The dollar rally in 2022 was based on the Fed’s aggressive interest rate hikes. Now, with the other central banks (specifically the ECB) adjusting rates higher and providing guidance for more rate hikes, the dollar is getting crushed. We do not normally use such words to describe activity in markets, but there is no way to explain the recent fall. The U.S. employment, released on Friday, was much stronger than expected (263K v. 200K forecast). The 3.7% rate was unchanged and pay increased for the workers. While this may be good news for those that started working, it remains to be seen how the Fed will react at their next announcement on December 14. Fed fund futures are pricing a 78% probability of a 50 bp rate hike. This, along with an overbought dollar is a bearish combination. The U.S. dollar index is 9% lower than its October high.

Here are two quotes from Fed Governors:

John Williams (NY Fed): “Unemployment could rise to 5% in 2023 as a result of interest rate hikes.”

James Bullard (St. Louis Fed): “Financial markets are underestimating the chances that policy makers will need to be more aggressive next year in raising rates.”

EUR (1.0540): Last week’s late rally pushed the single-currency to levels not seen since June. The U.S. interest rates continue to fall, which has dollar selling supporting the euro. The first level of resistance is at 1.0660 and then 1.0900 (38.2% retracement). Support for the currency is 1.0480 and 1.0220. The momentum is behind the euro which points toward a test of the 38.2% retracement level. This week there will be several economic releases in the EU, but the GDP and employment data will have the most impact. Both are released on December 7.

GBP (1.2275): The current level is 16% higher than the 1.0295 low in September! Daily technical charts has the pound building a consolidation pattern, with the next leg higher to 1.2800. Confidence is growing in the Prime Minister’s leadership. The BoE remains hawkish, while the Fed is sending mixed messages for 2023. There are no economic reports this week. Activity will be determined by the Euro and the U.S. dollar.

JPY (134.40): Yen buying has been on the back of falling U.S. interest rates. The spread has fallen and that is benefiting the currency. China has let up on their Covid lockdown, which signals an opportunity to a pickup in the global economy. The threat of a Taiwan / China conflict remains and selling yen near 130.00 is a good idea. We hope no fight happens but holding US dollars against the yen may prove a protective position.

CAD (1.3450): Let’s begin with the positive employment data last week, and oil prices back above $80/bbl. ($81). Neither seems to have impact on the Canadian dollar. Daily trading ranges have narrowed. Most foreign currencies have gained ground against the U.S. dollar, but no impact on USD/CAD. This type of quiet rangebound trade in the CAD is not unusual. The next move will most likely be a large one. With OPEC+ keeping their output levels as they were, a pick-up in global economic activity should push oil prices and the Canadian dollar higher.

MXN (19.4500): Last weeks USD/MXN low was 19.0385, before snapping back to the current resistance area. 19.35/19.50 had been major support since 2018, now that should be strong resistance. While the dollar has been under pressure, the Mexican Central bank has been hawkish, with their benchmark rate now at 10%. Their GDP is projected to grow by 1.8% in 2023 and third quarter growth 2022 by 4.3%. All signs point toward continued increase in Mexican rates while the U.S. central bank may be slowing their future rate moves. Benefit to the peso. Support at 19.0000 and 18.8500.

CNY (7.0000): Last week the CNY made a large gain against the dollar on the back of China indicating that they were going to lower Covid restrictions. With the USD under stress, the rising CNY met little resistance. Next support for the U.S. dollar is 6.8500 and then 6.7000.