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- US Dollar in the green with BoJ backtracking on end current policy
US Dollar in the green with BoJ backtracking on end current policy
- The US Dollar is up near 1% against the Japanese Yen.
- Traders will keep their powder dry towards FOMC on Wednesday.
- The US Dollar Index holds above 104 and has more room to go higher.
The US Dollar (USD) is riding the reversal wave against last week’s turbulence that sparked after comments from Bank of Japan (BoJ)’s Chairman Kazuo Ueda who said that the end of negative monetary rates was near. This Monday morning, several headlines read that the BoJ sees little need to end negative rates in December. As a result, the Greenback takes back a lot of lost ground from the Yen’s move from last week, and is up 1% in early Monday trading.
On the economic front, besides CPI on Tuesday, traders will mainly look forward to Wednesday when the Fed will kick off ahead of Super Thursday, when no less than three major central banks will issue their last monetary policy for 2023 (four with Fed included).
Daily digest: Standstill ‘till Wednesday
- A possible main driver for the sudden backtracking on changing its monetary policy at the BoJ, could have come with the drop of 13.6% year-on-year in Machine Tool Orders for Japan.
- Meanwhile Chinese markets are trembling as deflation fears are soaring. With a big focus on central banks this week, the European Central Bank could be facing a similar issue as inflation is sinking very rapidly in the region and the ECB already guided markets that it will not cut quick.
- The US Treasury is the main driver this Monday in the economic calendar with no less than four debt issuances.
- Near 16:30 GMT both a 3-month and a 6-month bill will be auctioned.
- At 18:00 GMT a 10-year and a 3-year note will be allocated.
- Equites are flying in Asia after the statement from the BoJ. Japan has closed its Nikkei up 1.50% and the Topix at 1.47%. The already closed Hang Seng was able to erase an early 1.6% loss to close this Monday up 0.5%. European equities are not sure what to make off all these messages out of Asia and are flat for this Monday, together with US futures.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.
- The benchmark 10-year US Treasury Note trades near 4.25%, a substantial leg higher than last week. The recent US Jobs Report from last Friday revealed a persistent uptick in wages and another drop in unemployment, which opens the risk for persistent inflation.
US Dollar Index technical analysis: Pressure is building
The US Dollar is gearing up for a comeback in this last trading week of the year under normal trading regime. This means that the last volatile moves in the Greenback and its US Dollar Index (DXY) will be unfolding this week. From a pure technical point of view, the DXY looks set to end this year near 105.
The DXY is recouping losses against the Japanese Yen, one of its main constituents, and is up by 1% in the USD/JPY pair. The DXY trades above 104 and would attract more volume if it was able to break above the high of Friday at 104.26. Once from there, the 100-day Simple Moving Average (SMA) near 104.55 looks very appealing to head toward prior to ahead of Wednesday’s Fed meeting.
To the downside, the 200-day SMA has done a tremendous job in supporting the DXY with buyers coming in below 103.56 and pushing it back towards that same level near the US closing bell. If it fails this week, the lows of November near 102.46 is a level to watch. More downside pressure could bring into view the 100 marker, in a case where US yields sink below 4%.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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