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T3 Group

2023 November’s Outlook - The Resilient U.S. Dollar: Strength Amidst Global Economic Changes

Updated: Jul 2


USD's Macro:


The latest inflation data indicates a relatively modest year-on-year inflation rate of 3.7%. However, there is a significant risk of elevated crude oil prices due to escalating geopolitical tensions in the Middle East, particularly if Iran intensifies its oil embargo sanctions against its adversaries. The release of almost 40% of the U.S. Strategic Petroleum Reserve (SPR) during the 2022 Russia-Ukraine conflict has depleted SPR reserves to 351 million barrels, potentially leaving the U.S. reliant on countries like Saudi Arabia to bolster supply in the event of an Iranian oil cutoff. Furthermore, concerns loom over U.S. shale production, with the best drilling locations already exploited. A slowdown in hiring is evident, as Non-Farm Payrolls (NFP) fell below consensus at 150,000, impacting job vacancies and mitigating wage pressures. Economic indicators suggest a contractionary outlook in manufacturing based on the Purchasing Managers' Index (PMI), while services PMI, though still expansionary, exhibits a decline in service demand. Collectively, these factors support the narrative of the Federal Open Market Committee (FOMC) maintaining "higher rates for longer." Despite nearing the end of interest rate hiking cycles in major economies like the Eurozone and the United Kingdom, the U.S. dollar is poised to remain strong, owing to its economic resilience, safe-haven status, and global reserve currency standing, even in the face of potential risks like a U.S. recession and narrowing interest rate differentials.


USD's Technicals:


On the daily timeframe, price has recently broke below consolidation to hit a key support level at 105.0, which coincides with the 50% Fibonacci Retracement level. This could provide the bullish acceleration towards the next key resistance level at 106.8. Price is hovering above Ichimoku cloud, supporting our bullish bias.




JPY's Macro:


The world’s third largest economy, Japan, after several “lost decades” - a phenomenon characterised by an slow economic growth, low inflation, meek employment, faces a conundrum in their easy monetary policy as inflation, hitting a high of 4.3% in January 2023, dawns upon its economy. As such, many economists hold rising expectations of BOJ’s exit from its Yield Curve Control (YCC) in later half of 2024. Recent tweak in BoJ’s YCC, more specifically on expanding the previously fixed cap of 1% on yields to a flexible reference range of 100 basis points up or down, compared to the prior 50 basis point target, could see possible stem in yen’s decline as a substantial rise in 10-year JGB yields could lead to the repatriation of Japanese investors' foreign assets, fostering demand for the local currency. However, Ueda maintains the belief that its economy has yet to achieve sustainable inflation of 2%, on the back that inflation is driven by import costs due to weak yen and declining real wage growth (Real wages y/y for Sep 23 at -2.4%). These tweaks in YCC could be interpreted as a response to speculative pressures in the financial markets, so as to ensure stable functioning of financial markets. As such, while yen’s weakness has been limited, we do not foresee much strengthening from this point forward either.


JPY's Technicals:


On the daily timeframe, price is exhibiting bullish order flow, forming higher lows and higher highs, which manifested itself as an ascending channel. Price has recently tapped into a key resistance level, and a throwback to the key support level at 147.50, which coincides with the 61.8% Fibonacci retracement, could provide the bullish acceleration towards the resistance level at 151.50, which is in line with the 161.8% Fibonacci extension. Price is hovering above Ichimoku cloud, supporting our bullish bias.




NZD's Macro:

Similar to the dual mandate in the United States, the Reserve Bank of New Zealand (RBNZ) is committed to fostering conditions that support full employment and uphold the purchasing power of its currency. Inflation, having moderated from its peak of 7.3% in Q2 2022 to 5.6% in Q3 2023, has prompted the RBNZ to adopt a stance of rate pause since May 2023. Despite the prevailing high interest rates at 5.50%, the New Zealand economy faces challenges, including a trade deficit of $2.3 billion in September, a decline in total exports, and reduced export prices, all of which dampen demand for the New Zealand dollar (kiwi). Nevertheless, there is cautious optimism surrounding the prospect of the elected opposition party in New Zealand, as potential tax cuts pledged by the National Party may stimulate demand for new homes, potentially bolstering home prices. Nevertheless, we foresee further downside risk for the kiwi as relative economic resilience in the US outshines New Zealand and many more.


NZD's Technicals:


On the daily timeframe, price has been on a bearish trend, forming lower highs and lower lows. Price is currently approaching a key support-turned-resistance zone at 0.5880, which is in line with the 38.2% Fibonacci retracement level. This could send prices lower to the next key support level at 0.5600, which coincides with the 78.6% Fibonacci extension level. Price is hovering below Ichimoku cloud and 20 EMA, supporting our bearish bias.



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