FX Update: How high can the USD go after big break?

As to how far the USD move can extend, I suspect it can continue for a while, but will rapidly become self-limiting as USD strength becomes so destructive at anything approaching the current momentum. We are already within about two percent of the levels that triggered Yellen’s abrupt slowing of rate normalization plans back in early 2016, although to be fair, that was after a sustained rally of some 20% from the mid-2014 time frame. Levels of note would include the higher of the sub-0.7000 targets for AUDUSD mentioned above, the 1.1300 area for EURUSD and the 115.00 level in USDJPY. Anything significantly higher than these dramatically accelerates Fed or coordinated central bank action as the USD would be suffocating the global economy. Otherwise, fundamental factors that could help the USD lose speed would be:

• US economic loss of speed (watching current fiscal argument closely on that front, but higher energy prices are a recovery risk as well if these head higher still) forcing a rethink of the degree to which the Fed can ever extract itself from QE. Longer term, the Fed can’t, but that remains for the all of us to discover over time.
• German coalition forms quickly and the EU shows signs of getting its act together in responding to the current energy crisis with massive new fiscal stimulus – importantly geared towards supply-side on energy rather than as income replacement to keep demand elevated – the current global supply side can’t even cope with current demand levels. Ditto for Japan…

Elsewhere, on the US fiscal front, today is critical for the outlook as the House is meant to vote on the infrastructure bill passed by the US Senate. Will the progressive Democrats hold true to their word and nix the bill in protest as the larger social- and climate spending bill has been de-linked from this bill? If so, the fiscal cliff next year for the US looms that much larger, requiring massive consumer dis-saving if the US economy is to continue to expand. The immediate threat of a US government shutdown/default has been averted for now by a stop-gap spending measure that delays that issue until at least December 3.

Table: FX Board of G10 and CNH trend evolution and strength
With China off for Golden Week starting tomorrow and through next Thursday, interesting to see if CNH continues to track a follow-through move higher in the US dollar over that time frame. Elsewhere, note the severe loss of altitude in NOK despite the ongoing Natural Gas spike and kiwi and sterling in a race to the bottom).

Table: FX Board Trend Scoreboard for individual pairs
NZDJPY is the latest JPY cross to roll back over, while EURGBP has flipped higher, but really needs to follow through out of the 0.8600+ range and through the 200-day moving average to suggest a new up-trend is unfolding here. USDCAD has flipped back higher, but the range there extends all the way to 1.2950.

Upcoming Economic Calendar Highlights (all times GMT)

• 1200 – Poland Central Bank meeting minutes

• 1200 – Germany Sep. Flash CPI

• 1230 – Czech Central Bank Repurchase Rate

• 1230 – US Weekly Initial Jobless Claims and Continuing Claims

• 1345 – US Sep. Chicago PMI

• 1400 – US Fed Chair Powell and Treasury Secretary Yellen before House panel

• 1400 - US Fed’s Williams (voter) to speak

• 1430 – DOE’s Weekly Natural Gas Storage Change

• 1500 – US Fed’s Bostic (voter) to speak

• 1530 – US Fed’s Harker (non-voter) to speak

• 1600 – USDA’s Grains Quarterly Stock Report & Wheat production

• 1630 – US Fed’s Evans (voter) to speak

• 1800 – Mexico Central Bank Rate Decision

• 2100 – New Zealand Sep. ANZ Consumer Confidence

• 2350 – Japan Q3 Tankan Survey