The US dollar index is already building a medium-term top, but the top is mostly bimodal or triple-peak structure. Yen: The yen depreciates moderately in the mid-December scenario, but the depreciation is coming to an end, and a significant appreciation band is expected to occur

Strategy recommendation: USD index :

fundamentals reversal and repair trade deficit appeal will drag down the USD index, but Federal Reserve hawkish stance and dot chart upward revision may continue to give USD index short-term rebound support. The US dollar index is already building a medium-term top, but the top is mostly bimodal or triple-peak structure. euro: Fed's dot map upward repair potential and energy issues return to the horizon will put pressure on the euro to fall against the dollar. Beware of the unexpected hawks of the ECB. pound: The decline in labor market prosperity gives the Bank of England a reason to slow down the pace of rate hikes in . The implementation of 50bp rate hikes will be difficult to boost the pound against the dollar, and the weakness basically faces it further drags down. yen: The yen depreciates moderately under the neutral situation in December, but the depreciation is nearing its end, and a significant appreciation band is expected to occur in 2023.

1. US dollar index: There is still support below

As we pointed out at the end of October, the US dollar index will continue to pullback in the short term or range consolidation . As the relative advantage of the United States fundamentals weakens and market pricing Fed rate hikes slow down, the US dollar index and US bond yield jointly declined. It is expected that the decline rate of the US dollar index will slow down in December, beware of the rebound after the Fed's interest rate meeting .

.1 Fundamental advantages reverse

uses the economic surprise index to measure the relative performance of the United States and other developed economies (Europe, UK, Japan, Canada). It can be found that there is a 6-12-month conversion cycle. At the end of October, we have pointed out that it is likely to enter a time window for the relatively weakening of the United States fundamentals after November. At present, the fundamentals of the United States have become relatively weak as expected. Judging from historical experience, this process will last between 2 and 5 months, so the fundamentals will continue for a period of time in the face of the drag of the US dollar index. In terms of economic clock, the United States and major non-US developed economies are already in different quadrants of cycles. U.S. growth is still slowing down year-on-year, while non-US developed economies have turned positive and stronger than expected year-on-year. The phased misalignment of the economic cycle will increase the pressure on the US dollar index to pull back.

.2 The adverse impact of strong US dollar on exports

The Federal Reserve rarely mentions its attention to strong US dollar in the minutes of the meeting. The minutes of the November interest rate meeting released pointed out that the overseas economic downturn and the strong dollar are not conducive to US exports. In the medium and long term, after the US payment support continues to deteriorate, the US dollar has a strong demand for depreciation. In the first two rounds of US dollar index cycles, when the US current account balance/GDP fell by about 3%, it corresponds to the cyclical top of the US dollar index. Since 2020, this ratio has dropped by 3%, and the probability of the US dollar index approaching the medium-term top is relatively high.

.3 The market may underestimate the end-point interest rate

The market's expectations for the Fed's interest rate hike are still concentrated at 5.25%, and interest rate hikes are expected to slow to 50bp in December. The minutes of the November interest rate meeting also confirmed the judgment that the market slowed down the interest rate hike, so the market is likely to continue its previous trading inertia before the December interest rate meeting, that is, the US dollar interest rate and exchange rate correction. The current focus is not only the extent of a single interest rate hike, but more importantly, the height of the end rate. Even though the Federal Reserve's FOMC vote committee is relatively dovish in 2023, it should be noted that Brainard, which has recently been dovish, also reminds of inflation uncertainty and expected upward risks. Both Powell and Williams mentioned that the endpoint interest rate level is higher than expected in September. There is a certain probability that the Fed end rate will not stop at 5.25%. If the CPI data in November shows stickiness, and the FOMC dot matrix chart in December is raised again, it will bring a new round of impact to the market. In terms of holdings of

CFTCh, after a significant increase in non-commercial short positions in mid-to-early November, the increase in holdings of in has slowed down in the past two weeks, waiting for December economic data and guidance for the Federal Reserve's interest rate agenda meeting. Leveraged funds have rapidly increased long positions.

