USD Index Price Analysis: Losses expected to accelerate below 109.00

• DXY regains some poised following three daily pullbacks.
• The 9-month support line appears around 109.00.

DXY picks up some buying interest and briefly tests the area just beyond 110.00 the figure on Wednesday.

Further weakness in the dollar should not be ruled out despite the current bullish attempt. That said, the loss of the 9-month support near 109.00 carries the potential to magnify the decline and open the taps to extra retracement in the near term.

In the longer run, DXY is expected to maintain its constructive stance while above the 200-day SMA at 104.66.

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Stronger USD heading into year-end amid higher terminal rate expectations – MUFG

The US Dollar has continued to trade at stronger levels after the Fed dashed hopes again for a dovish policy pivot. Higher terminal rate expectations for Fed's hiking cycle are set to continue strengthening the greenback into year-end, economists at MUFG Bank report.

The Fed is shifting to plans for a slower but more extended hiking cycle

“The US rate market is now pricing in 62 bps of hikes at the December FOMC meeting as it weighs up whether the Fed will deliver one final 75 bps hike or step down to a 50 bps hike.” 

“The updated policy statement added as well that the Fed would take into account ‘the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments’.”

“The comments signal that the Fed is shifting to plans for a slower but more extended hiking cycle. The increase in market expectations for the Fed’s terminal policy rate support our outlook for an even stronger US dollar heading into year-end.” 

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USD Index Price Analysis: Upside target remains at 114.00

• DXY comes under pressure soon after hitting daily highs near 111.60.
• Next on the upside still emerges the 114.00 region.

DXY reverses three consecutive daily advances and slips back below the 110.00 mark on turnaround Tuesday.

Despite the ongoing corrective downside, the near-term bullish stance in the dollar remains unchanged and with the immediate target at the 114.00 area ahead of the 2022 high at 114.78 (September 28).

The near-term upside bias is expected to hold while above the 8-month support line near 108.60. The proximity of the 100-day SMA also reinforces this area of contention.

In the longer run, DXY is expected to maintain its constructive stance while above the 200-day SMA at 104.22.

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US Dollar Index to extend upward momentum on a break above 111 – SocGen

The US Dollar Index (DXY) moves sideways slightly above 109.50. Economists at Société Générale expect the index to enjoy further gains on a break past 111.

Short-term downtrend likely on a dip under 107.60

“If the index establishes itself above the high formed earlier this month at 111 – which is also a graphical level, the up move is expected to extend further towards next projections at 112.60/113.00.” 

“It is worth noting that the daily MACD has started posting negative divergence. Although this is not a reversal signal, it does point towards receding upward momentum.”

“Defending the 50-DMA at 107.60 would be essential for persistence in uptrend. Should a break materialize, a short-term downtrend is likely.”

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US Dollar Index retreats from cycle highs near 110.00 ahead of Payrolls

The index comes under pressure and recedes from 110.00.

The risk complex regains some composure and trims recent losses.

All the attention remains on the August’s Nonfarm Payrolls due later.

The greenback, in terms of the US Dollar Index (DXY), gives away part of the recent advance to fresh cycle highs in the 110.00 region (September 1).

US Dollar Index looks to key data

The index now comes under pressure and sheds some ground following Thursday’s advance to levels last seen back in June 2002 in the 110.00 neighbourhood.

The recent strong climb in the dollar has been underpinned by the equally intense move higher in US yields, particularly in the short end of the curve, which was at the same underpinned by persistent expectations of the continuation of the normalization process by the Federal Reserve.

On the latter, the probability of a 75 bps rate raise at the September event is now at nearly 75% as per CME Group’s FedWatch Tool.

Still looking at the next Fed’s rate hike, Friday’s focus of attention is expected to remain on the release of US Nonfarm Payrolls for the month of August due later in the NA session. Consensus expects the economy to have added 300K jobs during last month and the jobless rate to stay unchanged at 3.5%.

Additional data will also see Factory Orders for the month of July.

What to look for around USD

Despite the ongoing knee-jerk, the greenback keeps the bullish outlook well in place in the area of 20-year highs near the 110.00 zone.

Bolstering the dollar’s strength appears the firm conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market. This view was recently reinforced by Chair Powell’s speech at the Jackson Hole Symposium.

Extra volatility in the dollar, however, should not be ruled out considering the ongoing debate around the size of the September’s interest rate hike by the Federal Reserve.

Looking at the more macro scenario, the greenback appears propped up by the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: Nonfarm Payrolls, Unemployment Rate, Factory Orders (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation over a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

US Dollar Index relevant levels

Now, the index is retreating 0.18% at 109.43 and faces the next support at 107.58 (weekly low August 26) seconded by 106.69 (55-day SMA) and then 104.63 (monthly low August 10). On the upside, a breakout of 109.97 (2022 high September 1) would aim for 110.00 (round level) and finally 112.17 (high May 31 2002).

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Russian companies, banks could reap windfall from depositary receipt delisting

Russian companies and global banks including BNY Mellon (NYSE:BK), Deutsche Bank (ETR:DBKGn), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) could profit if Moscow moves to de-list Russian companies' depositary receipts from foreign exchanges, according to two people familiar with the matter.

The potential windfall is due to the fees that bank issuers of depositary receipts can contractually charge investors when they cancel the product.

