The major central banks have met, and not one felt it incumbent upon them to take fresh policy action. Despite some dramatic intraday swings and close scrutiny, the euro-dollar exchange rate continues to be mainly in a $1.17-$1.19 trading range that has dominated since the end of July. All the brouhaha about the rapid rise of the euro misses that it has been moving sideways for nearly two months. With all the
attention commentary on the euro, it was the yen, whose 1.6% gain last week, led the majors. It arguably was a cleaner way to express a bearish dollar view. The dollar broke below JPY105 in the middle of last week for the first time since July and remained below there ahead of the weekend. It approached the July 31 low set near JPY104.20.
While the major currencies were rangebound, the two emerging market currencies we monitor here, the Mexican peso and Chinese yuan, continued to trend higher. The peso has appreciated now for six consecutive weeks. It has recouped more of its steep losses suffered earlier this year. It has risen by almost 9.7% this quarter. In fact, here in Q3, it has been the best-performing currency in the world and pays around 4.40% on cetes (Mexican T-bills). The yuan's advance extended for the eighth consecutive week. It has fallen in only one week since the end of June, during which time it has appreciated by about 4.3%. If something is going to change, it seems that the peso and yuan stabilizing is more likely the majors breaking out.
Dollar Index: The Dollar Index is in the 92.00-94.00 range. Participants get excited when one side or the other is approached. The breakout after Powell's Jackson Hole announcement proved a head fake, and it may have proven to be the case even if ECB economist Lane did not speak on September 1. The momentum indicators are pointing lower. While we do expect an eventual breakout to the downside, it may not be ready quite yet.
Euro: The single currency covered a good part of its range last week. It reached exactly $1.19 before selling off to a little below $1.1740, which it had not seen in a month. It finished the week near $1.1850. The MACD and Slow Stochastic have turned up, but it is not clear the catalyst that will sustain a break higher. That said, we do favor an eventual break higher, and official comments likely have diminishing returns. The question about the euro and inflation is really part of an internal debate in the ECB about additional stimulus.
Japanese Yen: A new Japanese Prime Minister and a BOJ who dismissed the kind of inflation report that sent the chins wagging in Europe saw the yen break below JPY105 and fall to almost JPY104.25 before the weekend. It closed on the lows for the week. A break of JPY104 would likely trigger stop-loss selling. The low from the market disruption in March saw the dollar fall to around JPY101.40. The lower Bollinger Band is found two standard deviations from the 20-day moving average (~JPY104.70), but the dollar had moved nearly three standard deviations (~JPY104.15). The momentum indicators are headed south.
British Pound: The dollar's bounce starting on September 1 and the Brexit drama had taken sterling from almost $1.35 to nearly $1.2760 on September 11. It rose in the first four sessions last week before stalling out near $1.30 in the second half of the week and slipping fractionally lower ahead of the weekend. The $1.3040 area corresponds to a (38.2%) retracement of the decline. If that can be overcome, the next target would be the $1.3100-$1.3125 area, which houses the (50%) retracement and the 20-day moving average. On the other side, a break of $1.2855 could signal another run at the lows. The Slow Stochastic has turned higher, and the MACD looks like it wants to do the same. The cross against the euro may be a more important factor given the Brexit focus. The cross held important technical support near GBP0.9080. On the upside, if GBP0.9210 gives way, it could spur a move to the month's high near GBP0.9300, and open the potential for GBP0.9500 in Q4.
Canadian Dollar: The greenback has been in a narrow trading range against the Canadian dollar, and the closes for the past six sessions have taken place in the 20-tick range between CAD1.3165 and CAD1.3185. The range that has been established is roughly CAD1.3120-CAD1.3130 to CAD1.3250-CAD1.3260. Only a break of that will be noteworthy. Recall that the US dollar fell for eight consecutive weeks through September 4. It bounced to end the streak and was virtually flat last week, and some further consolidation seems reasonable. The new parliament session begins next week, and new fiscal plans are expected to be unveiled.
Australian Dollar: The Australian dollar is carving out a range between $0.7200 and $0.7400. Frustratingly, it has staddled the middle of the range, which helps neither bull nor bear. In fact, last week, it did not go below $0.7250 or above $0.7350. The MACD has not been helpful for a couple of months, and the Slow Stochastic is ambiguous. Like with the euro, we expect the consolidation to eventually yield to an upside break.
Mexican Peso: Even with the setback ahead of the weekend, the peso rose almost 1.5% last week. . The momentum indicators are stretched but have not turned. The failure for the dollar to close below MXN21.00 suggests a consolidative/corrective phase may be at hand. The initial target may be the MXN21.25-MXN21.30 area. The greenback saw MXN20.8450 before the weekend. If we are wrong and the dollar's decline continues, the next target is near MXN20.70.
Chinese Yuan: In the eighth consecutive weekly advance, the yuan rose almost 1% against the dollar. The momentum appears to be stalling. However, given that the currency is heavily managed, Beijing's intentions are critical. Given the magnitude and persistence of the move, we must assume that they want it as protests have not been seen or heard. It seems reasonable that they do not want it to become a one-way bet and need to make sure businesses have time to adjust. If there is a consolidative/corrective phase, our first target is the gap created on the dollar's low opening on September 15. That gap is found between CNY6.7970 and CNY6.8085.
Gold: Gold rose for the second week, eking out a nearly 0.5% gain. It was the first back-to-back weekly gain since the end of July. From a technical perspective, it is hard to get excited about gold at the moment as it continues to chop between $1900 and $2000, and it has not seen the extremes in a month. It is near the middle of the range. The MACD has flatlined, and the Slow Stochastic appears in the middle of its range poised to turn down.
Oil: The sharp sell-off in US equities ahead of the weekend saw the November WTI contract snap a three-day nearly 10% rally. The oil rally had been fueled by optimism about the vaccine, a drawdown in US inventories (the lowest level since April), and signs of more pressure on past excess output by OPEC producers to make additional cuts. The week's 8.4% gain is the most since early June. The contract was bid above $41.20 before the weekend, which is the (61.8%) retracement of the drop since the late August high, before reversing lower. It held support near $40.50, and although the momentum indicators are still pointing higher, if that area gives way, it could signal another 2-3% decline.
US Rates: The US 10-year yield edged almost two basis points last week to 0.68%. The two-year yield was little changed at 13 bp. The implied yield of the December 2023 Eurodollar futures contract rose a single basis point to 37.5 bp. Net-net the FOMC meeting adding little new. It confirmed the average inflation target is dressed up forward guidance and was not backed up by any new measures. Under the current setting, the Fed itself does not see its objective being meet in the next couple of years. In the futures market, the December 10-year note looks comfortable between 139 and 140.
S&P 500: With the pre-weekend loss, the S&P 500 has retraced half of its Q3 gains. After posting an outside down day at the conclusion of the FOMC meeting on September 16, the index continued to sell-off. Recall that the S&P 500 gapped higher on to begin August. That gap is found between roughly 3272 and 3284. Below there is the next retracement objective (61.8%) near 3224. The poor close increases the risk of a gap lower opening on Monday. A bounce is likely to be held in check by another gap; the one created by the lower opening the day following the FOMC meeting. It is found between 3375 and 3384. The NASDAQ is extending its 10% decline. If 10% is seen as a correction, a 20% sell-off is seen as a bear market, which would put the NASDAQ near 9660, which is the low from June 29.