November Has Been a Bad Month for the USD

USD: On track for largest monthly decline since November of last year

At the commencement of this week, the US dollar has displayed continued weakening, particularly evident in its depreciation against the yen overnight. This sets the dollar index on a trajectory to register its initial monthly decline since July, poised to be the most significant in percentage terms since November of the previous year when it sharply decreased by -5.0%. Like last year, the decline in the US dollar follows the peak of US yields in October. Subsequently, US yields corrected lower, consolidating at reduced levels throughout the first half of the current year. In this instance, US yields have once again peaked in October and have since undergone a correction through November, with the 10-year US Treasury yield presently positioned just over 50 basis points below the peak observed on October 23rd at 5.02%.

DXY Chart

Source: Finlogix Charts

Recent statements from Federal Reserve officials and the release of softer US Consumer Price Index (CPI) and nonfarm payrolls reports for October have instilled greater confidence among market participants that the Fed's rate hike cycle concluded back in July. This has prompted a robust relief rally for risk assets, leading the S&P500 index to nearly reverse the entire downturn experienced between August and October, which amounted to an almost 11.0% decline.

FedWatch

Source: CME

Among the G10 FX currencies, the high beta currencies of the Swedish krona (+6.9% vs. USD month-to-date), Norwegian krone (+4.5%), New Zealand dollar (+4.3%), and Australian dollar (+4.0%) have been the primary beneficiaries of the notable improvement in investor risk sentiment. This situation leaves the US dollar susceptible to further weakness in the upcoming week if positive investor risk sentiment persists. A substantial shift in expectations for Fed policy that could trigger a reversal of US dollar weakness seems unlikely. The primary economic data release in the upcoming week is anticipated to be the latest Personal Consumption Expenditures (PCE) deflator report for October, providing additional evidence of decelerating inflation following the October CPI report. Fed Chair Powell is also scheduled to speak towards the end of the week on Friday.

While not entirely unfavourable for the US dollar, optimism among investors regarding a potential reduction in geopolitical tensions between Taiwan and China following the Taiwan election at the start of the next year received a setback at the end of the previous week. The failure of the two main opposition parties, KMT and TPP, to agree on a unity presidential ticket impeded progress. Consequently, KMT candidate Hou Yu-ih and TPP candidate Ko Wen-je both registered as separate candidates for next year's election, increasing the likelihood of the ruling DPP party candidate, Vice President Lai Ching-te, being elected Taiwan's next president on January 13th. This development is unfavourable for geopolitical tensions in the region. Although this month's rebound for the Taiwan dollar and Asian currencies more broadly has lost momentum, a recent poll released over the weekend indicates that opposition TPP candidate Ko Wen-je has an approval rating of 31.9%, surpassing DPP candidate Lai Ching-te for the first time in a survey by the Taiwanese Public Opinion Foundation. Other polls, however, still show Ko in the third position.

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