.333 and possibly long term up trend resumption, in the latter half of the year. That, if happens, would be an indication of prolonged above target inflation and Fed tightening.

As for the Dollar Index, the break of 103.44 resistance last week should confirm short term bottoming at 100.82, on bullish convergence condition in daily MACD. Immediate focus is now on 55 day EMA (now at 104.02). Sustained break there will bring stronger rebound back to 38.2% retracement of 114.77 to 100.82 at 106.14, even as a corrective move. If that happens, it would likely mean that Fed is likely to continue the tightening cycle longer, even longer than the ECB which may pause after May.

CAD surges after job data, EUR/CAD in correction

The blockbuster Canadian job report was another surprise in the week. While the 150k headline growth blew all expectations away, the details were also exceptional strong, with gains concentrated in full-time jobs in the private sector, and more working hours. Probably, the only goods news to BoC is the slowdown in wage growth.

Talking about BoC, it made itself clear in the minutes that the pause in tightening is “conditional” while “the bar for additional rate increases was now higher”. One set of data is definitely not enough to alter BoC’s course. But it should have definitely made the board nervous and raise the chance of going back to rate hikes at a later stage.

EUR/CAD was the top mover last week, losing -1.51%. The development now suggests that a short term top was at least formed at 1.4640. Indeed, fall from there should be correcting whole up trend from 1.2867. Firm break below 1.4232 support will set the stage for 38.2% retracement of 1.2867 to 1.4640 at 1.3963.

Considering that 55 week EMA is now sitting at 1.3955, downside on pullback should be contained by 1.3963, at least on first attempt, to bring rebound.

Risk on Yen tilted to the downside on BoJ nomination

Lots of jitters were seen in Japanese Yen last week, on news regarding the new BoJ Governor, after Haruhiko Kuroda’s term ends in April. Initially, there was talks that current deputy Masayoshi Amamiya would be nominated by the government. Yen gapped down the week as Amamiya was seen as continuation of Kuroda’s ultra loose policy.

Then, Yen was shot up later in the week on reports that academic, and former BoJ board member, Kazuo Ueda would be nominated instead. That’s seen a an intention of the government to direct away from the current path. Yet, Ueda sounded composed in telling NTV that “The Bank of Japan’s current policy is appropriate and monetary easing needs to be continued at this point.” Then Yen came down.

The question on who the next BoJ is should be answered rather soon, as the government would table nomination on February 14.

Risks to Yen could now be a bit skewed to the downside. While Ueda is not the “dove” as Kuroda as perceived by some, he’s not likely the “hawk” that some would hope for.

While USD/JPY’s pull back from 132.89 was deeper than expected, it’s looking more like a corrective move than not. That is, rebound from 127.20 is likely not over yet. Break of 131.88 minor resistance will bring retest of 132.89 first. Decisive break there will resume the rebound to 38.2% retracement of 151.93 to 127.20 at 136.64.

EUR/USD Weekly Outlook

EUR/USD’s decline last week indicates that it’s already in correction to whole up trend from 0.9534. Rejection by 4 hour 55 EMA maintains near term bearishness and favors more downside. Break of 1.0668 temporary low this week will bring deeper fall to 38.2% retracement of 0.9534 to 1.1032 at 1.0463. Nevertheless, on the upside, break of 1.0790 minor resistance will turn bias back to the upside for retesting 1.1032 high instead.

In the bigger picture, the rally from 0.9534 low (2022 low) is a medium term up trend rather than a correction. Further rise is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.

In the long term picture, while it’s too early to call for long term trend reversal at this point, the strong break of 1.0635 support turned resistance (2020 low) should at least turn outlook neutral. Focus will turn to 55 month EMA (now at 1.1189). Rejection by this EMA will revive long term bearishness.

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