Weekly Currency Market Review: G10 Currencies Face Broad Dollar Pressure

Overview of G10 Currency Movements

Last week, all G10 currencies depreciated against the US dollar, with six of them declining by more than 1%. Notably, the Japanese yen rebounded by nearly 0.7% late in the week following an explicit intervention warning from Japan’s Ministry of Finance, recovering from a 10-month trough. By contrast, the Swiss franc underperformed, falling approximately 1.75% against the dollar. This dynamic suggests a shift in carry trade positioning, with the yen and Swiss franc increasingly serving as the funding currencies replacing the US dollar.

Despite the greenback’s relative strength, this did not coincide with concurrent rises in US interest rates. Market expectations for a Federal Reserve rate cut in December dipped below 30%, but following remarks from the New York Fed President signaling potential for a near-term rate reduction, odds doubled by week’s end in the Fed funds futures market. The US labor market data remain pivotal in shaping Fed rate outlooks.

US Economic and Market Drivers

Economic Data Scheduled

Key US releases for the upcoming week include September retail sales, producer prices, house price indices, and consumer confidence measures from the Conference Board. Weekly ADP employment estimates and jobless claims are expected to have limited market impact. Note that US markets will close on Thursday for Thanksgiving.

Dollar Index and Fed Policy Outlook

The Dollar Index retreated by about 1.35% in early November after peaking on November 5 at its highest since May. While the tapering of rate cut expectations had previously depressed the dollar, official Fed communications provided some support. However, commentary from the NY Fed President revived the probability of a near-term federal funds rate decrease, with futures pricing a roughly 66% chance of a cut, closely mirroring the level at the time of last month’s rate reduction.

Market Sentiment and Indicators

Technical signals for the Dollar Index are mixed but suggest potential for continued upward movement. The index surpassed its 200-day moving average for the first time since March, with momentum indicators improving and the 5-day moving average crossing above the 20-day average. The next notable resistance lies near 101.55, corresponding to a 38.2% retracement of this year’s decline.

Eurozone Developments

Sensitivity to Interest Rates and Risk

The euro’s responsiveness to interest rate differentials has lessened significantly. The inverse correlation between euro exchange rate movements and changes in the US two-year yield has declined from roughly -0.80 in mid-September to about half that level, a pattern not seen since early July. Correlations with German two-year yields have weakened to near zero, reversing positive correlations observed earlier this year. Similarly, the relationship between euro exchange rate movements and the S&P 500 has shifted from positive to moderately negative.

Economic Calendar and Price Action

Eurozone data will be limited this week, with October money supply and lending figures available, alongside the ECB’s inflation expectations survey expected at the week’s close. The euro traded below $1.15 ahead of the weekend, reaching lows not seen since early August. A breach of the $1.14 level and the proximate 200-day moving average could open the path toward $1.1240, representing a 38.2% retracement of 2024’s rally. However, the narrowing US two-year yield premium over German bunds to just below 150 basis points tempers downside risks.

People’s Republic of China (PRC) Insights

Currency and Monetary Policy

The People’s Bank of China has systematically lowered the dollar’s reference rate; however, the offshore yuan has remained stable over the past two months. Implied volatility for the yuan hit an eight-year low earlier this month. Market speculation persists about an eventual official midpoint set near CNY7.0. Meanwhile, exchange rate discussions have not been a prominent feature of recent US-China negotiations, which remain marked by diverging interpretations regarding trade and geopolitical issues.

Upcoming Data and Price Levels

China will release October industrial profit figures, expected to reflect improvements seen in August and September. The dollar’s value against the yuan bottomed near CNH7.0850 on the same day as the Fed’s initial 2024 rate cut, with the range between CNH7.08 and CNH7.15 largely maintained in recent weeks.

Japan Market Overview

Exchange Rate Sensitivities and Correlations

The dollar-yen rate shows greater sensitivity to US Treasury yields than to Japanese government bond yields, with 30-day correlations around 0.45 for US yields and roughly half for Japanese yields. Correlations with equity markets have risen, while the previously negative association with gold prices has reversed to a modest positive.

