Prices: A Week in a Day

The pattern has been repeated.  The Federal Reserve, to which he appointed the Chair, and several Governors does not move as quickly as the President wants on monetary policy. He responds by escalating the trade tension, delivering the independent central bank a fait accompli.  Increasing the trade conflict succeeds where the unusual and repeated protestations of the dollar’s strength fail, pushing the greenback lower in the foreign exchange market.  

Until the end of the last week, relatively narrow trading ranges characterized the major currencies.  The euro did make a marginal new low following another disappointing PMI, while the German manufacturing reading remaining below the 50 boom/bust level for the eighth consecutive month.  The deterioration of the US-China trade relations turned back what had looked like a pending run at the $1.10 area that held last month.  The dollar was confined to less than 65 pip range against the yen for the first four sessions last week before the range was nearly doubled ahead of the weekend. 

Sterling is showing signs of life.  It was the best performing major currency last week, edging out the Japanese yen.  It rose for the second week against the euro after a record 14-week uninterrupted fall.  The market may have seized upon a flimsy excuse–that Merkel or Macron were breaking from the EC’s united front and offering a new compromise on Brexit–to take some risk off, i.e., cover some short sterling exposure.  That is what speculators (non-commercials) did in the futures market in the week ending August 20, according to the latest Commitment of Traders report.

Much time and effort continue being spent on calculations of winners and losers in the US-Chinese conflict.  They have focused on the means, not the end.  The end is disengagement not better trade relations.  The dubious legal basis of Trump’s ordering US companies to look for alternatives to China, without declaring some kind of emergency notwithstanding, this seems clearly the direction he is moving.  Similarly, China’s retaliatory tariffs particularly on US animal protein (for which it has a shortage), and energy (oil and ethynol) that is has a nearly insatiable hunger for, are aimed not only at Trump’s constituency but also to encourage Chinese companies to find alternatives to the US.  

The disengagement is disruptive.  It adds to the economic headwinds hitting the long-in-the-tooth expansion in many countries, and contributes to the disinflationary pressures. Major currencies, like the dollar bloc, which are not merely commodity-currencies as often bucketed, typically do better in stronger growth phases and when risk appetites are strong.  The Australian, New Zealand, and Canadian dollars were the only majors to finish lower last week, extending their losing streaks. 

Dollar Index:  The Dollar Index saw the biggest intraday range in over a year ahead of the weekend as it recorded a large downside reversal.  In the jargon of technical analysis, a downside reversal occurs when the instrument takes out the previous day’s high and then sells off through the previous day’s low and closing below that low. Follow-through selling is needed to validate the pattern. The sell-off took the Dollar Index toward the (61.8%) retracement of the rally from the last significant low (late June near 95.85) that is seen near 97.00 and the 200-day moving average (~96.90).  The RSI and Slow Stochastics are moving lower, while the MACDs have yet to turn. 

Euro:  The upside reversal in the euro was more dramatic.  While the Dollar Index held the week’s high before reversing lower, the euro recorded new three-week lows (~$1.1050) before rallying a cent to just above $1.1150. This is also the (50%) retracement of the decline since August 6 high only through $1.1250.  The $1.1165 area is the (38.2%) retracement of the decline from the last June high (~$1.1400).  The technical indicators look supportive, and the Slow Stochastics can turn higher in the coming days.   Still, with the ECB still preparing fresh stimulus, speculators may look for a less encumbered currency to express dollar negativity.   A move above $1.1250 is needed to suggest anything of significance.  

Yen: The dollar reversed lower against the yen after making a new high for the week (~JPY106.75) and fell to a nine-session low (~JPY105.25).  The JPY105-level held earlier this month amid talk pension fund dollar purchases.  Technically, a break leaves little support ahead of JPY100.00. Despite talk of the hunger for yield, the yen is the best performing major currency this year, appreciating 4% against the US dollar, 7% against the yuan, and nearly 9% against the South Korean won.  The technical tone is weak, suggesting penetration of JPY105 is possible, but it may not initially be sustained. 

Sterling:  Sterling rose for the second consecutive week against the dollar for the first time in four months.  It has risen by nearly 2% over the two weeks.  It neared $1.23 ahead of the weekend, which is the (50%) retracement of the decline from the last important high in mid-July (~$1.2580).  The next immediate objective is near $1.2365, but the measuring objective of the potential head and shoulders bottoming pattern projects toward $1.2450.  The five-day moving average has crossed above the 20-day moving average for the first time since July 1.   The technical indicators have accelerated to the upside, and a close below $1.22 would be disappointing.  

