The US dollar had a solid week as the recovery from the October slide began. We had a high conviction it was coming, but we thought the technical indicators gave scope for one more marginal new low, which in the end did not materialize. It is difficult to say that there had been much new information or progress on the three macro issues that have captivated investors: US-China trade, Brexit, and global economic outlook.
The UK is headed for the December 12 election, and that is the key Brexit focus. Developments around that include both major parties promising to open the public purse with new spending plans to entice voters. From the outside, it is not clear this is an effective means to increase one’s base as opposed to reward those who were going to vote for you in any event. Separately, the Bank of England softened its neutral stance, and two members of the policymaking committee dissented in favor of immediate cuts.
The US and China have apparently have agreed that if there is a deal that it would include some rolling back of existing tariffs. Yet there has been no agreement, and there does not appear to be a meeting of the minds over the extent of the tariff unwind. Also, there is no agreement on when or where the two leaders can meet to do the formal signing.
There was not much added to the macroeconomic picture. While the EMU’s manufacturing slump continued to be reflected in the Oct PMI, the service sector continues to appear resilient. The stronger than expected rise in German factory orders was offset by a larger than expected decline in industrial output. China’s exports and imports were less weak than expected while Germany’s were stronger than expected.
One large meta-trade seemed to dominate: Buy equities and the dollar, sell bonds, and other currencies. It was as if there were a large portfolio shift by Mr. Market, not so much triggered by the news stream as a swing in the pendulum of sentiment from the world at the edge of the proverbial abyss and monetary policy is exhausted, to things aren’t so bad and maybe the worse has passed. US-China trade talks are progressing, and there is optimism that the US will not levy tariffs on European autos as early as next week.
Dollar Index: The 1.15% rise last week was the largest since the end of August. A double bottom appears in place (97.10-97.15), and the neckline set at the late October high near 98.00 has been successfully overcome. The measuring objective is around 98.90-99.00. The (61.8%) retracement of the decline from the October 1 high is just below there near 98.70. The pre-weekend gains to 98.40 recouped about half of last month’s decline to approach the upper Bollinger Band (~98.45). The MACDs and Slow Stochastic reflect the upside momentum as does the five-day moving average crossing above the 20-day for the first time in several weeks. Support is seen near 97.75.
Euro: In a mirror image of the Dollar Index, a double top appears in the euro near $1.1180. The neckline around $1.1075 was taken out early last week. The measuring objective is around $1.0970. The (61.8%) retracement of the euro’s rally from the start of October is found just below $1.10, The MACDs, Slow Stochastics, and the crossing of the five and 20-day moving averages reflect the strong downside momentum. The euro settled on its lows ahead of the weekend, despite Trump casting some doubt on the extent of the tariff rollback he was willing to accept, The euro fell every session last week after rising every session the week before. Previous support around $1.1075 should now offer resistance.
Japanese Yen: The dollar has risen against the yen in four of the past five weeks and successfully rose above its 200-day moving average (~JPY109.00), which more or less corresponded to the neckline of a possible head and shoulders pattern (see chart). A conservative estimate of the measuring objective is JPY114.00-JPY114.50. At this juncture, it seems extreme. We suggest the next objective is more modest near JPY110.00. The dollar’s 1% rally last week took it to the upper Bollinger Band, which also suggests some caution is in order. Initial support is seen near JPY108.65.
British Pound: Sterling was unable to close higher in a single session last week as the market seemed to give up on the $1.30 area. Technical indicators and the crossing of the five and 20-day moving averages point to the strong downside momentum that does not appear to have been exhausted. The $1.2700 area is the next target. It corresponds to a (38.2%) retracement objective, the 200-day moving average, and the lower Bollinger Band. The Bank of England softened its neutral stance as two dissents favored a cut. Both major political parties have promised new spending, and just before the weekend, Moody’s cut the outlook for the UK’s sovereign rating to negative from stable. We suspect potential exists toward the lower end of the recent range found near $1.26, where the next (50%) retracement of the rally off $1.22 is found. Resistance is seen in the $1.2820-$1.2840 area.
