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The Greenback does Not Look Ready to Break Down Quite Yet

Summary:
The US dollar had a tough week, falling against all the major and most emerging markets currencies.  The weakness came in the face of higher US yields and a wider premium over most other high-income countries. The US 10-year yield almost 10 bp, the most in a couple of months to settle around 0.84%, after reaching the highest level since early June.   It did not seem so much like a risk-on/off story.  Equities slipped lower, and the S&P 500 snapped a three-week advance.  Europe's Dow Jones Stoxx 600 fell almost 1% last week and that was after a nearly 1% advance before the weekend to snap a four-day fall.  The UK-EU resumed trade talks, and the House Democrats saw progress in talks with the White House, but no breakthroughs were announced.  While somewhat more presidential, the last debate

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The Greenback does Not Look Ready to Break Down Quite Yet

The US dollar had a tough week, falling against all the major and most emerging markets currencies.  The weakness came in the face of higher US yields and a wider premium over most other high-income countries. The US 10-year yield almost 10 bp, the most in a couple of months to settle around 0.84%, after reaching the highest level since early June.   

It did not seem so much like a risk-on/off story.  Equities slipped lower, and the S&P 500 snapped a three-week advance.  Europe's Dow Jones Stoxx 600 fell almost 1% last week and that was after a nearly 1% advance before the weekend to snap a four-day fall.  

The UK-EU resumed trade talks, and the House Democrats saw progress in talks with the White House, but no breakthroughs were announced.  While somewhat more presidential, the last debate between Trump and Biden unlikely swayed many.  The pandemic has prompted many states to introduce or expand early voting, and before the weekend, more than 47 mln people have already voted (~128 mln voted in the 2016 presidential election). Some states like NY have begun early voting on October 24.   Some political analysts expected more than 70 mln people will vote before the election day proper on November 3. 

No decisive new developments in the macro, and the same is generally true for the dollar. It remains rangebound.  Of the currencies we track here, two may be exceptions to the range affair generalization.  The first is the Chinese yuan.  Defying conventional wisdom has continued to strengthen and reached its best level since July 2018 last week.  As a (heavily) managed exchange rate, it's appreciation must reflect Beijing's acquiescence.  Since the end of July, it has only fallen in three weeks.  The other exception is the Mexican peso.  The combination of large trade surpluses, strong worker remittances, and high real and nominal yields attract savings beyond what the domestic economy may justify.  In a world of low rates and more than $16 trillion of negative-yielding bonds, the one-month cetes offers almost 4.25% annualized yield.   Since the middle of the year, the peso is up nearly 10.2%, and its recovery not over.  It is still off more than 9% year-to-date.  

Dollar Index:  The Dollar Index is near the middle of the 92.00-94.00 range that has contained most of the price action since late July. The MACD has been trending low since the end of September.  Last week the Slow Stochastic looked to be turning higher, but this week it.  The five-day average remains below the 20-day moving average since crossing over earlier this month.  In the second half of last week, the euro flirted with the lower Bollinger Band (two standard deviations below the 20-day moving average).  With the ECB meeting approaching and dovish signals anticipated, and the Dollar Index weighted toward the euro and currencies that move in its orbit, continued range trading is the most likely scenario.

Euro:  The euro reached $1.1880 on October 21, its highest level since mid-September.  It backed off but held support at $1.1780 and recovered to $1.1860 ahead of the weekend.  The MACD and Slow Stochastic point to new highs near-term, but the air above $1.1900-$1.1920 may be too thin ahead of the ECB meeting.  The upper Bollinger Band will begin next week a little below $1.1870.  Moreover, with the surging virus, new shutdowns, earlier optimism on European growth surpassing the US, or that the underperformance of European equities was over, is being questioned. 

Japanese Yen:   The dollar's break down in the middle of last week saw it fall to about JPY104.35, its lowest level in a month.  Since the tumble, it has not been able to resurface above JPY105.  The momentum indicators suggest the pressure is still oo the dollar's downside.  The greenback appears to fall move on down days than it rises on an up day.  Here too, continued range trading is likely.

British Pound:  Although sterling did not sell-off much when the official rhetoric was that the UK-EU talks were off, it rally strongly when the signal was that talks would resume.  Sterling rallied from about $1.2940 to almost $1.3180, the highest level since September 7.  However, little new substance has emerged from the talks, and sterling has drifted lower and gave back more than the (61.8%) retracement found near $1.3030. The momentum indicators are not generating particularly strong signals. Sterling finished on session lows.  Support is seen in the $1.2940-$1.2980 band. 

Canadian Dollar:  The US dollar dipped below CAD1.31 briefly in the middle of last week but spent the bulk of the time above there but below CAD1.32.  It finished the week near the middle of the range. The MACD continues to gently trend lower as it had since late last month.  The Slow Stochastic has flatlined. This month's downtrend line comes in near CAD1.3165 at the start of next week.  A convincing close below CAD1.31 would signal a test on the September low near CAD1.30.  Some are talking about a possible head and shoulders pattern with a neckline around CAD1.31 that would project toward CAD1.28.  While sympathetic to the bearish US dollar view,  such a pattern is more often seen as a reversal pattern rather than a continuation pattern. 

