The Dollar May be at an Inflection Point

The dollar’s inability to gain after the much stronger than expected March employment data may have encouraged a bout of profit-taking. Next week offers a test on the hypothesis that the dollar-bullish divergence meme has been fully discounted. After a brief hiatus, US coupon sales will return ($110 bln), and a string of high-frequency data is likely to confirm an acceleration of prices and activity.

On balance, we expect the US dollar and long-term interest rates to rise next week. US rates fell, with the 10-year yield falling to two-week lows near 1.60%. This means that there is no concession to next week’s supply that begins with a $58 bln sale of three-year notes on Monday. The US will be raising $110 bln in coupon sales, while the data will likely show a jump in prices (base effect and more).

There will also be a surge in real sector data, partly reflecting the recovery from February’s weather-induced weakness and the new stimulus. Meanwhile, new restrictions in Japan and Europe mean that divergence with the US may extend deep into Q2. In fact, if the dollar does not trade higher next week, the bears, who seemed to go into hibernation in Q1, will re-emerge on ideas that investors are moving beyond its focus on the stimulus-driven US recovery and yawning divergence.

Dollar Index

Last week’s pullback met the (38.2%) retracement target of the leg up since the late February low (~89.70) found near 92.00. A convincing break could signal a return to the 91.00-91.30 band. A move now above the 92.50 area would lift the tone, with an initial target in the 92.85-93.00 band, and, perhaps, to the five-month high set at the end of last month closer to 93.50. The MACD and Slow Stochastic point lower, while the RSI is turning higher. The 200-day moving average, which the Dollar Index begins the new week a bit above, is found around9 2.35. The recent decline has seen the five-day average slip below the 20-day moving average for the first time in a little more than a month.

Euro

The outside up day on April 5, which seemed to complete a small head and shoulders pattern with the close above $1.18. It set the technical tone for the rest of the week, and the euro met the minimum objective of a bit more than $1.19. However, disappointing European industrial production figures and a jump in US rates (before the US PPI jump that was twice the median forecast in Bloomberg’s survey) stalled the euro’s recovery.

A little shelf has emerged near $1.1860. A bit lower is the (38.2%) retracement of the bounce since the end of March and the 20-day moving average (~$1.1840). A break of the $1.1790-$1.1800 area would signal a retest on $1.17. Some think a new range may be emerging, roughly $1.17-$1.20.

Japanese Yen

The 15 bp decline in the US 10-year yields from its March 30 peak above 1.77% seemed to drag the dollar lower against the yen. Speculators in the futures market had jumped with both feet into short yen positions. The gross short yen position by non-commercials jumped from 13.3k contracts, a multi-year low, in the first half of January to 84.7k contracts as of April 6. Last week was only the third (weekly) decline in the dollar since the end of January.

The dollar peaked in the last session of Q1, just shy of JPY111.00. It hit JPY109 on April 8 before jumping back to almost JPY110 ahead of the weekend as higher US (and China) inflation lifted yields. The JPY110.20 area is the next retracement (61.8%) of the dollar’s pullback. It takes more than a pre-weekend dollar bounce to turn the momentum indicators. A break of last week’s low could spur a move toward the JPY108.30-JPY108.40 area.

British Pound

Sterling fell for the fifth week of the past seven. It flirted with the lows from late March, near $1.3670 ahead of the weekend, before recovering back to almost $1.3750. The MACD remains in its trough, while the Slow Stochastic is turning lower from the mid-range. The five-day moving average has held below the 20-day since early March. Cable also appeared influenced by the dramatic recovery of the euro against sterling. The euro fell to its lows level since March 2020 against sterling at the start of last week (~GBP0.8470).

It recovered smartly to almost GBP0.8700 before the weekend, which corresponds to the (38.2%) retracement of the leg lower that began on January 6 near GBP0.9085, where it met strong selling pressure. It was the biggest euro advance against sterling in about seven months. While we cast a jaundiced eye over many seasonality claims in the foreign exchange market, we note April tends to be a good month for sterling. In the past 20 years, sterling has risen in 17 Aprils. However, May is cruel and sterling has fallen in 16 of the past 20 years in May.

Canadian Dollar

The US snapped a three-week advance against the Canadian dollar that lifted it from a three-year low (~CAD1.2365) to around CAD1.2650 at the end of March. That late March high was retested last week. A robust Canadian jobs report blew away expectations and gave the Loonie a bid. The greenback settled on its lows, and a break of CAD1.25 will open up the downside.