Canadian Dollar:  The US dollar rose against the Canadian dollar for a fifth consecutive week.  Nevertheless, slipping 0.1% against the greenback meant that the Loonie was the best performing among the dollar bloc.  It is helpful to keep in mind the drivers.  The two-year interest rate premium the US offers over Canada has narrowed by about 10 bp so far this month.  It has compressed from 85 bp in March to almost 15 bp before the weekend.  Of three drivers, the interest rate differential is the only one supportive of the Canadian dollar, the other two, the S&P 500, as a  proxy for risk appetites, and oil prices, have been less constructive.  The S&P 500 has declined for four consecutive weeks.  The price of WTI has fallen for three of the past four weeks, including last week’s 1.2% drop, all of which seemed to be in response to China’s announced tariff on US oil and the implications of slower growth on demand.    The US dollar stalled by CAD1.3350 and a break of CAD1.3250 would help confirm a top is in place, which the technical indicators suggest is likely.  This could see CAD1.3150 initially. 

Australian Dollar:  The Australian dollar lost about 0.35% last week to extend its losing streak for the fifth consecutive week.  It successfully tested the lower end of its range (~$0.6735) ahead of the weekend, but the bounce was not inspiring.  It stalled ahead of the previous day’s high (~$0.6785). It is difficult to be enthusiastic toward the Aussie this side of $0.6800.  It probably requires resurfacing above the $0.6830 area to boost the chances that a low is in place.  

Mexican Peso:  The dollar closed at its best level of the year against the Mexican peso (~MXN19.92).  It is the fifth consecutive weekly gain.  It is a function of investor concerns about AMLO at the same time that the world outlook has soured and the fear that the US is headed into a recession.  Emerging market currencies have broadly fallen out of a favor, for which the peso is often used as a proxy.  The technical indicators are getting stretched but do not seem to stand in the way of a push through MXN20.00. Trendline support is seen near MXN19.75, while last week’s low was closer to MXN19.65.  

Chinese Yuan:  It has been 15 sessions since Chinese officials allowed the dollar to rise above CNY. It has fallen in 10 of the sessions, including the last seven.  That said, it declined by 0.75% last week and about 1% over the streak. The dollar extended its gains against the offshore yuan (CNH) after the onshore yuan (CNY) was no longer available points to the market’s bias.  The dollar rose from about CNH7.10 to CNH7.14.  Even though corporate America seems to be scoffing at President Trump’s order that American business immediately begins looking for alternatives to China, it may have a chilling effect.  Chinese officials will try to absorb some of the downside pressure on the yuan by setting the reference rate for the dollar lower than the bank models project. The latest escalation in the trade war nevertheless raises whatever target many had anticipated for the exchange rate once CNY7.0 was breached.  We had thought CNY7.10 area, but this now too low.  

Oil:  The price of WTI for October delivery fell for the consecutive week, and over that time it has lost about 3.6%.  It has been making a series of lower highs, loosely marked by the 200-day moving average, which begins the new week a little above $57.  In fact, the Oct contract tested that moving average in the middle of last week and reversed lower. Follow-through selling and the rising trade tensions saw the selling accelerate ahead of the weekend to reach $53.25, just above the (61.8%) retracement of the rally from August 6 low near $50.50. The RSI (nine-day) has already turned lower, while the MACDs seem about to cross.  The Slow Stochastics are lagging.   

US Rates:  The US 10-year yield fell for the fourth consecutive week. It last closed above a 2.0% yield on July 31.  Ahead of the weekend, it finished at 1.53%. The two basis point decline on the week does not do justice to what happened.  The yield had a seven-day high (~1.66%) before falling to almost 1.50% ahead of the weekend on the rising trade tensions.  The two-year yield snapped a three-week slide and rose nearly six basis points to 1.53%, and this includes the pre-weekend seven basis point slump.  The January 2020 fed funds futures contract implies about 60 bp of easing this year has been discounted.  The most likely scenario is two 25 bp cuts.  What is at stake with the swings in sentiment is if a third cut will be delivered.  The pendulum had been swinging against it before the pre-weekend escalation.  

S&P 500:  The S&P 500 fell 2.6% on Friday, giving back the week’s gains and more.  It fell almost 1.5% on the week to extend the losing streak to four weeks, over which time it has shed about 6%.  The S&P 500 has chopped back and forth between roughly 2820 and 2940.  It was turned back from the upper end on Thursday before the dramatic sell-off ahead of the weekend when it traded briefly below 2835.  A break of the range could signal a test on the 200-day moving average found just above 2800.  On the other hand, a convincing downside breakout of the range would suggest a move toward 2700-2720.


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