US Dollar firms up at the start of the last normal trading week of 2023
|Most Recent Article: US Dollar jumps with rising yields ahead of event-packed week
- 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 steady in the green on Monday at the last week of normal trading for 2023. Some volatility picks up in the commodity complex as headlines are being issued that a COP28 agreement is on the table after host Saudi Arabia objected to "phase out" fossil fuels, and rather wanted to see a "reduction of consumption". Meanwhile traders are brushing off the recent US Jobs Reports with Central Bank Futures now pointing to the European Central Bank (ECB) to be the first to cut in the first quarter of 2024, before the US Federal Reserve (Fed) will in the second quarter of 2024.
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: Last calls from central banks
- Several new agencies are reporting that an agreement has been drafted for all countries to agree upon after Saudi Arabia, which was the host this year, asked to redact the wording "phase out" rather to "reduce consumption" of fossil fuels.
- Still very far away, though for the US Presidential elections: former US President Donald Trump is leading the Republican Primary elections.
- 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: DXY steady above 104
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%.
Central banks FAQs
What does a central bank do?
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation undershoots or overshoots its projected target?
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
Who decides on monetary policy and interest rates?
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Is there a president or head of a central bank?
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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