The MACD is trying to turn lower, while the Slow Stochastic already has rolled over. The Bank of Canada meets on April 21. Even though Ontario has reintroduced social restrictions, and the excess fatalities in Canada may rival the US on a per capita basis, the central bank will likely be increasingly confident of a strong economic rebound.

Australian Dollar

The Aussie peaked in late February at a little over $0.8000. It fell to around $0.7600 and has spent most of the past three weeks confined to around a half of a cent range around it. While there appears to be little momentum, the MACD is trying to turn up from overextended territory, and the Slow Stochastic is already trending higher.

Upticks last week were capped by the 20-day moving average, which begins the new week near $0.7660. Australia lost around 350k full-time positions from March through June last year. In the eight months since, it has recouped them all, plus. On the other hand, the unemployment rate was at 5.8% in February, up from 5.1% at the end of 2019. The March figures are the highlight of next week’s data.

Mexican Peso

The dollar eased by around 0.7% against the peso last week. It was the second consecutive weekly decline and the fourth in the past five weeks. This largely mirrors the performance of the JP Morgan Emerging Market Currency Index. Mexico reported a jump in inflation (CPI 4.67%, up from 3.76% in February, and the bi-weekly readings warn it may not have peaked. Mexico also reported a 0.4% rise in industrial output (economists had projected a decline).

A recovery in auto production and sales seems to be critical and linked to the strengthening US economy. The greenback peaked in early March near MXN21.6350 and last week recorded a low around MXN20.0650, its lowest level in almost two months. The move is stretched. The MACD is at its lows for the year, while the Slow Stochastic is poised to turn higher from oversold terrain. The MXN20.40-MXN20.50 area offers the first hurdle for a dollar bounce.

Chinese Yuan

The yuan rose for the first time against the dollar in seven weeks. It has completely unwound its earlier gains and is now off about 0.4% for the year. More trackers of flows into different funds are seeing outflows from Chinese bonds. The yuan’s weakness seems to be fundamentally driven, and the PBOC is not leaning hard against it. Last week, the dollar traded inside the previous week’s range (~CNY6.54-CNY6.58).

The offshore yuan is a little softer than the onshore yuan, which is understood as offering insight into the direction of the underlying pressures. Beijing is expected to report lending figures, trade, investment, retail sales, and industrial production figures for March, culminating in the first look at Q1 GDP. The economy has lost some of its mojo, and the median forecast in Bloomberg’s survey projects that growth nearly halved from the Q4 20 pace (2.6%) to around 1.4%.

This article was written by Marc Chandler, MarctoMarket.

Market Pushes First Rate Hike into 2022

US futures are pointing higher, led by the Dow, while the NASDAQ lags. The US 10-year yield is little changed after surging before the weekend on the back of the stronger than expected employment report. It is hovering around 1.71%. The dollar is narrowly mixed. Sterling is the strongest, rising above last week’s high and knocking on resistance near $1.3880, the top of a two-week range. The dollar-bloc currencies are also firm.

European currencies, including the Scandis, euro, and Swiss franc, are the laggards. Emerging market currencies are also mixed, leaving the JP Morgan Emerging Market Currency Index a little changed after rising by about 0.35% last week. Gold is softer, holding below $1730 in quiet turnover. OPEC+ decision to boost output is weighing on oil prices today. May crude that closed at $61.45 is now more than a dollar lower. The low for the second half of last week was closer to $58.85.

Asia Pacific

When the IMF announces its updated forecasts tomorrow, there will likely be two drivers. The US fiscal stimulus is significant, and so is the recovery of China’s economy. The weakness seen in China’s service PMI readings was attributed to uneven recovery that favored supply over demand. That was partly a reflection of asynchronous activity. The service PMI has picked up, and this could signal that the world’s second-largest economy is seeing a broadening of economic activity.

Separately, the State Administration of Foreign Exchange report last year’s capital inflows. They were nearly evenly divided between direct (~$265 bln) and portfolio ($255 bln). That said, note that direct investment may include retained earnings, not just acquisitions or greenfield investment. While direct investment rose by 14%, portfolio flow surged by 73%, as global benchmarks including China’s asset market. Flows into the bond market dominated portfolio flows, rising 86% to $190.5 bln.

