Still Wary of a Breakout

The dollar’s losses were extended last week, but among the majors, only the New Zealand dollar and the Swedish krona made new highs for the year.  Last week, we were cautious about chasing the greenback lower, and we still are.  Perhaps the bearish dollar view making the front page of the Wall Street Journal before the weekend reflects the ubiquitousness of the dollar bearish view and offers a contrarian indicator.

While the US preliminary PMI accelerated, the eurozone and Japan showed a contraction in business activity.  Similarly, while Japan and the EMU wrestle with deflation (falling prices), the US CPI (headline and core) is above 1%.  The divergence of economic performances is likely to find further evidence next week.  While the unemployment rates in the euro area and Japan are expected to make new cyclical highs, the US’s unemployment rate is expected to continue to ease.  The high was recorded in April at 14.7%.  It slipped below 7% in October.  

Neither the rally in equity markets nor the weaker US dollar offered gold any succor.  The once precious metal tumbled nearly 5% last week, the largest decline in eight months, and fell through the 200-day moving average for the first time since March.  Even the assassination of Iran’s nuclear program architect was not enough to prevent gold from breaking down further.  

Meanwhile, US, German, and Japanese benchmark 10-year yields were little changed, while the yields in the periphery of Europe (Italy, Spain, Portugal, and Greece fell to new record lows.  Rising agriculture, industrial metals, and oil prices lifted the CRB index by more than 2% for the fourth consecutive week.  The US 10-year breakeven (the difference between the yield of the inflation-protected security and the conventional note) firmed to about 1.75% last week, almost a seven basis point increase on the week. It is near the upper end of the range since briefly pushing above 1.80% at the end of August/early September. 

Dollar Index:   Under strong selling pressure, the 92.00-level gave way.  It stopped shy of 91.75 seen on September 1. There appears to be little meaningful support below there ahead of the 90.00 area.  The RSI and Slow Stochastic are over-extended, while the MACD is trending lower.  The lower Bollinger Band comes in near 91.50.  A move back above the 92.00-92.20 band would help stabilize the technical tone.  

Euro:   The $1.18-level held in a volatile session to begin last week, and the euro finished the week probing a little above 1.1960, its best level in almost three months.  Beyond it lies the $1.20, which when tested on September 1 brought a flurry of chatter from ECB officials, who emphasized the linkages between euro strength and deflationary pressures. The record of the ECB’s recent meeting was underscored the downside risk of prices. The momentum indicators are trending higher, and the Slow Stochastic is in the over-extended territory. It appears to be leveling off.  The upper Bollinger Band begins the new week a little above $1.1975. The euro’s strong recovery against sterling, likely Brexit-related (~GBP0.8865 Monday’s low to almost GBP0.9000 ahead of the weekend), appears to have helped the euro against the dollar.  

Japanese Yen:  From a base around JPY103.65, the dollar bounced a big figure before running out of steam, and it was straddling the JPY104 level ahead of the weekend.   It is the only major currency that fell against the dollar last week.  The technical indicators are not particularly helpful now.  The MACD has moved sideways a little below zero, and the Slow Stochastic has turned higher.  It is difficult to get excited about the exchange rate at these levels.  Even if it were to break the JPY103.65-JPY104.65, the range extension runs into perhaps even stronger barriers around JPY103 and JPY105. 

British Pound:  Every day last week, sellers capped sterling between $1.3380 and $1.3400.  The UK looks particularly messy now.  Brexit talks continue amidst a deterioration of the surrounding rhetoric.  The time and attention spent on the fishery debate seem far out of proportion with the average annual catch by EU or roughly 650 mln euros. The pandemic has struck the UK particularly hard.  While the government announced several new spending initiatives, it controversially cut foreign aid and froze civil servant pay. The BOE forecast a contraction here in Q4, and the Brexit disruption puts Q1 at risk.  Both the MACD and Slow Stochastic appear poised to turn lower.  Initially, $1.3265 may be tested, and then the $1.3200 area.  If we are right about the near-term prospects for a firmer US dollar and idiosyncratic developments are sterling negative, a move toward $1.3125 is possible.  

Canadian Dollar:  After setting what turned out to be the high for the week on Monday around CAD1.3115, the greenback spent the rest of the week moving back and forth through CAD1.30. A new two-week low was set ahead of the weekend near CAD1.2970, and it settled at its lowest level since January.  While the momentum indicators leave room for further US dollar weakness, the lower Bollinger Band (~CAD1.2955) comes in ahead of the year’s low (~CAD1.2930).  A move above CAD1.3030 would stabilize the tone.  If the CAD1.2900 level goes, there is little meaningful technical ahead of the CAD1.2700 area. 

