The US dollar was little changed for most of last week and then weakened against most of the major currencies ahead of the weekend. The consensus narrative is that comments by the US Administration fanned optimism on a trade agreement with China, and that encouraged a rally in risk assets. We are skeptical, in part because earlier worries failed to entice much of a market reaction. Also, bond yields fell last week, with the 10-year yield on US Treasuries leading the way with an 11 bp decline. The dollar fell against all the major currencies last week except the Australian dollar (~-0.6%), unable to fully recover from the sell-off in response to the disappointing jobs data.
Broadly speaking, the dollar trended lower in October and corrected higher in the first half of November. Only the Norwegian krone and Swedish krona of the major gained against the dollar so far this month. Among emerging market currencies have also generally depreciated in the past two weeks. The JP Morgan Emerging Market Currency Index has fallen by about 1.5% since the end of October.
The South African rand was the strongest of the emerging market currencies over the past week (~+0.9%) to bring the month-to-date gain to 2.65%, helped by strong foreign demand for its bonds. This month so far, foreign investors have bought back about a quarter of the South African bonds it sold in the first ten months of the year.
The Chilean peso was the weakest currency last week, losing about 3.8% against the dollar last week, and that was with the 3.4% rally before the weekend an agreement was struck to re-write the constitution after nearly a month of protests. The government also indicated it would pull $1 bln for the sovereign wealth fund to boost domestic spending.
Dollar Index: The Dollar Index slipped about a third of one percent last week, and a half was registered in the last session. It has now fallen in five of the past seven weeks, comprising the first half of Q4. It had retraced about half of what it lost in October and consolidated around there for most of the week before breaking down ahead of the weekend. The pre-weekend loss took the Dollar Index a little below 98.00, giving back a little more than a third of the previous week's rally. A band of support is seen between 97.60 and 97.80. A break of this area would target a retest on the recent lows near 97.00. The MACDs and Slow Stochastics are poised to turn lower.
Euro: The euro dipped a little below $1.0990 on November 14, which met the (61.8%) retracement of last month's gain and the measuring objective of the dollar top pattern we noted last week. It staged a potential key reversal then by trading and closing above the November 13 high. There was follow-through buying ahead of the weekend. The euro needs to get above the $1.1065-$1.1085 area to signal a retest on the recent highs near $1.1180, which is also where the 200-day moving average is found. The technical indicators are constructive. A break below the $1.1025 area would neutralize the favorable tone.
Japanese Yen: The dollar rose ahead of the weekend to snap its longest losing streak (five sessions) in six months. The greenback began the week above JPY109 and above the 200-day moving average, but was sold off to around JPY108.25 on November. It rebounded the next day and closed above the 20-day moving average (~JPY108.80) to recoup half of its pullback. The technical indicators warn of new dollar weakness, and as we noted, the Slow Stochastics did not confirm the recent highs.
British Pound: Since rallying eight-cents (~$1.22 to ~$1.30) in a six-session mark-up beginning October 10, the pound has consolidated mostly between $1.28 and $1.30. The downtrend line from the recent highs begins the new week near $1.2845. The MACDs have been trending lower, but the Slow Stochastics are curling up. One-month sterling volatility, which covers the election, rose to 12.2% before the weekend before slipped back below 12%, nearly doubling last week. It appears that market participants have been buying puts, probably as a hedge.
Canadian Dollar: The US dollar trended lower against the Canadian dollar in September and October, falling in six of the eight weeks. However, it corrected higher in recent weeks, helped by some disappointing data and softer sounding neutral central bank. The greenback rallied from nearly CAD1.3040 on October 29, when it posted a key upside reversal and to peak close to CAD1.3270 on November 14, just shy of the 200-day moving average. The heavier US dollar tone over the last couple of sessions, plus ideas that the US Congress may indeed approve the USMCA helped the Canadian dollar recover. The technical indicators suggest that the US dollar has not put in a near-term high, it has come pretty close. A break below CAD1.3200 would likely signal a move toward CAD1.3150.