Canadian Dollar: A softer neutral central bank and a softer than expected jobs report (after recent strength) helped lift the greenback for the second consecutive week against the Canadian dollar, the first back-to-back weekly gain since the end of August. The US dollar shot through CAD1.3200 to test the (61.8%) retracement (~CAD1.3230) of the drop since the October 10 high near CAD1.3350. The next target is around the 200-day moving average (~CAD1.3275), though the upper Bollinger Band will begin the new week by CAD1.3250.
Australian Dollar: For the fifth time or so since last November, the 200-day moving average has kept counter-trend Australian dollar rallies in check. After stalling nearly a quarter-cent below it, the Aussie fell as if the market had given up. It lost about 0.5% to test the 20-day moving average (~$0.6850) for the first time in a little more than three weeks and nearly retraced (38.2%) of the rally that began in early October that is found near $0.6830. Below there is the trendline drawn off last month’s ascending lows (~$0.6825). The next retracement (50%) is found by $0.6800. The MACDs and Slow Stochastics have only recently turned down, warning it may remain under pressure. The $0.6880-$0.6900 area offers resistance.
Mexican Peso: The dollar was above MXN19.80 in early October and fell to near MXN19.00 by the end of the month. It has been chopping in MXN19.05 to MXN19.25 or so range, just below the 200-day moving average. The sideways movement has left the technical indicators mixed. We were more confident that the MXN19.00 was going to hold in late October than we are now. Banxico meets next week, and speculation has shifted away from a 50 bp cut. The central bank cut the overnight rate target in August and September by 25 bp. A third cut seems to be nearly fully discounted.
Chinese Yuan: The dollar’s eight-day slide against the Chinese yuan that took it back below the previously important CNY7.0-level ended before the weekend with a 0.25% gain. The offshore (CNH) seems over-extended, especially as the US has cast shade on an agreement and large-scale de-escalation. It is in China’s interest to dis-enchant the magical attributes people, including the US Treasury, seem to subscribe to CNY7.0. The best way to do this is to let the dollar trade back and forth through it. Initially, there may be scope back to CNY7.02-CNY7.04.
Oil: The key reversal in the middle of the week, whereby the December WTI futures contract made new highs for the move before reversing lower and closing below the previous day’s low, did not amount to anything. A marginal new low for the week was set before the weekend near $55.75 before rebounding to $57.50, around where the 200-day moving average is found. The December contract has been flirting with it but has not closed above it. The next target is near $58.20. On the downside, the $56-area may offer support.
US Rates: The US 10-year yield jumped 23 bp last week to close near 1.95%. It was the fourth weekly rise in the past five weeks. Recall the yield bottomed in early September around 1.42%. The sharp rise in yields is part of a global move out of bonds into stocks ostensibly on trade and growth optimism. Consider that the dollar value of negative-yielding bonds has fallen from more than $17 trillion at the end of August to about $11.6 trillion at the end of last week. The price of the December 10-year note futures contract briefly dipped below 128-00 last week before consolidating. The technical indicators are getting stretched, and nearby support is seen in a band beginning near 127-15 and extending to 127-04. The US 2-10-year curve steepened by about 11 bp to over 26 bp, the most in nearly four months. Some argue that it is not the inversion of the curve that signals a recession but the re-steepening.
S&P 500: The S&P 500 enjoys strong upside momentum. It has rallied for five consecutive weeks for a cumulative gain of almost 4.8% and set a new closing record high ahead of the weekend. The technical indicators are stretched, but they were last week as well. The next target looks to be a little above 3100. The gap higher on November 1 that significantly appears on the daily and monthly bar chart signal the upside acceleration. The S&P 500 gapped higher on Monday, November 4, but that was a normal gap with was filled midweek. It gapped higher again on November 7 and filled the following day before rallying to close at new session and record highs. Last week’s low was set near 3065, and that may provide initial support ahead of the 3-4 week trendline that begins the week near 3058.