Invest1 publisher2 min readPublished
The Dollar Index climbs to the 61.8% retracement of its decline from June's high
The Fed's unanimous quarter-point hike still pushed the two-year yield higher, and the dollar gained on both the yen and the Canadian dollar. Marc Chandler sees a quieter data week making politics more salient.
The Investor · Invest desk
What happened
- The Dollar Index reached slightly above 100.55 ahead of the weekend, its best level since late July and the 61.8% retracement of the decline from the year's high of about 101.80 on June 24.
- Dollar-yen jumped more than 2% after the Bank of Japan delivered its own widely anticipated hike, then pulled back to settle about 0.50% higher.
- The dollar has risen against the Canadian dollar for eight consecutive sessions, gaining almost 1.7% over that run.
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Why it matters
- constraint With the major central bank meetings done and a thinner run of high-frequency data, dollar positioning has no fresh macro catalyst this week and takes its cue from the political calendar instead.
- decision A central bank that has signalled an extended pause now has to hold that line against a swaps market pricing a coin flip on a hike, and the Fed's move made the choice harder.
- exposure Anyone who bought the yen on the Bank of Japan's hike was worse off by the settle, since the dollar's front end outbid a Japanese tightening on the same day it happened.
This week's dollar move sits in short rates. Marc Chandler wrote that the Fed "delivered the quarter-point hike that was widely anticipated by a unanimous decision, and still the two-year yield rose a little" [2], and that near-term dollar movement continues to be sensitive to changes in US rates [1]. The two-year rose even though the hike was already written into the price.
The yen leg is the more interesting version of the same trade. The dollar jumped more than 2% against the yen ahead of the weekend, after the Bank of Japan delivered its own widely anticipated hike, then pulled back and settled about 0.50% higher [5]. That is at least 1.5 of the 2 points handed back, roughly three quarters of the advance [3]. Two central banks raised rates inside a week [2][5], and the dollar still ended about half a percent up on the yen [5].
100.55 matters as a chart level. Chandler puts the Dollar Index slightly above it ahead of the weekend, its best reading since late July and the 61.8% retracement of the decline from the year's high of about 101.80 on June 24 [4]. Work back from those two numbers and the decline being retraced bottomed near 98.5 [2]. The index sits 1.25 points, about 1.2%, under that June high [1].
Canada is the quieter move: eight consecutive sessions of dollar gains for almost 1.7% in total [6], an average of about 0.21% a session [4]. Chandler writes that the central bank has signalled an extended pause while the swaps market discounts around a 50% chance of a hike, and that the Fed's hike may make it a closer call [7]. The note does not name the bank in that line.
His framing for the week is that with the major central bank meetings over and high-frequency data thinner, political events may become more salient [3], and he headlined the note on the Trump-Xi meeting [8]. I would put less weight on the meeting than the title implies. Two other paths are open: the two-year keeps grinding higher and the dollar needs no communique at all, or the swaps pricing moves past a coin flip and breaks the eight-session Canadian dollar streak with nothing political attached to it. I would be wrong on rates if the Dollar Index cannot hold above 100.55 and drifts back toward the 98.5 low the retracement implies, or if the yen takes back the whole 2% it briefly lost.
What to watch
- Whether the Dollar Index holds above 100.55 or slips back toward the 98.5 low its retracement implies.
- Whether swaps pricing for the unnamed central bank moves past 50% and ends the eight-session Canadian dollar slide.
- What the Trump-Xi meeting produces, and whether dollar-yen gives back the rest of its post-BoJ jump.