Diminishing Dollar Dominance?

November 30, 2022

2 minute read

by Ryan Hansen, Derivatives Manager, Charles Schwab & Company

One of the biggest trades this year has lost steam and its outlook for the next year has become much more mixed.

One of the biggest trades this year has lost steam and its outlook for the next year has become much more mixed. The US Dollar index (DXY) climbed nearly 20% this year by the end of September as the Federal Reserve embarked on its most aggressive rate hike cycle in decades. It has since dropped 7% back to 106. Kerry Craig in JPMorgan Asset in Melbourne noted that “The dollar is no longer the straight, one-way buy we’ve seen this year. There’s room for currencies like the euro and yen to recover.”If the US Dollar (USD) does retreat, it will have implications all over the world. Imported inflation in Europe and Asia will dampen, help alleviate the price of food purchases for developing economies and lower the debt burden for those who borrowed in the world reserve currency.

Some in the markets are seeing signs that US inflation has peaked and think the Fed will slow their pace of rate hikes. However, on Monday St. Louis Fed President James Bullard said he thinks “markets are underpricing a little bit the risk that the FOMC will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have in the US.” The development of US monetary policies could dramatically shift the currency markets if they are to diverge from expectations. Agnes Belaisch at Barings in London thinks “The Fed’s job is not done. A long dollar position continues to make sense.” While Andrew Sheets at Morgan Stanley has predicted that the USD will peak this quarter and decline next year.

All seven major pairs reversed and have rallied against the USD starting at the end of September and most joining in at mid-October around the CPI release for the month. On Tuesday all major pairs except the British Pound, Euro, and Swiss Franc advanced with the Australian dollar outperforming on news of possible COVID Zero relaxation in China – the Aussie is closely linked to Chinese growth for its tourism and demand for raw resources. Only the Canadian dollar is below its 50-day moving average, but only by a couple pips while the other 6 are well above.

Technicals

Looking at the December Australian Dollar Futures (ADZ22) we can there is a short & medium-term uptrend has formed from the October lows. Higher-highs and higher-lows have been created and the 5-day is above the 13-day moving average which is above the 50-day moving average and 14-day RSI is up at 60.The CFTC’s Commitment of Traders (COT) report shows that Asset Managers have decreased their net short position by almost 11K contracts to short 17,367 contracts for the week ended 11/18.