Overall, the reversal of fundamental advantages will continue to drag down the US dollar index in the coming months, but as long as the Federal Reserve maintains its hawkish stance of continuous interest rate hikes, it will limit the decline of the US dollar index. Technically, the US dollar index is gradually approaching the strong support levels below 105 and 103, and the downward trend will slow down or rebound in the short term, with the upper resistance of 109 and 110.5.

. Euro: again under pressure

html In November, the euro zone regained its fundamental advantages over the United States and the decline in the Fed's interest rate hike expectations were the main support for the strengthening of the euro against the dollar. Natural gas prices rebounded slightly but the constraints on the euro against the dollar were not significant. Looking ahead to December, given that Powell's argument at the November interest rate meeting laid the groundwork for the Federal Reserve's December upward revision, and the possibility of a recurrence of the US inflation in November announced in December is still possible, the Fed's interest rate hike expects an upward revision to pressure the euro to fall against the dollar. And with the advent of winter, the fermentation of the EU oil embargo, and the differences in natural gas price limits still exist, energy issues may return to their horizons.

.1 European central bank will slow down interest rate hikes. After the October interest rate meeting, most ECB officials' remarks have softened, including the most hawkish management committee, the central bank governors of Germany and the Netherlands are also open to the marginal reduction of interest rate hikes to 50bp in December. However, Schnabel, the most influential official in the hawks, still opposed the cut in December's rate hike. She believes that the current "inflation is not reassuring" and "there is limited room for slowing down the pace of interest rate hikes."

Under the constraints of recession risks and financial conditions, the European Central Bank is relatively likely to raise interest rates by 50bp in December. However, the ECB's rate hike pace remains data-dependent. If inflation exceeds expectations in November, it intensifies the risk of inflation expectations deaning, which will make the ECB reposition. Currently, the market expects the ECB to raise interest rates in in December to be between 50bp and 75bp, and the ECB is expected to reach an end rate of 3.5% in May next year. If the ECB raises interest rates significantly in December than expected, it will inject momentum into the euro.

.2 Deterioration of trade terms drags down the euro

Minutes of the ECB's October interest rate meeting pointed out that as the euro zone's import prices rise faster than exports, the impact of deterioration of trade terms on the euro exchange rate is amplifying. Since February 2021, with the narrowing of the trade surplus of the euro zone, , even turning negative after April 2022, the effective exchange rate of the euro continued to depreciate. According to the Citigroup's leading trade terms index, the euro zone trade deficit will expand into the first quarter of next year.

.3 Technical analysis

According to the spread valuation model, the euro against the US dollar has been repaired to be relatively undervalued and returned to the center. Without more positive news beyond expectations, especially when the ECB has not tightened beyond expectations, the momentum for the euro to further appreciate against the US dollar is limited. The euro and the US dollar entered the intensive trading range of 1.03 to 1.07 in the previous period, and are expected to encounter strong resistance and the upward trend will slow down.

. British Pound: The bulls are insufficient

1, the UK's high-frequency economic indicator showed signs of recession, and the weak growth of the UK has limited the increase in the pound against the US dollar against the weakening of the US dollar index. At the same time, the implementation of the UK's medium-term tight fiscal plan has increased concerns about market recession. The pound performed weaker than the euro against the dollar. Looking ahead to December, the decline in labor market prosperity will give the Bank of England a reason to slow down its rate hike. The implementation of 50bp rate hikes will be difficult to boost the pound against the dollar, and the weakness basically poses a further drag on it.

