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The Dollar is Still King

Summary:
Once again the US appears to be diverging from the world.  With its large and mostly closed economy (exports plus imports as a percent of GDP), it is perceived to among the best positioned to escape the newest shock with minimal economic impact.  Europe cannot get out of its own way, and the real sector data have not confirmed the improvement in sentiment indicators.  There is little doubt that the Japanese economy contracted in Q4 19, but the recovery spurred by the government's stimulus and preparations for the Olympics may not be sufficient pave way for a strong rebound in Q1 20. Some have begun speculating that the Chinese economy itself could contract this quarter. Even the prospects of further Fed easing, for which the market has discounted about 34 bp of cuts this year

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The Dollar is Still King
Once again the US appears to be diverging from the world.  With its large and mostly closed economy (exports plus imports as a percent of GDP), it is perceived to among the best positioned to escape the newest shock with minimal economic impact.  Europe cannot get out of its own way, and the real sector data have not confirmed the improvement in sentiment indicators.  There is little doubt that the Japanese economy contracted in Q4 19, but the recovery spurred by the government's stimulus and preparations for the Olympics may not be sufficient pave way for a strong rebound in Q1 20. Some have begun speculating that the Chinese economy itself could contract this quarter.

Even the prospects of further Fed easing, for which the market has discounted about 34 bp of cuts this year (about one-and-a-third 25 bp moves) this year has not dented the demand for dollars.  The greenback rose to new highs for the year against all the major currencies but the Japanese yen.  It also appreciated against most emerging market currencies. The dollar enjoys strong momentum and the underlying macro-divergence is unlikely to be reversed in the near-term.

Dollar Index:   The Dollar Index rose every day last week, for the first time since last July.  It pushed through the highs set last November around 98.50, which also corresponded to the (61.8%) retracement of the Q4 19 sell-off.  The next target is near 99.00 and the October 1 high around 99.65.  The MACD is still headed higher though it is in over-extended territory.  The Slow Stochastic is turning back up after having turned lower in late January. The Dollar Index closed above its upper Bollinger Band (~99.55) for the past two sessions.

The Dollar is Still King
Euro:  In a mirror image of the Dollar Index, the euro fell each session last week for a cumulative 1.3% decline.  While it is the largest decline since last November, the technical damage was greater.  The neckline of a head and shoulders top was retested, which is common, but was unable to resurface above it.  The minimum measuring objective is near $1.0940, the low before the weekend.  However, the strong downside momentum warns of the risk of a push toward last year's lows set in early October near $1.0880. The technical indicators allow for additional euro losses.  The lower Bollinger Band is near $1.0950.

Japanese Yen:   The rise in US 10-year yield and the rally in equities helped ease the demand for the Japanese yen and the dollar snapped a two-week slide,  The greenback rebounded from the JPY108.30 low seen at the end of January to briefly poke through JPY110.  The pullback in equities and bond yields saw the dollar end a four-day rally ahead of the weekend.  Support was found ahead of JPY109.50 and the technical indicators suggest another push higher is likely in the coming days. 

British Pound: Sterling posted a key downside reversal to start last week by making new highs for the move (~$1.3215, highest in over a month) and then selling off to close below the previous session's low (~$1.3085).  It finished the week below $1.29 for the first time since late November.  Its 2.4% loss against the dollar was the largest drop by far among the major currencies.  The Swiss franc's just less than 1.5% decline was the second weakest.  With a minor exception of two, $1.28 marks the lower end of the two and a half-month-old range.  The momentum indicators suggest additional near-term losses are likely, but the close below the lower Bollinger Band (~$1.2905) warns to be cautious. 

Canadian Dollar:  The US dollar edged to marginal new highs for 2020 against the Canadian dollar ahead of the weekend even though Canada's employment data, which included a rise of permanent worker wages (4.4% vs. revised 3.8% from 3.6% in December).  The greenback had poked above CAD1.33 each day last week but failed to close above it.  Resistance is also seen a little higher in the CAD1.3320-CAD1.3340 area that capped the US dollar in October and November last year.  The MACD is about to slow while the Slow Stochastic has already leveled off.  Initial support is seen near CAD1.3250. 

