((I am in California for the next two days and the time zone will interrupt the regular schedule of the commentary. Apologies for the disruption.)
The US dollar rose against most of the major currencies last week for which the new SARS-like virus injected fresh volatility into the capital markets. There were two exceptions. The first is the Japanese yen, which gained about 0.8% as the chief beneficiary of more limited risk appetites. The second was sterling, where the pendulum of market sentiment shifted away from a rate cut in the week ahead helped lift the pound by almost 0.45%. The Norwegian krone was the worst-performing major currency, losing 1.5% against the dollar on the back of a weakened and now minority government, the general risk-off environment, and the 6.4% drop in the price of Brent crude oil, nearly doubling the loss of the previous two weeks.
The dollar rose against nearly all the emerging market currencies. The South African rand (~0.55%) and the Indonesian rupiah (~0.45%) were the main exceptions. The Chinese yuan was the worst-performing emerging market currency. The 1.2% decline was the largest since last August. The MSCI Emerging Market equity index snapped a seven-week advance with a 2.4% decline. China and Hong Kong equity indices were off more than 3%.
The US dollar will carry good momentum (except against the yen) into the last week of January. There is scope for additional near-term gains. These gains will likely stretch the technical indicators and warn that February may not be as kind the dollar as January has been. The downside reversal in the S&P 500 ahead may test the “buy the dip” meme.
Dollar Index: Gains ahead of the weekend lifted the Dollar Index to its highest level (~97.95) and above the 200-day moving average (~97.70) for the first time since December 2. A move above 98.00, which also corresponds to the upper Bollinger Band, will target the 98.40-9.50 area where it topped out in November. The MACD and Slow Stochastic are rising but at a slower rate as the tops are gradually developing. The now three-week rally is the longest since last August.
Euro: After an outside down day on January 23, which some attribute to a dovish read of ECB President Lagarde, follow-through selling on January 24, took the euro to an eight-week low near $1.1020. The November lows are found in the $1.0970-$1.0980 area. A topping formation (potential head and shoulders pattern) may have unfolded, and the inability to close back above the neckline (~$1.1100) warns of the risk that the euro may retest the lows seen last September near $1.0880. The four-week slide, the longest since November 2018. The MACD is trending lower, and the Slow Stochastic is getting more over-extended.
Japanese Yen: The dollar’s upside momentum against the yen stalled in the JPY110.20-JPY110.30, leaving the late longs in weak hands and vulnerable to bad news, which was delivered in the form of a new coronavirus. The greenback fell to nearly JPY109.15 ahead of the weekend. It closed the week below the 20-day moving average for the first time in more than two weeks. The pullback met the (38.2%) retracement objective of the rally from the JPY107.65 low seen as tensions between the US and Iran escalated. The halfway mark is just below JPY109.00, and the (61.8%) retracement is found nearer JPY108.65. The technical indicators have rolled over from extended levels, suggest the risk-off phase may continue in the coming days.
British Pound: Sterling rose to its best level since January 8 (~$1.3175) before reversing lower ahead of the weekend and closing below the previous session’s low. The potential key reversal suggests further losses lie ahead. The lower end of the recent range is around $1.2950. It seems as if the easing of the rate cut fears blunted the impact of a resurgent dollar. The technical indicators are more constructive than the price action itself. The Slow Stochastic, for example, is moving higher.
Canadian Dollar: The Bank of Canada kept the door open to a future rate sufficient to encourage the selling of the Canadian dollar we had been anticipating. The US dollar shot up from support near CAD1.3030 to CAD1.3150 after the central bank’s decision. Follow-through buying lifted it through CAD1.3170, highs for 2020, before reversing lower. However, selling pressure was minimal, and the new buying emerged near CAD1.3120, the minimum (38.2%) retracement of the Bank of Canada sparked a rally. The technical indicators give the greenback scope for additional gains. A more cautious signal from the fact that the US dollar closed at its upper Bollinger Band.
Australian Dollar: The Australian dollar found new reasons to remain out of favor. It has now fallen for four consecutive weeks after rising for the previous four weeks and declining for the four weeks before that. Net-net, the Aussie has fallen by about 1% from roughly $0.6900. The MACD is trending lower, and the Slow Stochastic is still falling into over-extended territory. The consistent closes below $0.6850-$0.6860 may also mark the confirmation that the neckline of a topping pattern (head and shoulders) has been broken. It projects toward a retest of the lows from last October near $0.6670.
