No Santa Rally for Greenback?

The US dollar struggled the week before Christmas, despite the
final approval of tax changes and a backing up of US interest rates.
  The dollar fell against most of the
major currencies except the Japanese yen.  The yen is particularly
sensitive to changes in the US 10-year yield and the 14 bp increase over the
past week, the most in Q4, kept the yen under pressure.  
However, even with the US
10-year yield reaching nine-month highs, the market, or what is left of it, showed little enthusiasm for the
greenback as it approaches the upper end this month’s range (~JPY113.75).
  Still, the bottom end of the recent
range (~JPY112.00).  The daily Slow Stochastics and MACDs are
supportive.  The 50-day average crossed above
the 200-day average (golden cross) in early November, though it did not spur
dollar buying.  
The dollar had shot higher
at the end of 2016 against the yen, and after correcting lower in the first
part of 2017 spent much of the year in range. 
 Although the edges frayed, the range was mostly
between JPY108 and JPY114.50.    We often find the dollar-yen is a
range-trading pair, and when it looks like there is a trend, it is often a
transition to a new range.   We anticipate
that it will be a higher dollar range next, even if not right away.  
The euro traded heavily
before the holiday-weekend as the political parties that ostensibly seek
Catalonia’s independence won a majority of seats (but not popular vote) in the
regional election.
Spanish stock underperformed, as one would expect, and the two-year yield rose
four basis points.   However, the 10-year yield was finished slightly
There is an understandable
fear that the independent parties are secessionist too and there is a repeat of
this past October confrontation. 
  We do not expect a less-secessionist minded leadership
to emerge in Catalonia and suspect the
programmatic differences between the parties may make for a more fragile
coalition than may be appreciated in the
immediate aftermath of the election.  The Ciutadans picked up 12 seats to
37 in the new assembly, the largest single party.  It is opposed to
The euro losses before the
weekend snapped a four-day advance. 
 However, earlier gains gave it a sufficient cushion and
the single currency finished the week higher for the first time in four
weeks.  Since the middle of July, euro has been in a broad range of
roughly $1.16 and $1.20.   The euro traded above $1.19 for the second
time this month but failed to close above it on December 20.  The
subsequent pullback, spurred in part by the Catalan election results, saw the
euro approach the middle of that broad range. 
Interest rate differentials
moved in the US dollar’s favor since September.
  The US two-year premium over
Germany rose more than 50 bp since early September and is now at levels not
seen since the middle of 1999 (above 250 bp).   The US 10-year
premium over Germany has widened by about 35 bp since September to 207 bp. It
peaked at the end of last year near 235 bp.  
The higher rates the US has
been forced to pay just managed to keep its exchange rate constant against the
euro in Q4 (the euro is up 0.25% since the end of September).
  The larger interest rate premium
may be required to compensate for some other risk or policy uncertainty. 
 The dollar did rise against all the other majors in Q4 (save the Danish
krone, which shadows the euro).  It is the euro that looks like the outlier in Q4, not so much the dollar.  
Still, given the performance
of sterling, the increasing US interest rate premium has barely kept the dollar
flat this quarter.  Sterling rose 0.4% last week to recoup a little more
than a third of what it lost in the previous two weeks. 
 It spent the entire week within the
range set on December 15.  That range, roughly $1.3300 to $1.3450, is the key to the near-term outlook.  
The US two-year premium over
the UK is near 145 bp.
It is the most in at least 25 years.  It has risen 55 bp since early
September.  The US 10-year premium is about 45 bp wider since late
September.  It is near 125 bp now and put in the quarter of a century peak
earlier this year near 137 bp.  
The Canadian dollar was the
second strongest major currency against the dollar last week, gaining nearly
Swedish krona surpassed it was a 1.85% gain on the back of a shift in the Riksbank monetary policy.  It
began what promises to be a slow exit from its extraordinary policies by ending
its QE.  However, it will front-load
the reinvestment of maturing issues and coupons, which means the balance sheet
has not yet peaked.  In any event, the krona has spent this month bouncing
along the year’s trough against the euro. 
Recent comments by the Bank
of Canada coupled with a string of favorable data spurred speculation of a rate
hike as early as January.  
We have been skeptical, and the disappointing October GDP report denies officials any sense of urgency. 
The flat October report (median expectation was 0.2%) means that the Canadian
economy has stagnated from July through October.  The two rate hikes in Q3
do not appear to have worked their way through the system.   The Bank
of Canada meets January 17. 
The US dollar appears
range-bound against the Canadian dollar marked by around CAD1.2660 and
ends of the range have been frayed this
month. Since the greenback most recently (December 20) tested the upper end of
the range, the rule of alternation suggests a test on the lower end of the
The Australian dollar rose
for the second consecutive week against the US dollar and finished above the
$0.7700 barrier that has blocked the upside since early November. 
The area also corresponds to the 200-day moving average. The technical indicators are
constructive, but the $0.7730-$0.7745 area houses what could be important resistance and retracement
The strong labor market
report and what appears to be growing confidence of the central bank has been reflecting in the rise of short-term interest
two-year yield had fallen below comparable US yields earlier this month, but
have rebounded and now is a little more than 10
bp on top of the US, the most since mid-November. 
The price of light sweet
crude oil also has been confined to a broad trading range in recent
for February delivery has mostly traded in a $56 to $59 range.  The
technical indicators favor further upside probing.  However, the weekly
readings warn that this near-term advance could complete the rally that began
six months ago near $44 a barrel.  
US interest rates marched
higher, and the curve (2-yr-10-yr)
two-year generic yield rose six basis
points to 1.90%.  The 10-year yield rose 14 bp to 2.49%.  At the end
of H1 17, the Fed funds futures strip implied about a 20% chance that the Fed
funds target range would be at 1.50%-1.75% at the end of March 2018.  The
odds now, unchanged on the week, are nearly 70%.  
At the same time, the
10-year breakeven, an imperfect but readily handy market-metric of inflation
expectations, has risen about 1.65% at the end of June to 1.95% before the
March note futures contracted approached the year’s low set in March near
123-10.  The low from the end of last year (continuation contract) was
123-00.  Beyond that are the 2014 lows in the 122-22 to 122-24
area.  The large speculators in the futures market have swung to a net short position for first time since April.  The bulls (the gross longs) have been liquidating exposure and now hold 685.3k contracts, down from 844.3k at the end of November.  

The S&P 500 gapped
higher on Monday and filled the gap on Wednesday, but spent the week meandering
in narrow ranges.
It managed to eke out a minor gain on the week despite falling in three of the
five sessions and extend its winning
streak to the tenth week.  It has
fallen in only two weeks since mid-August.  The daily technical indicators
are looking stretched and a pullback into
the 2640-2660 area ought not to surprise.

The Russell 1000 Value Index
rose 0.6%.
  It has
appreciated for the past five weeks, which is the longest streak since the
first quarter.  The 11% gain year-to-date is respectable and suggest this
sector is not being ignored. 
Europe’s Dow Jones Stoxx 600 is up 8% this year.  On the other hand, the Russell 1000 Growth Index slipped a
fraction (less than 0.1%), but just enough to break the 12-week rally. 
The Growth Index is up 28.8% year-to-date, a little below the MSCI Emerging
Market Index (+32.3%).


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