The Dollar Index (DXY) yesterday suffered its largest one-day correction since early August. One factor in play was some less dovish comments from the ECB's Isabel Schnabel and the other was probably some buy-side end-month rebalancing flows. Fund managers will have been re-adjusting non-USD portfolios upwards to bring them back to desired benchmarks. Presumably, some of this activity took place in the more liquid markets yesterday than waiting for Thanksgiving-thinned conditions, ING’s FX analyst Chris Turner notes.

DXY can find support near 106.00

“Also worth mentioning overnight is the Mexican peso rallying 1% after President-elect Trump posted that he'd had a ‘wonderful conversation’ with Mexico's President Claudia Sheinbaum. Trump concluded that she had agreed to effectively close the border with the US, while her post seemed to reflect a different conversation. Rather than signaling the all-clear for Mexican asset risk, probably the strongest takeaway is that volatility is here to stay. For example, USD/MXN three-month realized volatility is now 15%. This compares to 7% back in March. Volatility is the enemy of the carry trade and at these kinds of volatility levels, don't expect the peso to benefit from carry trade inflows anytime soon.”

“Some possible mild negatives exist from the Israeli-Hezbollah ceasefire opening the door for a calmer period in the Middle East and some softer US macro data next week building back expectations of a 25bp Fed rate cut in December. Nearly 17bp of that 25bp cut is currently priced. However, high US interest rates (4.61% one-week deposits), European politics and the threat of more tariff social media posts coming through should keep the dollar bid on dips. “ 

“We think DXY can find support near 106.00, but would have to change our multi-week views if it started trading sub 105.70.”