Trending or Range-Bound Markets?

Last week will be remembered for the collapse of oil prices. The WTI contract for May delivery would find no buyers and the price fell to an unheard-of minus $41 a barrel. It is a bit of a fluke having to do with a physical settlement contract (as opposed to cash), and some large participants, including a popular US ETF and Chinese bank, had exposure near expiration. The shortage of inventory had deterred buyers, leading to the unprecedented drop.

Although it is tempting to read into the negative oil price, some deeper meaning about current conditions or the economic trajectory. It is a new Roarshoch test. However,  to say demand for oil has fallen faster than supply or that inventory space is getting scarce is to belabor the obvious. We wonder if the negative price of oil that lasted less than 24 hours says nothing about anything but the peculiarities of this contract at this time.  Still, this does not mean that supply and demand are better aligned. Inventories are still accumulating. Nevertheless, the peak problem is at hand, and starting next month, the combination of the new OPEC+  agreement and the market-induced cuts in the US, Canada, and Brazil, for example, will begin addressing supply. At the same time, the gradual relaxation of social restrictions suggests demand may be near a bottom, even if the recovery is protracted.

The dollar rose against most currencies last week. Among the majors, the Australian dollar and the Japanese yen resisted the greenback’s pull and posted small gains. The dollar rose the most against the Norwegian krone. The 3.3% advance, the third weekly gain this month, brings the year-to-date advance to 21%. The next weakest currency among the majors so far this year has been the New Zealand dollar. It has depreciated by about 11%. The JP Morgan Emerging Market Currency Index fell by about 2.2% last week. Each month this year, it has risen in only one week and is off about 15.2%, which is more than the previous two years combined. A poll by the Institute for International Finance found many expect emerging markets to bottom in late May or early June.  

Dollar Index:  Selling pressure in the North American afternoon was sufficient to halt the week-long rally. It settled on its lows (a little below 100.25) after approaching the three-week high near 101.00. A bearish shooting star candlestick may have been carved. Follow-through selling early next week would confirm it. Initial support is seen near 99.60 and then 98.80. On the topside, a break, and ideally, a close above 101.00 would reengage the bulls.  

Euro: The single currency snapped a four-day fall ahead of the weekend but only after recording its lowest level (~$1.0725) in a month. It recovered to $1.0820 before consolidating by straddling the figure. The MACD and Slow Stochastic are softer but not over-extended. The euro has not closed above its five-day moving average since April 14, and it will begin the new week just below $1.0825. A close above it could be the first sign that the downside momentum is easing. It was in roughly an 8.5-cent range in March and April has been closer to 3.25 cents. It is inside the March range and in the lower half.  

Japanese Yen: The dollar’s range against the yen last week (~3/4 of a yen) was the narrowest in more than two months. For the fifth consecutive week, the dollar fell in three sessions. And it was the third weekly decline. Japanese banks continue to be the largest users of the Fed’s swap lines. This may have reduced or removed some participants that would otherwise be active in the market. Broad sideways trading is the most likely scenario. Only a break of JPY106.45 or JPY109.25 is important.  

British Pound: Sterling has a three-day rally in tow to start the new week. It still lost 1.1% last week. The MACD and Slow Stochastic are moving lower. Some technicians are tracking a potential head and shoulders pattern whose neckline is seen near $1.2280, and if convincingly violated, could signal a move toward $1.20. A move back above $1.25 would begin calling this pattern into question. Perhaps, a simpler way to frame the price action is to note that on April 21, it set a range of roughly $1.2250 to $1.2450. Prices have remained in this range since and the breakout points to the next move.  

Canadian Dollar: Although the Canadian dollar appears to be the most sensitive among the major currencies to the change in the risk appetites measured by the S&P 500, it seems more sensitive to declines than gains. The US dollar rose by about 0.75% against the Canadian dollar last week, which might be pretty good considering the S&P 500 fell 1.6%, and oil slid 31.6%. The US dollar has found support around CAD1.40. A move above the CAD1.4260 area would suggest the greenback can make another run at the March high near CAD1.47.  