Australian Dollar:  The Australian dollar bounced in the first half of last week, posted an inside day on Thursday before selling off on Friday to its lowest level since 2009 (almost $0.6660).  Both the MACD and Slow Stochastics were flat-lining in their respective troughs, and while the former edged down the latter did not confirm the new lows. The lower Bollinger Band is a bit further off near $0.6645. There is little in the way of chart points before $0.6250.  On the topside, a convincing move above $0.6750 is needed to suggest a low is in place. 

Mexican Peso:  The dollar fell to MXN18.56 last week, its lowest level since 1 October 2018.  It bounced back ahead of the weekend to reach almost MXN18.83. The peso is one of three currencies that have appreciated against the dollar so far this year (the Indonesian rupiah has gained 1.4% year-to-date, while the peso has appreciated by about 0.85% and the Hong Kong dollar by around 0.35%).  The technical indicators are mixed.  The MACD recorded its low back in January and has edged higher, while the Slow Stochastic bounced into the end of January but appears to be rolling over again.

Chinese Yuan:   The dollar jumped to around CNY7.0250 when the local markets re-opened from the extended holiday.  Official guidance, injections of liquidity, a small rate cut, helped the yuan to recover.  The dollar almost touched CNY6.96 on February 6 but bounced back to finish the week a little above CNY7.0.  When Chinese markets closed on January 23, the dollar was near CNY6.9425.  The offshore yuan (CNH) is a little weaker.   Although it is too early for the US to grant any forbearance to China on the trade agreement in light of the coronavirus, commodity importers are a different story and claiming force majeure.  In the current climate, with the dollar broadly stronger and has already flipped on whether China is manipulating its currency, a weaker yuan seems to be the path of least resistance.  There appears to be potential without much fanfare for the dollar to rise toward CNY7.05 or a bit higher. 

Gold:  When China's markets re-opened, gold fell, losing $45 an ounce in the first two sessions.  It held chart support on a closing basis near $1550 and recovered $17 in the following three advancing sessions. The MACD and Slow Stochastic are still headed lower.  The upper end of the range is $1575-$1.600. The rolling 30-day correlation between percent change in gold and the percent change in the S&P 500 is near the most inverse in three-and-a-half years (-0.65).  This is one measure of gold's safe-haven role.

Oil:  Despite a mid-week bounce, light sweet crude for March delivery fell 2.1% to extend its drop for the fifth consecutive week. During this run, the price of oil has fallen by about 20%.  It finished the week near $50.50, though spent some time and even closed once below the $50-mark.  Russia is expected to announce next week whether it will support more output cuts in H1 and extended existing cuts until the end of the year.   The Slow Stochastic has been flat-lining since mid-January and the MACD has joined it in recent days.  Immediate resistance is near $52.  The last significant low, from Q4 18 was near $42.50. 

US Rates:  The US 10-year yield rose in the first three sessions by a combined 14 bp only to give almost half back in the last two sessions, despite the robust economic data and finished the week near 1.58%.  The March note futures contract held support near 130-00 and reversed higher on February 7. Follow-through buying ahead of the weekend lifted the contract above 131-00.  A move above 131-08 would suggest another run at the highs (implying a retest on 1.50% in the cash market).  The two-year yield rose by 13 basis points in the first four sessions last week before surrendering 7.5 bp ahead of the weekend to close around 1.40%.

S&P 500:  The S&P 500 surged in the first part of last week, gapping higher both Tuesday and Wednesday.  A new record high and closing high were seen on Thursday (almost 3348 and 3345.8, respectively) before profit-taking was seen ahead of the weekend.  The gaps remain unfilled and attract prices next week.  They are found roughly at 3268.4-3280.6 and 3306.9-3313.8. Both the MACD and Slow Stochastic have turned higher.  The S&P 500 has risen 3% year-to-date, while the Dow Jones Stoxx 600 is up 2% and the MSCI Asia Pacific Index is flat.  The MSCI Emerging Market equity index is off 1.1% thus far this year, the MSCI World Index of developed countries is up about 2.5%.  

Disclaimer




Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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