Economic Release Schedule and Price Movements

A heavy schedule begins midweek including October services PPI, employment data, retail sales, industrial output, and Tokyo CPI. Despite Q3 GDP contracting 0.6% quarter-over-quarter, indications point to a Q4 recovery. Market expectations for Bank of Japan rate hikes have diminished, with the probability of a rate increase next month falling from 50% to roughly 32%.

The dollar reached JPY157.80 on November 20, near the highest levels since January, prompting intensified verbal intervention threats from Japanese officials. Nevertheless, swap markets heavily discount near-term rate hikes, with past resistance near JPY155 likely transitioning to support.

United Kingdom Outlook

Interest Rate and Exchange Rate Dynamics

Sterling’s correlation with US interest rates has weakened sharply, while its alignment with UK yields has modestly recovered. Despite recent weakness against the euro, the exchange rate correlation remains solid.

Fiscal Policy Focus

Market attention centers on the November 26 budget, where Chancellor Reeves faces the challenge of fiscal tightening amidst a skeptical market and political opposition from the Reform UK party. Budget proposals are expected to avoid breaking election promises, instead focusing on bracket creep and targeted levies such as gambling and high-value property taxes.

Sterling Price Levels

Sterling appears to have established a short-term bottom near $1.3040 but lacks follow-through strength, trading below its five-day moving average for much of last week and hovering around $1.3100 at the start of the coming week.

Canada Market Summary

Exchange Rate Correlations and Interest Rate Outlook

The Canadian dollar’s sensitivity to movements in the US dollar and interest rates has diminished considerably since the summer peak. Correlations with Canadian bond yields remain relevant, though inverse correlations with US yields have intensified.

Economic Releases

September and Q3 GDP data are due, with forecasts indicating a modest 0.5% increase in Q3 following a prior contraction. The Bank of Canada is widely expected to maintain its policy rate at least through Q1 2026, with limited pricing for rate cuts in futures markets.

Canadian Dollar Technicals

Following a temporary bearish signal mid-November, the US dollar rallied sharply against the CAD, reaching several-month highs above CAD1.41. Failure to break higher resistance near CAD1.4165 keeps technical prospects uncertain; a consolidation or reversal could occur if key support near CAD1.4030 is breached.

Australia Market Highlights

Correlation Anomalies and Commodity Sensitivities

Unusually, the AUD’s correlation with the Dollar Index briefly turned positive earlier this month for the first time in years before reverting to a modest negative stance. The AUD shows elevated sensitivity to commodity price movements, with correlations to the CRB Index rising to six-month highs.

Upcoming Data and Policy Outlook

Australia releases October CPI on Wednesday, with the year-over-year inflation rate accelerating from 1.9% in June to 3.5%, consistent with market expectations for a pause in Reserve Bank rate hikes. Q3 private capital expenditure and October private sector credit data round out the calendar. On balance, the data likely supports a steady policy stance into early 2026.

Price Action

The AUD declined roughly 2.4% from its November 13 peak near $0.6580 to a three-month low near $0.6420, near a key 38.2% retracement of this year’s gains. The currency has since rebounded modestly, approaching resistance at the 200-day moving average near $0.6460. A move above $0.6500-$0.6520 would improve technical prospects.

Mexico Market Overview

Exchange Rate and Risk Sentiment

The Mexican peso’s correlation with the US dollar index and broader emerging market currencies has fluctuated substantially, reflecting complex influences including risk sentiment. Notably, the peso’s inverse correlation with the S&P 500 points to risk-off dynamics impacting recent exchange rate movements.

Economic Data and Central Bank Outlook

The Mexican economy contracted 0.3% in Q3 with inflation remaining elevated. November CPI data for the first half of the month and October trade balance figures will be closely scrutinized. Despite significant peso appreciation YTD, the trade deficit has narrowed considerably. Worker remittances continue to offset trade imbalances. The Bank of Mexico is expected to keep policy steady on December 18, with market pricing suggesting the terminal rate may fall toward 7% by mid-2025.

Exchange Rate Technicals

The US dollar reached a monthly peak near MXN18.77 early November before pulling back to MXN18.25. The dollar retraced slightly above MXN18.53 ahead of the weekend, surpassing the 50% retracement level of the early-November decline. Momentum indicators signal potential for further dollar strength near MXN18.5750, targeting previous highs.

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_This review incorporates recent market developments and economic data releases, providing a comprehensive outlook on currency trends across the G10 and select emerging markets._