Australian Dollar:  Support near $0.7100 held last week (actual low near $0.7020), reinforcing the importance of that area from a technical perspective. It was also the low in September.  For about a month, the Aussie has chopped in a $0.7000-$0.7200 range for the most part, though the October high was a little above $0.7240.  The momentum indicators look poised to turn higher.  However, we suspect the market will be cautious ahead of the November 2 central bank meeting, where easing cannot be ruled out.  Note that Australia's 10-year bond yield rose 10 bp last week, and once again, its benchmark yield is above (albeit barely) the US.  

Mexican Peso:  The peso has appreciated by 10.2% since the end of H1 and leads the world.  The gains have been persistent.  The peso has fallen in only two weeks over the past three months.   It has risen in seven of the past eight sessions.  The dollar finished the week a little above last month's low (~MXN20.8450).  The Slow Stochastic is moving sideways in its trough in oversold territory.  The MACD continues its month-long descent.  The outside down day on October 22 saw follow-through dollar selling ahead of the weekend, and the close was on the low.  There may be potential toward MXN20.65 in the next couple of weeks, provided the broader risk environment is conducive.  

Chinese Yuan:  A four-day rally in the yuan ended on October 22, and it closed essentially flat ahead of the weekend.  The PBOC has reduced the reserve requirement for forwarding transactions and has signaled it will increase the quota for foreign portfolio investment under the Qualified Domestic Institutional Investor program.  It makes sense to make such moves when the yuan is strong.  Last week's low may mark the beginning of a corrective/consolidative phase.  The magnitude of the dollar's bounce may offer insight into Beijing's intentions.  During next week's plenary session of the Central Committee, it may be desirable to keep the yuan off the headlines.  We suspect guess that there is scope toward CNY6.72. 

Gold:   The gains scored in the first part of the week were unwound in the second half, leaving gold little changed on the week.  It rose less than 0.15% last week to about $1902.  The attempt to rally stalled near $1931.40, a little shy of the previous week's high (~$1933.30) and in front of the upper Bollinger Band. This month's price action has been confined to a nearly $30 range on either side of $1900.  The momentum indicators are not helpful. The rising Treasury yields and heavier stocks probably did it no favors. 

Oil:   The push to almost $42 a barrel by the December WTI contract on October 20 set a new high for the month but stalled. The subsequent sell-off extended a little beyond $39.60 ahead of the weekend.  The $39.40 area corresponds to a (50%) retracement objective of the rally from the month's low (~$36.95 on October 2) to last week's high.  The next retracement objective (61.8%) is around $38.85.  The Slow Stochastic has rolled over in over-extended territory.  The MACD also appears to be turning.  While the virus raises new demand concerns, Libya's production is coming back, as is Alberta's.  The US oil rig count has risen for five consecutive weeks.  It is the longest streak in a couple of years.  

US Rates:  The US 10-year yield rose almost 10 bp last week after slipping a little ahead of the weekend to end a six-day rally.  The yield traded above the 200-day moving average (~0.86%) for the first time since last 2018.  A five-day spike in early June saw the 10-year rate rise to 0.95%.  The momentum indicators on the December note futures allow for additional losses but are over-extended.  A move back above 138-16 would help stabilize the tone.  In yield terms, 0.78%-0.80% may offer near-term value.  The two-year yield is firm near 15 bp, and most of the backing up of the long-end translates into yield-curve steepening. The 2-10-year curve reached 70 bp, the steepest since Q1 18.  The rise of the long-end yields and the steepening curve could be the result of rising inflation expectations.  But it does not look clean.  For example, the 10-year breakeven is down two basis points to about 1.75% since the end of August, while the 10-year Treasury yield is up roughly 12 bp.  On the other hand, the breakeven has risen by 17 bp this month, and the yield is up almost 20 bp. The FOMC is unlikely to take fresh steps when it meets on November 5, but investors will be keen to see if officials are thinking about lengthening the maturities of the Treasuries it is buying and what they make of the rising yields at the long-end.  The temptation is for them to believe it is their average inflation target forward guidance that is being reflected, which means they can be content to let it develop.  However, it could also be real and anticipated supply, which could be more troublesome and less supportive of the US dollar.  

S&P 500:  The benchmark drifted recorded nearly three-week lows on October 22 near  3415 and recovered smartly.  It was confined to a narrow range ahead of the weekend and also closed on its highs.  It stopped at the (38.2%) retracement objective of the decline from the October 12 high near 3450.   The next retracement (50%) is around 3483, and then (61.8%) by 3499.  Although the momentum indicators are still trending lower, the price action of the last two sessions suggests a reasonable chance the two-week decline that followed the three successive gap higher openings may be complete.  A loss of 3400 would likely signal a deeper and longer correction.  


 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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