Foreign investors bought more than $64 bln of Chinese shares. However, China is also a larger exporter of savings too, and SAFE reported that China’s financial accounts were in deficit for the first time since 2016. There are three channels. First, Chinese investors are diversifying savings offshore, buying foreign bonds and stocks. Second, there is outbound foreign direct investment, and third, banks have expanded their foreign loans and deposits.

Saudi Arabia feels sufficiently confident in the outlook for Asia’s recovery that it announced it will boost prices next month. Aramco will raise the premium over the benchmark for Arab light by 40 cents to $1.80. The increase is a little more than expected. On the other hand, Aramco announced it was cutting the premium to Europe by 20 cents. The 10-cent cut in the premium on most oil grades sent to the US may say something about the competitive environment.

The dollar is in a narrow range against the yen (~JPY110.50-JPY110.75) as the market consolidates recent gains. There is an option at JPY111.00 for $460 mln that expires today. The pre-weekend low was a little below JPY110.40. The Australian dollar has fallen in five of the past six weeks but is flattish today, near $0.7620. Resistance is seen around $0.7640, and initial support near $0.7600 has been tested. The offshore yuan is quiet, with mainland markets closed but a touch lower for the third consecutive session. It has fallen for the past two weeks.

Europe

While France’s survey data is holding up better than expected, the government chopped this year’s growth forecast to 5% from 6% due to the tighter social restrictions. Macron, well aware of his slump in the opinion polls, wanted to avoid a new nationwide lockdown. The mutations and spreading contagion have proved too much. The French economy contracted by a little more than 8% last year. Maron may have also been assuming funds from the EU. At the end of March, the German constitutional court stepped in to hear a challenge after the EU plan was widely supported in both chambers of parliament. The process is paralyzed for at least the time being, and this means that countries, including France, cannot count on the assistance.

The UK is about to enter a new phase in combatting the virus. In a speech later today, Prime Minister Johnson will launch a program to encourage everyone in England to take a coronavirus test every two weeks. Free kits will be widely available. Nearly all adults have had at least one jab (31.5 mln). The next phase in lifting social restrictions is set for a week from today. A covid-status certification (“passport) will be developed and could help expedite the re-opening of sporting events, theater, and clubs.

Turkey reported inflation accelerated last month. The 1.08% increase in March follows the 0.91% increase in February. The year-over-year rate stands at 16.19%, up for the sixth consecutive month and the highest level July 2019. The core rate is even higher at 16.88% and more than 0.5% above expectations. Producer prices also soared. The 4.13% monthly gain was near twice expectations and lifts the year-over-year rate to 31.2%. Rising energy prices and the weak lira appear to be the main culprits. Separately, military officers reported pushed back against President Erodgen’s Black Sea policy.

After pulling out of the international convention to protect women last month, there is suspicion that Erdogan is considering withdrawing from a 1936 treaty that regulates passage from the Mediterranean to the Black Sea. At least ten former admirals were detained. The lira is a little firmer today. It fell by 10% last month following the former governor of the central bank’s dismissal after a 200 bp rate hike. Today’s inflation report will make it harder to reduce rates at the April 15 CBRT meeting.

The euro approached $1.17 at the end of March and traded to about $1.1785 ahead of the weekend. Unable to resurface above $1.18, it is under a bit of pressure following the strong US jobs report and the new lockdowns in Europe. There is a 210 mln euro option at $1.18 that expires today and one ten-times bigger that expires tomorrow. The market is poised to rechallenge the lows. Sterling is firm and rose above last week’s high (~$1.3855) to its best level in two weeks ($1.3870). However, sellers emerged ahead of the $1.3880 resistance, and a return into the $1.3820-$1.3840 comfort zone is likely.

America

The March US employment data quantified what we have all known, and that is that the world’s largest economy is accelerating. The 916k increase in non-farm payrolls was well above most expectations, and the January and February job growth was revised higher (+156k). The report, coupled with the surge in auto sales (17.75 mln, two million more than in February and more than million above the median expectation in Bloomberg’s survey), likely sets the tone for the upcoming high-frequency data. Moreover, the early projections call for job growth to possibly continue to accelerate this month as the vaccine rollout broadens and more people return to their jobs. The US lost about 22.4 million jobs last spring, and roughly 14 mln people have returned to work. That leaves employment around 8.4 mln lower than in February 2020.

