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A Closer Look at the Price Action

Summary:
The most promising news of a vaccine to ward off Covid-19 became a new force shaping the investment climate.  The dollar did well after suffering broadly in the prior week.  The notable exception was the New Zealand dollar, which was bolstered by the unwinding of expectations that the central bank would adopt a negative target rate. Sterling's gains ahead of the weekend were sufficient to settle positive, albeit barely,  on the week.   The US dollar fell to a new low for the year against the Canadian dollar (~CAD1.2930) at the start of the week but recovered to and recouped about half of what it slows since late October.   News of the progress toward a vaccine spurred a dramatic sell-off in the Swiss franc and Japanese yen.  The dollar had fallen to new lows for the year against the Swiss

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A Closer Look at the Price Action

The most promising news of a vaccine to ward off Covid-19 became a new force shaping the investment climate.  The dollar did well after suffering broadly in the prior week.  The notable exception was the New Zealand dollar, which was bolstered by the unwinding of expectations that the central bank would adopt a negative target rate. Sterling's gains ahead of the weekend were sufficient to settle positive, albeit barely,  on the week.   The US dollar fell to a new low for the year against the Canadian dollar (~CAD1.2930) at the start of the week but recovered to and recouped about half of what it slows since late October.   

News of the progress toward a vaccine spurred a dramatic sell-off in the Swiss franc and Japanese yen.  The dollar had fallen to new lows for the year against the Swiss franc, and the greenback had broken below JPY104 support that had held since March.  The dollar finished the week around 1.5% higher against the Swiss franc and 1.2% better against the Japanese yen.  The vaccine made gold look less attractive, and the precious metal dropped almost 6% on the news. Although its gains were pared with a nearly 1.3% gain in the last two sessions, it still finished around 3%  ($60) lower on the week.   

Dollar Index: At the end of last week, we suggested the dollar's sell-off had been a bit too fast, and we cautioned about playing for a breakout.  The Dollar Index made a marginal new low to start the week but recovered and recouped half of what it lost from the election-day high (~94.30) to last week's low on November 9 (~92.15), which was also around the 20-day moving average.  That retracement objective is near 93.20, and the next one (61.8%) is almost 93.50.  The MACD hardly moved last week, but the Slow Stochastic is turning up.  Continued consolidation would not be surprising, and this can make for some choppy activity. 

Euro:  A wall of selling greeted the euro when it poked above $1.19 at the start of the week.  Follow-through selling saw it dip below $1.1750 in the middle of the week before new buying emerged.  It finished the week above the midpoint of the $1.16-$1.20 five-month trading range.  The MACD is slowly rising from its trough, the Slow Stochastics have turned down.  Immediate resistance is seen in the $1.1835-$1.1845.  A break of the $1.1770 area now warns of a test on $1.1700-$1.1725.  

Japanese Yen: New of the extraordinary preliminary results of Pfizer's vaccine sent the dollar screaming higher.  It rallied from about JPY103.20 to about JPY105.65, where it ran out of steam, though it managed to make a marginal new high a couple days later.  By the end of the week, the dollar had retraced (38.2%) of the rally (~JPY104.75) to approach the halfway point near JPY10.45.  Still, the dollar snapped a four-week slide with around a 1.2% gain. The downtrend line drawn off the July, August, and October highs (now around JPY105.45) was frayed but appears to be holding. A question that faces short-term trades is the JPY104 area holds support.  It did previously and now also hold the (61.8%) retracement objective and the 200-week moving average. The MACD looks like it is rolling over, while the Slow Stochastic is still accelerating to the upside. The sense from the charts is that dollar resistance may be stronger than support. 

British Pound: Sterling rallied from a low around $1.2855 on November 2 to about $1.3310 on November 11.  The subsequent drop saw it give back almost half of its gains as it tested the $1.31 area in the second half of the last week.  The MACD and Slow Stochastics appear poised to turn lower.  With the UK-EU trade talk deadline at hand, one-week implied volatility is firm near 10.5% (three-month implied vol is a little above 9.3%.  In the middle of last week, the euro traded at six-month lows against sterling (~GBP0.8860), but on the back of a hammer candlestick pattern, the euro snapped back to GBP0.9000 and consolidated a little below it ahead of the weekend. 

