The US dollar continues to blast higher with brutal momentum as key levels give way in major USD pairs. The momentum is impressive and could be set to continue if longer US yields also become unanchored and rise together with Fed rate hike expectations. But other central banks will be in focus next week as we look for whether hawkish surprises can offer any counterpoint to the strongest weekly surge in the US dollar since the panic phase of the pandemic outbreak.

The US dollar continues to track Fed rate hike expectations higher, with the USD back on an aggressive strengthening path today from the get-go, perhaps as long US treasury yields are back higher  an un-anchoring of long US yields and the yield curve steepening somewhat from here could take the USD move farther than if the long end of the US yield curve remains tame. In my portion of our quarterly outlook that was released this week and written some two weeks ago, Forecasted that the US dollar “could prove resilient for some of the early part of 2022 against the usual pro-cyclical currencies”, as assumed that risk sentiment could crater for a n extended period this quarter as asset markets continue to suffer under the weight of the Fed’s hawkish shift. Assessed that a “broad, aggravated extension of the [USD] strength we saw in late 2021” is unlikely on the assumption that those longer US treasury yields remain anchored. That is an important caveat, and long US treasury yields are creeping back toward the cycle highs. A quick move here significantly above 2.0% for the US 10-year treasury benchmark together with even higher Fed expectations could extend this USD move higher than I would have thought likely when writing the outlook or even after the FOMC meeting. If long yields stay tame, I have a hard time seeing the short end Fed expectations extending much further now that we have effectively already priced in five rate hikes for this calendar year.

Another important factor as 2022 wears on is that the US Federal Reserve is not the only central bank in town and if the Fed is moving in determined fashion to get ahead of inflation, we can expect other central banks to do the same  eventually even the ECB, especially as global prices are generally in US dollars and the price levels could rise even faster elsewhere. 

The RBA is certain to end its QE purchases as it has pinned the February meeting for a review of this stale policy after the embarrassing breaking of its prior commitment to the 3-year yield control. And after the hefty Q4 CPI surprise, together with ongoing inflationary risks that are aggravated by a weak currency, it is time for the RBA to wax far more hawkish, even though it has focused a considerable portion of its rhetoric on needing to see rising wage levels before raising rates. The market is looking for rate liftoff in April or May – this looks tardy and could be brought forward.
The AUDUSD has collapsed through 0.7000 and below the December pivot low just south of that level after the significant repricing of Fed expectations higher this week. Next week, we have the chance to witness the degree to which signals from other central banks are able to counter the USD strength, for example, if the RBA waxes far more hawkish than expected. This 0.7000 area is a major one and argue the last-ditch bull/bear line as we watch how the pair treats the RBA developments and the status of the USD rally next week. The next major downside area is perhaps the pre-pandemic major support zone near 0.6675.