.1 Short-term political risks are reduced

htmlIn November, British Prime Minister Sunak attended the Council summit of the UK and Ireland , and held active talks with the Iranian side on the long-term trade disputes arising from the Northern Ireland issue and the EU after resolving the long-term trade disputes arising from the Northern Ireland issue. Irish Foreign Minister Covenney has shown that the UK and the EU can reach an agreement on trade rules in Northern Ireland by the end of the year. However, the two sides have been committed to solving the problem for a long time, but have not been successful yet, which shows that it is not easy to reach a mutually recognized plan. British Foreign Minister Cliverly warned that while negotiations with the EU have a better atmosphere, there is still a long way to go to resolve all issues.

In addition, this month, the British Supreme Court ruled that the Scottish Parliament had no right to legislate on the Scottish Independence Commission, further eliminating the uncertainty of the UK political situation in the short term. However, EPFR data shows that the positive news has not slowed down the outflow of funds in the UK stock market, and foreign capital continues to withdraw from the UK stock market under the backdrop of the economic recession.

.2 The Bank of England raises interest rates back to back 75bp?

Judging from the results of the MPC historical voting, at each interest rate meeting this year, the claims of Peel, a relatively neutral chief economist, usually coincide with the Bank of England final interest rate resolution. In his latest speech, Peel pointed out that subsequent gas price interpretation, labor market development and UK fiscal policy are important references for him when evaluating the prospects of monetary policy. The current medium-term fiscal policy in the UK has turned, while the economy is in recession, and labor market indicators have begun to change - there are preliminary signs that job openings have fallen from historical highs and the unemployment rate has risen, which to a certain extent eases the persistent threat of inflation, so it is not ruled out that the Bank of England's December meeting will slow down the pace of interest rate hikes. The current market expectation of the Bank of England rate hike in December is also swinging between 50bp and 75bp. A 50bp rate hike will be difficult to boost the pound against the dollar.

.3 Technical analysis

pound relative interest rate spread valuation model is still significantly underestimated, but the market's pessimistic expectations of the UK's economic recession and continued capital outflows continue to drag down the performance of the pound. In addition, the Northern Ireland border issue and the Scottish independence referendum all exceed the scope of the Bank of England's policies and financial markets. These negative factors will be difficult to completely eliminate in the short term and will have a continuous negative impact on the pound. The pound entered a strong resistance range of 1.20 to 1.25 against the US dollar, and the rebound momentum is expected to weaken significantly.

. Japanese Yen: Pay attention to the final meeting of the US and Japan

html November market trading in November US core CPI peaked and fell, the Fed's expectation of interest rate hikes fell, driving the US dollar index and US bond yields to fall, the depreciation trend of the Japanese Yen was temporarily suspended, entering an appreciation rebound band. The Japanese authorities did not intervene in forex and large-scale fixed interest rate bond purchases.

In terms of cross-border investment, pension and life insurance companies accelerated their reduction in overseas long-term bonds, and the stock scale of US bonds held by Japanese investment and US MBS fell by 17% and 30% respectively from their 2021 highs. Overseas investors trade Japanese short-term bonds in swings. In terms of holdings, the short-short ratio of the yen is currently at the 40% quantile level, corresponding to the top of the US dollar against the yen in the first two rounds.

htmlDollar yen trend in November depends on the difference in monetary policy expectations of the United States and Japan. Under neutral expectations, the Bank of Japan remained silent in December, while the Federal Reserve revised the dot chart, and the faster rise in the US dollar OIS will drive the yen to depreciate in a phased manner. However, if the Bank of Japan tightens monetary policy beyond expectations, or the Federal Reserve fails to send hawkish signals that cause the US dollar OIS to continue to fall, the US dollar against the Japanese yen may challenge the 200-day moving average (135 support) and the 250-day moving average (130 support).

is based on the volatility range forecast of the US Treasury yield of 3.5%-4% in December 10, and we judge that the overall US dollar against the Japanese yen in December is 135-148.

In the longer term, 10Y US Treasury may challenge the 4.5% high again in the first half of 2023, and the US dollar against the Japanese yen may also sprint to the previous high of 150, but the depreciation trend of the yen this round is coming to an end, and the yen will brew an appreciation trend in 2023.