Canadian Dollar:  After recording new lows for the year (~CAD1.2930) on November 9 against the Canadian dollar, the greenback traded higher for the next four sessions.  It set the high for the week ahead of the weekend near CAD1.3175.  This is a little more than the (50%) retracement of the down move from late October that began near CAD1.3400. The momentum indicators are constructive, and the next (61.8%) retracement is found around CAD1.3215.  Above there, and the CAD1.33-area may be a magnet.  Support is seen around CAD1.31.  

Australian Dollar:  As we have seen with the other major currencies, the Aussie's high was set on Monday. It then corrected lower and found new buying on the pullback.  The high near $0.7340 was the best in nearly a month and the pullback held above $0.7200, which is roughly the (38.2%) retracement of the rally since the dip below $0.7000 at the start of the month.  A move above $0.7300 would lift improve the outlook.  The MACD is slowly rising, but the Slow Stochastic has rolled over in over-extended territory.  The Aussie has been trading largely between $0.70 and $0.74 since mid-July.  

Mexican Peso: The dollar made a new eight-month low against the peso to begin the week near MXN20.00. Corrective forces lifted the dollar, and even the central bank's unexpected decision not to cut rates did not help the peso.  Ahead of the weekend, though, the greenback posted a key reversal by making a new high for the move and then selling off to close below the previous day's low. A break below MXN20.28 will signal a running start at the MXN20.00 level.  The momentum indicators are not very helpful now but seem to favor the dollar's upside.  The lower Bollinger Band will begin the new week near MXN20.2350.  

Chinese Yuan: The dollar edged slightly lower against the yuan last week.  It hit a low near CNY6.5640 last week, its lowest level since mid-2018.  However, it spent most of the week between CNY6.60 and CNY6.6350.  The fixings have become more predictable. There is already talk of CNY6.45-CNY6.50.  The yuan has appreciated against the dollar in all but four weeks here in H2 20, and when it has had a counter-trend setback, the losses were limited to around 1.5%. 

Gold:   The precious metal was trading near one-month highs (~$1965) before the Pfizer news broke and sent it down like a ton of bricks.  It closed below the previous session's low for a key downside reversal, hitting nearly $1850.  There was no follow-through selling. The upticks were capped near the (38.2%) retracement of the plunge, found near $1895.  The MACDs drifted a little lower but going nowhere quickly.  The Slow Stochastics are still moving lower.  Resistance is seen in the $1900-$1910 area. 

Oil: The price of oil spiked in the initial enthusiasm over a vaccine, which was seen as a favorable demand shock. At the same time, OPEC+ was talking about postponing its boost in output slated for January.  The December WTI contract rallied from around $37.20 to a two-month high above $43.  It recorded a bearish shooting star candlestick, and follow-through selling saw it approach $40 before the weekend, which is about the (50%) retracement of last week's advance.  The next retracement (61.8%) is found near $39.35, which also is around where the 200-day moving average comes in (~$39.45) and the 20-day moving average (~$39.25). The uptrend of the momentum indicators remains intact despite the heavier tone in recent days.  

US Rates:  The US 10-year yields reached 0.97% last week, the highest level since March.  Consolidation was the feature after the midweek Veterans Day holiday, and the yield pulled back to around 0.86% ahead of the weekend.  The prospects of a vaccine helped create a concession for the US quarterly refunding.  Given the numerous developments, including the election and the vaccine news, if we step back, the 10-year yield is net-net up less than two basis points since the end of October at 0.89%.  What of inflation expectations as measured by the 10-year breakeven?  It is up two basis points since that end of last month at almost 1.73%.  Over the past month, the US 10-year premium over Germany has risen by nine basis points, seven against the UK, and 16 against Japan.  The US discount to China has narrowed by nine basis points.  The short-end is more anchored by the central banks and the US premium at the two-year widened by 3-5 bp, though its discount to China widened by eight.  

S&P 500:  The S&P 500 gapped higher on Monday and raced to a new record high before staging a dramatic reversal dropping more than 330 points to settle on its low.  A gap lower opening the following day saw Monday's gap close, but bargain hunters returned close above the open encouraged overnight buying and a gap higher in the middle of the week.  The bounce stalled at about the (50%) retracement near 3580.  A retest on the lows Thursday proved successful, and the 3500-level held.  A firmer tone was seen ahead of the weekend, and the S&P 500 was back around 3580.  Recall the previous high was around 3588.  The real story last week may be a rotation.  The high-flying NASDAQ fell last week (~ -0.75%), while the Dow Jones Industrials rose by almost 2%, and the Russell 2000 jumped 6%.   



  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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