Australian Dollar:  The Australian dollar rose about 1.25% last week, its fourth consecutive weekly advance.  It tested $0.7400 for the first time since it reached a two-year high near $0.7415 on September 1. Support is seen around $0.7325.  The MACD is at its highest level since, while the Slow Stochastic has been over-extended since early in the month.  The next big target is near $0.7500.  The Reserve Bank of Australia meets next week.  It will not take fresh actions, but it could suggest that currency appreciation is negating part of the impact of its efforts to facilitate a more robust recovery.  

Mexican Peso:  The peso has been among the strongest of the world’s currencies in recent months, and the fact that its upside momentum has faded in recent days may portend a broader dollar bounce.  The dollar could not make much headway below MXN19.94.  While it traded below MXN20.00 every day last week, it only once closed below it (midweek).  The nearby cap appears around MXN20.10. The MACD and Slow Stochastic seem poised to turn higher.  There might be potential toward MXN20.20. 

Chinese Yuan:  The dollar rose against the yuan last week for only the fourth time since the end of July.  As we anticipated, a consolidative phase has begun, and even as the dollar weakened against most currencies ahead of the weekend, the yuan was unmoved. In fact, over the last three sessions, the dollar finished within a few thousandths of a yuan around CNY6.5750.  The range to watch appears to be CNY6.55 to CNY6.60. If the upper end is violated, there may be potential toward CNY6.65.   If it were a less managed currency, we would note that the MACD and Slow Stochastic have turned higher. 

Gold:  The yellow metal was thumped for 4.4% last week.  There were three days last week in which gold fell by more than 1.5%.  The 200-day moving average and the (38.2%) retracement of the rally since March came in a little below $1800. The precious metal punched through there and tumbled a little to a little below $1775 ahead of the weekend. The next retracement target (50%) is near $1763.  The gold sell-off may have been sparked by the reflation trade, but the US 10-year yield slipped a little last week, stocks rallied, and the dollar slumped, all of which have been ostensibly supportive of gold in the recent past.  Many reports link the selling to the unwinding of savings that poured into the gold ETFs and open-ended funds earlier this year.  The $1800 area that had been support, now will likely offer resistance.  

Oil:  There were some gyrations ahead of the weekend and the OPEC+ meeting early next week.  Despite the more than 25% rally this month, many still expect the producers to refrain from boosting quotas in January.  However, there is are challenges, including the rise of Libyan output to more than 1.2 mln barrels a day, which is not included in the agreement, and Iraq and Nigeria opposition. January WTI ended a four-day nearly 9% rally ahead of the weekend.  It was only the second down day in the past two weeks.  The momentum indicators are stretched but still on sharp upward slopes.  A move above $46.50 would target $48.  On the downside, disappointment would spark a sell-off if the producers go ahead with the scheduled boost of output in January.  A break of $43.30 could signal a correction to November’s rally. The first target is the $41.50-$42.00 area.   

US Rates:  In the holiday-shortened session ahead of the weekend, the US 10-year bond yield slipped four basis points to about 0.84%.  On the week, it gained a single basis point have having shed seven in the previous week.  The yield has remained above 0.80% since November 9 and below 0.90% since November 16. The momentum indicators of the note futures contracts favor additional gains (lower yields).  The market’s reaction to news that Yellen will be the next Treasury Secretary did not seem to have much impact on US rates.   Likewise, the market did not seem to react to Mnuchin’s decision not to extended several of the Fed’s special lending facilities. 

S&P 500:   The benchmark came within $1.50 of the record high (~$3646), set on November 9, ahead the weekend.  It gapped higher on Tuesday (~3589.80-3594.50) and has not looked back. A record close was set on Friday (~3638.40).  It gained 2.25% for the week, lagging a little behind the NASDAQ’s 2.9% gain, which itself lagged the Russell 2000 (3.9%).  Major global benchmarks have risen dramatically over the past four weeks, making it a November to remember, and momentum is favorable.  The evidence is still mixed between whether there is a rotation going on or whether it is more a broadening of the rally.  Separately, the weaker dollar may help flatter US multinationals’ earnings as they translate the foreign revenue into dollars for accounting/tax purposes.  This may become a focus, but typically the reverse case commands more attention.  



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