Mexican Peso: The dollar rose against the peso after declining in the previous two weeks. The 0.65% advance was the largest since late last November. The technicals have shown that the dollar’s decline was stretched, and its downside momentum has stalled. The risk aversion help spur what so far is a mild correction as the dollar recorded higher lows and highs last week. Still, the greenback has not closed above MXN18.80, despite intraday penetration for more than two weeks. The MACD is trying to turn up, and the Slow Stochastic is though more clearly, showing a dollar-bullish divergence. A close above the 20-day moving average (now ~MXN18.81), which has not happened since early December, may be seen as a confirmation of the upside correction.
Chinese Yuan: In a holiday-shortened but anxiety-filled week, the US dollar rose each last week’s four sessions for a cumulative 1.2% gain. It rose from about CNY6.84 to a little above CNY6.94. It is the largest gain since last August when the US accused China of being a currency manipulator. The health risks and curtailment of travel will sap the energy and economic activity that the Lunar New Year entails. The sell-off in Chinese stocks and the yuan are consistent with the economic shock, whose magnitude is still not known. The next upside target is in the CNY6.95-CNY6.98 area. The 10-year government bond yield slipped below 3% for the first time in a little more than three years. Last week, the offshore yuan (CNH) held up a little better. The dollar rose a little more than 0.9% against it to snap an eight-week slide.
Gold: The precious metal advanced almost 1% last week, which seems mild given the shift in risk-appetites. Nevertheless, gold posted its highest weekly close (~$1571.5) in seven years. Earlier this month, when it spiked a little a through $1611 on the US-Iran confrontation, it closed near $1556.4. The technical indicators have moved lower since that spike higher, but the momentum has faded, suggesting they may turn higher. Since moving above $1400 last year, our reading of the charts has suggested a move to $1700, and this still seems to be a reasonable medium-term target. Support now may be seen near the 20-day moving average (~$1550.7), which it has not closed below since December 9.
Oil: The price of crude oil sank last week. The March WTI futures contract fell each day in the holiday-shortened week for a cumulative loss of 7.5%. The previous week, it slipped less than 0.75% after shedding the prior week. It has fallen 11% so far this month at the close ahead of the weekend near $54.20. In December, the price of WTI rose by about 10.5%. There may have been volatility, but the net change has been small. Ligh sweet crude for March delivery ended November just below $55 a barrel. While the MACD is falling rapidly, the Slow Stochastic appears to be bottoming. Also, a note of caution from the fact that the pre-weekend close was outside the lower Bollinger Band (~$54.75). Follow-through selling may spur speculation of a test on June-October lows last year in the $50-$52 area.
US Rates: The 10-year US note yield fell each of the four sessions last week for a total of a 14 bp decline. At 1.68%, it is the lowest since early last October. The bulk of the decline may be explained by the change in Fed expectations. Specifically, the implied yield of the December 2020 fed funds futures contract fell almost 10 bp last week to 1.29%, the lowest closing yield since December 3. It reflects increasing confidence that a rate cut will be delivered this year. The yield curve (2-10-year) has been nearly halved since the end of last year when it stood at 35 bp. The March 10-year note futures contract broke higher ahead of the weekend, and the technical indicators confirm the upside momentum. However, the futures contract closed (130-09) above the upper Bollinger Band (130-01), and as it approaches an important retracement near 130-18, the risk-reward may change for short-term participants.
S&P 500: The S&P 500 fell for only the fourth week since the end of Q3 19. The slightly more 1% decline was the largest weekly loss since August. The price action was particularly bearish ahead of the weekend. Initially, the benchmark gapped higher at the open but reversed and closed below the previous session’s low. It held above the 20-day moving average (~3273.6), as it has done since early December. Still, the technical tone looks fragile. The MACD’s have turned lower, and the Slow Stochastic has bearish divergence. The price action will challenge the buy-the-dip mentality. The (38.2%) retracement of the rally since the low on December 3 is found near 3235.6 and would be the next important downside target.