With a firmer tone ahead of the weekend, the US dollar closed higher against the major currencies but the Australian and New Zealand dollars. The pre-weekend gains were not enough against many emerging markets, and the greenback finished mixed. It seemed a fitting way to end the month that witnessed conflicting macro impulses, including weaker US and EMU price pressures, a more than 20% drop in oil prices, a new cyclical high in US average hourly earnings. There is great uncertainty surround US-China relations and the UK Parliament vote on the Withdrawal Bill looms large.
Dollar Index: There was limited follow-through selling after the Dollar Index posted an outside down day reversal pattern in the middle of the week in response to Powell’s comments. It finished the week on a firm note, near 97.00, retracing little more than a 38.2% of the decline. The Dollar Index has fallen in only two weeks since the end of September, one week in October and one week in November. The technical indicators are constructive, and the close above 97.20 could encourage a run at the 16-month high set in November near 97.70. Recall that the 97.90 area corresponds to a 61.8% retracement of the decline from early last year. Surpassing it lends credence to our contention that 2016 setback was a correction in the dollar’s larger bull market.
Euro: The euro was threatening two-week lows (~$1.1265) before Powell’s comments spark a short squeeze. The bullish reversal pattern saw limited follow-through buying and the squeeze fizzled out near $1.1400, an important retracement (61.8%) of the decline since the November 20 high. The euro finished on a soft note, and the RSI and Slow Stochastics have turned down. The MACDs appear poised to rollover shortly. Initial support is seen in the $1.1285-$1.1300 which was approached before ahead of the weekend and where options for 1.46 bln euros will expire on Monday. A bullish view of the euro requires rising through the trend line created by the two the peaks in November, which comes in near $1.1440 at the end of next week.
Yen: The dollar finished higher against the yen for the second consecutive week. It is the fourth weekly advance in the past five. However, the rally stalled a little above JPY114.00, where a trendline drawn from the October and mid-November high intersects. The pullback held a retracement target near JPY113.20. The RSI and Slow Stochastics have turned higher. The MACDs appear neutral. The dollar’s range against the yen in November was the smallest monthly range since June 2016. It leaves three-month implied volatility near 6.85%, the lower end of the range since early January. Implied volatility tends to fall as the dollar rises (inverse correlation percent change ~-0.41 over past 60 sessions).
Sterling; Uncertainty over Brexit has been a drag on sterling, which has fallen for the past three consecutive weeks against the dollar. It is pinned at the lower end the month’s range near $1.2700. The year’s low was set in August near $1.2660. The technical indicators are soft but of little help in this sideways market. Right now, it still looks like a binary situation where sterling is likely to be sold hard if Parliament rejects May’s bill or rally strongly if it passes. The two-week skew in the options market (25 delta risk reversal), which covers the Parliament vote, favors sterling puts over calls by a little less than the 100-day average ~(-0.68 vs. -0.80). Perhaps this indicates the positions have already been set.
Australian Dollar: A disappointing Chinese PMI, the threat of rising trade tensions, fear of slower world growth (IMF cut forecasts last week), a stock market that bucked the global trend and fell last week, and still the Australian dollar was among the strongest currencies, gaining 1% against the US dollar last week. It is the fourth advance in the past five weeks. It is in the upper end of a 3.5-month trading range. Recall that the Aussie peaked in late January around $0.8135 and trended lower. The low for the year was recorded in late October near $0.7020. The downtrend has been broken. An uptrend line off the lows intersects at the end of next week a little below $0.7250. The Reserve Bank of Australia meets next week. Policy is clearly on hold, and the central bank assures us that the next move will be an increase eventually, probably.
Canadian Dollar: The Bank of Canada also will hold policy steady when it meets next week. The market has pushed out its expectations for additional tightening and reduced the amount it expects. Consider that since the first week of November, the implied yield of the December 2019 BA futures has fallen 26 bp to 2.61%, with this low print registered ahead of the weekend. The US two-year premium over Canada has pushed above 65 bp to new four-month highs. Although Canada’s Q3 GDP was as expected (2.0%), final domestic demand contracted for the first time since early 2016. The CAD1.3360-CAD1.3380 area offer nearby resistance but also represents a 50% retracement of the greenback’s slide from the 2016 high near CAD1.47. The next retracement objective is found near CAD1.37.
Oil: January WTI stabilized around $50 a barrel. The two-year high was set in early October near $74. A seven-week skid came to an end last week as prices closed about 1.4% higher or about 70 cents. The technical indicators are stretched but are showing little indication of turning up. Short-covering by momentum traders has lacked enthusiasm. If Saudi Arabia is on a public relations campaign, it cannot announce a deal with Russia on the sidelines of the G20 meeting but must wait for OPEC+ to formally meet next week.
US Yields: The US 10-year yield finished the week five basis points lower and below 3.0%, for the first time since mid-September. The yield has fallen in five of the past six weeks. At 62 bp, the real 10-year yield deflated by the headline CPI it is five basis points below the 50-day moving average. That suggests that most of the decline in nominal yields has been the result of a reduction in the term premium. Some suggest it is the prospect of weaker growth. However, the sharp decline in oil prices, 22.4% in November, appears to have lowered inflation expectations. The implied yield of the January 2020 fed funds futures contract fell 2.5 bp last week that many heralded as some kind of shift in Fed policy. However, most of the adjustment took place before Powell’s speech in NY on November 28 and the FOMC minutes the following day. The implied yields reached 2.955% on November 8 and finished last week at the yield lows of 2.705%. The two-year yield closed virtually unchanged on the week at nearly 2.81%.
S&P 500: The week’s 4.5% gain is the largest in seven years. It was sufficient to put the benchmark back in positive territory for the year (3.2%). Powell’s comments in the middle of the week help account for half of the gains, but from a technical perspective, the gap higher opening on Monday was important, and it never looked back. After the previous Friday’s gap lower, a bullish island bottom was created. And several hours before Powell spoke, the S&P 500 gapped higher again. The benchmark spent the last two sessions mostly consolidating its gains in narrow ranges around 2750, which also corresponds to a 61.8% retracement of the sell-off that began November 7. A trendline drawn off the October 3 retest of the record high set in September and the November 7 high came in around 2745 before the weekend, which the S&P closed above. The next target is 2800-2820.