- The US Dollar sinks over 1% against the Japanese Yen.
- Traders brace for jobless claims and Challenger Job Cuts data.
- The US Dollar Index could close above 104.00, on track to return to October levels.
The US Dollar (USD) is facing a blow from the Japanese Yen after Bank of Japan’s (BoJ) Chairman Kazuo Ueda signalled to the markets that a change in monetary policy is coming. The Bank of Japan has kept rates negative for multiple decades, though an end is appearing to be near. The result is that the Japanese Yen is up over 1.25% against the Greenback, which tips the US Dollar Index (DXY) in its turn in the red and snaps this week’s winning streak.
On the economic front, traders can further assess the healthiness of the US jobs market ahead of the actual US Nonfarm Payrolls Jobs report on Friday. If the Challenger Job Cuts Index is a thrustworthy index, it looks that the US Jobs Report will be a positive upbeat one as the number of Job Cuts for October was actually negative against the previous month by -40.8%. US Initial Jobless Claims are up next.
Daily digest: All about jobs and cuts
- Bank of Japan’s Chairman Kazuo Ueda has hit a nerve in markets in Asian trading hours, after alluding that a change in monetary policy might be at hand in the next central bank rate decision on December 16th. Analysts are expecting that the BoJ might end its decade-long trend of negative rates.
- The Challenger Job Cuts were released. Previous was for -36,836 with now -45,510.
- Near 13:30 GMT the weekly Jobless Claims are due to be released:
- Initial Claims are expected to rise from 218,000 to 222,000.
- Continuing Jobless Claims are expected to fall from 1,927,000 to 1,910,000.
- Around 15:00 GMT the lighter Wholesale Inventories are due to be released for October. Previous was -0.2% with again -0.2% expected.
- Consumer Credit Change for October will be released near 20:00 GMT with a previous outstanding credit debt of $9.06 billion. The forecast is for a decrease to $9 billion.
- Equities are dropping like a stone after the surprise comment from the BoJ. Both the Nikkei and the Topix, leading Japan indices, have closed over 1% in the red. European markets are marginally in the red with US futures flat ahead of the US opening bell.
- 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 drops to 4.16%. Yields in Europe, however, are falling even quicker and widening the gap with US Yields.
US Dollar Index technical analysis: bump on the road
The US Dollar retreats firmly this Thursday in early trading, after the BoJ rattled markets with a surprise comment that might mean the end of negative rates on the island. The US Dollar drops over 1% against the Japanese Yen and in its turn is dragging the US Dollar Index (DXY) to the downside. This decline ahead of the US Jobs Report could be the window of opportunity US Dollar bulls are looking for to add to US Dollar positions.
The DXY printed a new third consecutive high on Wednesday, which is what bulls are looking for as confirmation of a winning streak. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 55-day and 100-day Simple Moving Averages (SMA) turned over to support levels.
To the downside, the 200-day SMA should act as support and not allow the DXY to drop below 103.56. If it fails, the lows of June make sense to look for some support near 101.92. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.
US Dollar FAQs
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.
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.
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.
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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