It is unclear how much companies and banks could make or if banks will charge the fees and risk angering investors who say it would be unfair given the extraordinary circumstances which have been triggered by Russia's invasion of Ukraine.

However, the fees could potentially translate into hundreds of millions of dollars according to Reuters' calculations based on fee data provided by the sources.

Assailed by Western sanctions, Moscow is preparing to de-list Russian company depositary receipts from foreign exchanges and convert them into local Russian securities in a bid to reduce foreigners' control over these companies.

Depositary receipts are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange. They allow investors to dabble in overseas stocks in their own geography and time zone.

There are more than 30 depositary receipts on Russian companies including Gazprom (MCX:GAZP), Rosneft, Lukoil and Norilsk Nickel issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, among others, trading on U.S. and European markets.

Under standard agreements, depositary receipts can be canceled by the issuer or the investor. When that happens, the investor typically gets cash from the sale of the underlying shares, although they have the right to take custody of the shares instead.

Banks charge an administration fee, typically around $0.05 per receipt, which may be shared with the companies, two sources said.

If Moscow de-lists Russian depositary receipts, banks will have to cancel the products. Banks could still charge the fees, even though their hand was forced, according to three sources.

For example, an investor in Rosneft with 150 million depositary receipts representing the same number of shares in the company could be on the hook for $7.5 million in cancellation fees, according to Reuters' calculations.

Sweeping Western sanctions could make it challenging for banks to transfer the cash to some companies.

Regardless, some investors say the fees should not apply. One global asset manager told Reuters that if Russia passes the de-listing law there should be no fees as investors would have no choice in the matter. The other two sources, however, say banks still have to cover their costs.

BNY Mellon, Deutsche Bank, JPMorgan and Citigroup declined to comment. Russian companies did not respond to a Reuters emails seeking comment.

MARKET FREEZE

As Western sanctions pummeled Russian stocks from late February, the Moscow exchange closed and the Russian central bank banned foreigners from transferring shares out of their custody accounts. It also barred foreigners from selling Russian shares.

The restrictions made it nearly impossible for banks to cancel receipts when asked by investors anxious to slash their Russia exposure.

With curbs on custodians recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing cancellations. But because the foreign banks still can't sell the shares, investors have to take custody of them instead. To do that, investors need an account in Russia, which many don't have.

As a result, a lot of investors are likely to hold onto the receipts for the time being, according to three people.

Many investors are worried, however, about the de-listing bill which Russia is preparing.

Aside from the potential cancellation fees, investors are worried about what will happen if they can't open a local custody account.

In a note to clients, JPMorgan said clients may be able to open a Russian account under some unspecified circumstances if the new law is passed.

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 Dollar Edges Lower Ahead of Fed Minutes; Aussie Dollar Soars

The U.S. dollar traded in a tight range Tuesday, while the euro edged lower on talk of additional sanctions on Russia and the Australian dollar received a boost from a hawkish central bank.

At 3:00 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 98.955, just below the one-week high of 99.083 reached overnight. 

The dollar has been drifting this week so far as investors await the arrival of the minutes from last month’s Federal Reserve policy meeting, due on Wednesday. 

Expectations are building that the central bank will move more aggressively at its meeting in May, especially after a jobs report that showed nonfarm payrolls increasing by 431,000 jobs last month while the unemployment rate fell to a new two-year low of 3.6%.

Ahead of the Fed minutes, Tuesday sees the release of ISM’s non-manufacturing PMI data for March, at 10:00 AM EST (1400 GMT), which is expected to show increased momentum in March, while speeches from Fed policymakers Neel Kashkari, Lael Brainard and John Williams will also be closely studied.

Elsewhere, AUD/USD rose 0.9% to 0.7607, jumping to a nine-month high, after the Reserve Bank of Australia left its benchmark interest rate unchanged at 0.1% at its latest policy setting meeting, but indicated that rate hikes were coming.

Australia’s central bank dropped its pledge to be "patient" on tightening policy in its statement following the decision, a phrase that has featured in every post-meeting release since November 2021, suggesting that it is going to hike sometime soon.

EUR/USD was largely unchanged at 1.0972, hovering above a one-week low, on talk of fresh sanctions on Moscow following alleged atrocities on civilians by Russian forces in the Ukrainian town of Bucha.

German Chancellor Olaf Scholz said that Putin and his supporters would "feel the consequences" of events in Bucha, while Biden's national security advisor, Jake Sullivan, stated that new U.S. sanctions against Moscow would be announced this week.

“It still seems that the EU is some way from weaning itself off Russian oil,” said analysts at ING, in a note. “Presumably, any moves from the EU toward a Russian oil embargo would see crude prices spike higher again and the euro come under pressure.”

USD/JPY fell 0.2% to 122.58, dropping back further from the multi-year high of 125.10 reached in late March after Bank of Japan Governor Haruhiko Kuroda stated that the recent pace of appreciation was "somewhat rapid," and policymakers are watching moves "carefully."

GBP/USD rose 0.1% to 1.3133, USD/CNY was flat at 6.3638, while USD/TRY rose 0.1% to 14.7092 the day after Turkey’s inflation jumped to a fresh 20-year high in March, with consumer prices rising an annual 61.1% through last month.

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