Australian Dollar: The Australian dollar has declined in only three of the past 15 sessions. It has risen about four cents over the run. It finished last week the way it had begun it: knocking on the $0.6400 area. The market has not given up on the $0.6450 area that marked the high earlier this month and corresponds to a (61.8%) retracement objective of the drop since the start of the year. Watch the trendline off this year’s highs begins the new week near $0.6235. A shelf has been carved in the $0.6250-$0.6275 area. The MACD remains stretched, but the Slow Stochastic looks ready to turn up again after barely correcting. 

Mexican Peso: The dollar rose every session last week for a nearly 5.7% gain against the Mexican peso. It settled above MXN25.00 for only the third time ever. Both the MACD and Slow Stochastic have curled higher. Mexico will report Q1 GDP on April 30. The median forecast in the Bloomberg survey is for a 1.7% contraction. The risk seems to be on the downside as GDP fell every quarter in 2019, underscoring its vulnerability even before the crisis struck. The dollar’s record high was set on April 6, near MXN25.7850. A move below MXN24.55 would weaken the greenback’s technical tone.  

Chinese Yuan: The dollar is going no place quickly against the Chinese yuan. In fact, three-month implied volatility (~4.36%) has returned to levels seen last year. The weekly range (~CNY7.0665-CNY7.0985) appears to be the smallest of the year. Officials seem to want a stable currency, and that is what it has achieved. The yuan is virtually unchanged against the dollar here in April. Year-to-date, the yuan is off about 1.7% against the dollar, which makes it among the world’s best-performing currencies.  

Gold: The price of the yellow metal rose by about $45 last week (~2.65%) and posted its first weekly close north of $1700. The multiyear high was sent on April 14, near $1747.40. The MACD is rising in over-extended territory, while the Slow Stochastic pulled back a bit and is set to cross back high. A new high looks likely, but it may be marginal. Many observers make it sound like gold is a one-way bet. If the markets turn sour again, gold rallies as a safe haven. And while stocks go up, so the argument goes some buy gold as a hedge. Since breaking above $1400, we thought the technical indicators pointed to $1700, but now there seem to be increasing calls to $2000.

Oil: Inventories continue to rise, and the idling of drill rigs has accelerated. Three important changes are taking place that will lay the groundwork for a change in the fundamentals. First, US oil ETFs have modified their strategies. Second, OPEC+ output cuts begin May 1. Although they are less than necessary to offset the demand shock, the supply will slow. At the same time, the bottom in demand is near. Third, the output cuts driven by market forces will continue to force production cuts. Cushing is expected to be full in the coming weeks, and the cost of storage will continue to discourage production The high for June light sweet crude oil on April 21 was near $22.60.  That is going to be an important level technically, though initial resistance near $20 may suffice. The low that day was $6.50.  

US Rates: The Federal Reserve’s efforts to stabilize the markets is yielding results. LIBOR has fallen, though there is scope and need for further declines before the Fed’s transmission mechanism is functioning properly. The Treasury market is also calmer. The spreads between the bid and offers appear to have normalized, though a more granular inspection is necessary. The range in the 10-year yield last week about 11 bp, the narrowest since mid-February. The new narrow range seems to be about 0.50% to 0.65%. The Federal Reserve continues to scale back its Treasury purchases. At its peak, it was $75 bln a day, and next week it will buy $50 bln of Treasuries. The momentum indicators of the June 10-year note contract are fading. They suggest the risk is toward higher yields.  

S&P 500:  The VIX finished last week below 36% for the first time since March 4. The week’s range was set on Monday and Tuesday (~2727.1-2869.0), and it spent the rest of the week gravitating around the middle of the range (~2800). It closed near session highs ahead of the weekend. However, the momentum indicators are not particularly encouraging. The MACD is flattening out after rising for more than a month. The Slow Stochastic has eased from the over-extended condition we noted last but has also leveled off. A break of the 2720 area should be respected as it could confirm a topping pattern that could point to a 100-150 point pullback.    


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