Australian Dollar: A five-day losing streak fueled by weak domestic and Chinese data ended before the weekend as the Australian dollar popped up about 0.45% to record its best day so far here in November. The technical indicators, however, warn that the down move might not be over, and the pre-weekend advance simply put the Aussie back into its Bollinger Bands. An advance through the $0.6840-$0.6860 area is needed to begin repairing the technical damage. Talk that the central bank may initiative an asset purchases program may see the Aussie underperform until the situation is clarified. RBA minutes may help, and the preliminary November PMI next week may shed fresh light on the trajectory of the economy and policy.
Mexican Peso: The dollar rose about 0.4% against the peso last week, but the real story is the rebound in the peso in the second half of last week. The greenback peaked surged to nearly MXN19.53 in the middle of last week after finishing the previous week near MXN19.10. The weakness in emerging market currencies in general, the tensions in numerous Latam countries, for which the peso acted as a proxy, and prospects for Banxico to cut rates were the main drags on the peso. The dramatic recovery in the Chilean peso, "sell rumor buy fact" behavior on the as-expected 25 bp rate cut, and the prospects of US approval of the USMCA deal sparked a dramatic recovery in the peso. The dollar fell a little less than 1% in the last two sessions. The rate differentials still favor the peso among many carry-traders in the levered community. The technical indicators do not appear particularly helpful now as the prices swings have been too quick. The dollar is back into the MXN19.00-MXN19.20 range that had previously dominated.
Chinese Yuan: The dollar broke back beneath CNY7.0 November 6-8, but pushed back above at the start of last week. It peaked in the middle of the week near CNY7.0265 before pulling back ahead of the weekend to retest CNY7.0. It does appear to be vaguely shadowing the trade talk signals from the US, but also to be tracking the JP Morgan Emerging Market Currency Index. The technical indicators for the somewhat freer offshore yuan (CNH) are mixed but seem to favor buying the dollar on a further pullback.
Oil: The January 2020 WTI futures contract finished last week at its best level since September 23 and is threatening to break higher out of the $56-$58 range that has more or less confined the price action over the last couple of weeks. The technical indicators cast a jaundiced eye toward an upside breakout. The MACDs are stretched, and the Slow Stochastics have not confirmed this month's gains. Meanwhile, the US rig count continues to fall, and M&A in the shale space appears to be accelerating.
US Rates: The US 10-year yield fell 11 bp last week to post its biggest decline since early October. Ironically, the series of pre-weekend data that prompted economists to revise down Q4 GDP estimates saw the US 10-year yield rose for the first time last week, albeit small. The December 10-year futures note peaked at the (61.8%) retracement of the decline since the November 1 high that came in near 129-17. This needs to be taken out to lift the tone, but it could signal a consolidative phase unless the 130-15 high can be surmounted. The technical indicators favor the upside. Meanwhile, the effective fed funds rate is trading five basis points from the lowe end of the target range after previously threatening to bust through the top. The Fed has boosted the size and duration of its repo operations to preempt disruptive pressures, which are already event over the roll (year-end).
S&P 500: What had been a quiet week ended with a bang as the S&P 500 gapped to new highs ahead of the weekend paradoxically despite mostly disappointing economic data. Moreover, the momentum was sustained, and the close was on session highs. In the face of downward revisions to growth and earnings, the fear of missing out has been widely touted as the explanation. While it seems reasonable, and it may help explain our sense too that the price action has become decoupled from macro developments, we are suspicious of hypotheses that cannot be tested. The technical indicators remain stretched as the S&P 500 extended its rally for the sixth consecutive week. During this streak, it has gained about 5.7%. Europe's Dow Jones Stoxx 600 is also carrying a six-week rally in tow to start next week. It has risen 6.8% over this period, and the euro has edged slightly higher net-net against the dollar. The pre-weekend gap could be one of three kinds. A break-away gap is the most bullish and implies that it is not filled in the near-term. A normal gap would be filled over the next couple of sessions. It could be an exhaustion gap, which marks a near-term high. The price action in the week ahead will likely set the record straight.