Dollar Rally Hits Resistance as Yen Gains Momentum

The US Dollar has been experiencing an unusual rally in recent months, despite factors that should theoretically contribute to its weakening. The rally occurred on the backdrop of Scott Bessent's tripled bond buybacks, BOJ Forex intervention, and weakening oil prices.

However, this behaviour is somewhat befuddling, as the US Dollar is expected to weaken given these factors. One possible explanation is that the US bonds market is revolting, with yields spending Q3 ripping higher. The 10-year Treasury yield is above 5%, and the 30-year Treasury yield is back around levels last seen more than two decades ago.

The yen side has also been gaining momentum, with USDJPY already losing its weekly trend behaviour and JPY sitting at support. Meanwhile, the DXY (Dollar Index) is currently at resistance, with JPY, EURUSD, GBPUSD, NZDUSD, and AUDUSD all sitting at support.

The author of the forecast uses Bollinger bands as a gauge for trend health, referring to them as an 'EMA band'. The primary EMA band used is the 20 EMA band, set to 1 standard deviation. The author notes that macrofundamentals determine the longer-term bias, while the bands provide assistance on the timing of reversals or trend continuation.

The DXY has rallied back into its 100.82-101.92 resistance zone, but the daily trend has not broken. However, since the DXY is still above its 20D-EMA band, it'll be tricky to time when a retracement will occur. The author suggests observing the 4H chart for signs of weakness.

The bond market is another area where the DXY story gets more interesting. The whole US curve has been moving higher, with yields spending recent weeks respecting rising daily bands. However, the split is starting at the front end, with August PCE coming in softer than expected and Fed president John Williams saying there was no urgency for another hike.

The labour side is where Q4 can swing. The ADP accelerated to 90,000 private jobs, which is 20,000 above expectations in September. Meanwhile, job openings have softened and layoffs remain low. NFP (Non-Farm Payrolls) now becomes the cleaner test, with a firm payroll print with sticky wages giving the front end a reason to reprice higher again.

Global sovereign yields are rising across major markets, so higher US yields are no longer a uniquely American signal. The Treasury expects another $628 billion in privately held net marketable borrowing during Q4, which can keep long-term yields uncomfortable.

Weaker Dollar typically occurs after midterm elections, as political uncertainty fades and higher beta, higher risk assets are preferred again. However, things may be different this time around because of the stress building across bonds and credit. If Treasury yields remain elevated, another Fed hike stays on the table in December.