What Happened

• U.S. Dollar strength faded in November, marking its worst monthly performance since 2010.
• As foreseen, a messy reopening in China and evidence of slower price growth caused the buck to fall 5.0%.
• Fears over a deep recession have subsided, giving way to a major recovery across Emerging-Market FX flows.
• Sterling reached its highest value since August, while the Euro rose to its strongest since July.
• U.S. Equities rose 5.6% for the month despite growing reports of layoffs and downgraded outlooks.

GreenShootsFX’s View

• Fed is likely to slow its pace of rate hikes by making a 50-basis-point increment at their Dec. 14th meeting.
• China’s situation will be closely watched after protests forced authorities to reconsider their COVID approach.
• European Central Bank messaging will determine if a hawkish approach further uplifts a resurgent EUR.
• MXN levels will be tested after hitting a two-and-a-half-year zenith based on an economic rebound.
• Uncertainty over 2023 remains, with FX volatility still high and markets overwhelmed with risk events.

In Focus

• The dollar fell in dramatic fashion with improved expectations about a slowdown.
• Recession is still a fear in the mind of some, but a wave of confidence over Fed action is here for now.
• Although Fed Chairman Jerome Powell confused markets with mixed commentary, it is clear the Fed is reconsidering how far they are willing to move rates.
• Nevertheless, the Fed’s goal is to slow down employment and the economy, bringing other Fed members to vow more hikes are to be counted on.
• USD strengthening reached all-time records, thus it is understandable that recoveries across the board are robust.
• Traders differ widely in view regarding how much more pain there is to bear and for how long into 2023.

In Depth

A return to risk appetite may keep the dollar subdued. While all is not well, markets seem to be ready to opt towards optimism in a hectic close to the year.

Traditional markets are proving to be resilient to chaos, pandemic, and even system-challenging technology. 2022 has been marked by the accumulation of struggle and fear, leading to a blurry outlook month after month as an unexpected war was thrown into the mix. Supply-chain issues plagued efforts toward a recovery that has been uneven worldwide.

There are still signs pointing at a recessionary period coming, primarily because it is considered desirable in the name of bringing down the rapid growth in prices. However, it seems like the era of central-bank tightening may come to a sooner end than anticipated previously. Overall, it feels like dollar advancement has hit a limit, but the merit in trusting the buck as a safe haven is not completely lost.

As mentioned throughout most of this year, USD strength had plenty to do with concluding that the negative effects of the Russian invasion of Ukraine and the likelihood that it will be a long-term conflict have not impacted the ability to reach domestic goals.

COVID-vaccine availability, a budget for expanding expenditures, and an end to all restrictions to travel made it possible for the economy to lift itself out of the hole the pandemic created. In order to support the financial system, the Fed has utilized plenty of tools at its disposal and has managed to take them away by telegraphing its moves.

While financial sanctions have not completely taken away Russia’s ability to do international business, Ukrainian advances have made a dent in the original quick ambitions Putin did have. The war is far from being an isolated conflict as it now involves all nations taking a side on whether Russia needs to be condemned. However, the U.S. is not directly affected by the physical threat it poses to both human safety and economic well-being. Geographically, the U.S. is at an advantage over its European N.A.T.O. allies, whose unity has been tested throughout the year.

It is reasonable to believe that there are two items that will be embraced going into the new year: life with COVID and life with ongoing armed conflict. Both revolve heavily around China and its policies. For starters, it is positive that even the National Health Minister sees the country’s systems more than ready to handle living while COVID is still around.

Recent studies in Singapore and Australia explained that COVID is now in a pathogenic state, which means its evolution has made the virus more deadly, resilient, and determined that boosters will need to be given out to prevent higher death tolls credited to it. Regardless of how monitored society is, it is up to individuals to avoid and fight the medical condition.

When it comes to relations and cooperation, China and the U.S. are looking for a middle ground while disagreeing in the short term about Russia’s role in the globe. As the U.S. vows to aid Ukraine, China has now allowed Rubles to flow unscrupulously across its exchanges, thus giving life to Russia while it remains cut off from access to the Western world.

Meanwhile, the U.S. is looking to expand its closeness with India, which is seen as the next giant economy to monitor and relief from manufacturing and services deals with China. Additionally, the U.S. hopes to gain back neighboring ground as it ignites talks with Venezuela to ensure oil and other energy supplies that are scarce and Russia cannot be relied upon.

As of now, we have reviewed what naturally kept the buck so high and pushed it to all-time bests, but there are currently important reasons for doubting that it will stay buoyant as we put an end to 2022. Indeed, China is the main reason for the switch in market mentality: if China is open, the recession feared will not materialize. Or will it?

The last few weeks revealed that nationally, China’s citizens are fed up with strict safety measures that put too many restrictions on their daily lives. There seems to be a commitment to easing and re-opening fully, thus the buck may have room to fall.

Another key element of the greenback’s downfall can be traced to the lack of an energy crisis. While winter is not technically here, much of the awaited chaos surrounding the ability for nations to heat themselves did not come to fruition.

The panic that emanated during the summer months was addressed aggressively by European Union and industry leaders who, along with the White House, worked on getting reserves and other developments going. OPEC+ decided to do its own thing, yet prices have gone down, and use has not been an issue. Meanwhile, alternatives have already been worked on to provide enough stability.

One final element is the Fed and its messaging about monetary policy. Again, it looks as if Fed members are in consensus that the way they have chosen to combat inflation is actually working. Evidence in the form of a lower-than-expected Consumer Price Index for October and jobs staying on the rise validate the Fed’s talk about a resilient economy that can still handle more interest rate increases.

There are no surprises, though, when it comes to Fed action. They are certainly looking to inflict pain in the economy, but not too much that threatens economic growth beyond the second half of 2023. Moreover, their communication indicates that perhaps the Dollar-Doom-Loop dictating an unbreakable buck has met its match: a central bank no longer interested in making the borrowing of dollars more expensive.