Interest rate futures appeared more volatile than usual after the employment report, which when the equity market is closed may not be surprising. Of note, the December 2022 Eurodollar futures contract was sold aggressively, and the implied yield settled at 56 bp, the highest in a year. The June 2021 contract implies a 17.5 bp yield. This would seem to be consistent with a rate hike, which the median Fed forecast does not expect until after 2023, by the end of next year. The December 2022 Fed funds futures contract implied a 31.5 bp yield, up from 12.5 bp implied in this month’s contract.

Today, the US economic calendar is busy with the final Markit services and composite PMI, the ISM services, and factory and durable goods orders. Only the ISM represents new news, as the flash PMI and preliminary durable goods orders steal most of the thunder. The conviction that the US economy is accelerating will not be challenged by high-frequency data given the strength of the employment data, auto sales, and fiscal stimulus in the pipeline. Canada has a light week of data, but what it does report is important.

In addition to trade and IVEY’s PMI, it reports March jobs data. Another robust report could fuel speculation that the Bank of Canada could change its forward guidance regarding its asset purchases (at the April 21 meeting). Mexico reports worker remittances (larger than its trade surplus) and the manufacturing PMI (remains below 50 boom/bust level). The week’s highlight is the monthly CPI report on April 8. It is likely to confirm the bi-weekly readings that put inflation above the central bank’s 2%-4% and encouraging investors to give up ideas of another rate cut.

The Canadian dollar is edging higher today after slipping ahead of the weekend. The US dollar recorded its low for last week just before strong US employment figures near CAD1.2530. Resistance was encountered ahead of CAD1.2600 before the weekend and earlier today. A retest on the CAD1.2530 area, and possibly CAD1.2500, is likely in the next day or two. Meanwhile, the greenback took out March’s lows against the Mexican peso last week, but the downside momentum is stalling near MXN20.26-MXN20.27. A move above MXN20.35 could signal a move toward MXN20.50. The US dollar fell by about 1.3% against the peso last week.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Big Week Begins Quietly

Europe’s Dow Jones Stoxx 600 ended a four-day advance ahead of the weekend but has come back bid today, led by consumer sectors and info technology. Utilities are the only sector lower in the European morning. US futures are slightly higher. The US 10-year benchmark yield is little changed near 1.61%, while European yields are mostly 1-2 bp lower. Australian and New Zealand bond yields rose (nine and 11 basis points, respectively) after the jump in Treasuries before the weekend.

The US dollar is mixed against the majors, with the New Zealand and Canadian dollars, and sterling a bit firm, and the Swedish krona, euro, Australian dollar, and yen trading heavier. Emerging markets currency are mixed, and the JP Morgan Emerging Markets Currency Index is little changed after slipping by around 0.4% at the end of last week. Gold is slightly firmer, near $1730. Last week’s low was near $1677, and the high was almost $1740. Light sweet crude for May delivery is trading around a 45-cent range on either side of $66 a barrel. Last week’s high was around $67.80.

Asia Pacific

China reported January and February data combined, and an uneven recovery remains evident. On the surface, it looks as if industrial production and retail sales were stronger than expected, rising 35.1% and 33.8% above year-ago periods, respectively. Fixed asset investment was a bit softer than anticipated at 35.0% (instead of nearly 41%), and the surveyed unemployment rate of 5.5% was higher than projected. It appears that retail sales in February were particularly soft (~0.6%), underscoring the weakness of the holiday period. Strong metal output (e.g., aluminum and steel) and coal and gas boosted industrial output.

Japan reported that January core machine orders fell 4.5%, ending a three-month increase. The series is seen as a lead indicator for capital expenditures, and the weakness is consistent with a sluggish start to the new year. Separately, Japan reported its tertiary index fell by 1.7% in January, much weaker than the 0.6% decline anticipated. Tokyo itself remains in a state of emergency until the end of the week, and the criteria for lifting restrictions have been tightened. Tomorrow, Japan reports January industrial output figures and February trade figures on Wednesday. The February CPI and BOJ meetings are the week’s highlights.

While the US was tightening the restrictions on sales to Huawei at the end of last week, a federal judge blocked efforts to prohibit Americans from investing in Xiaomi because of claims it has links to the Chinese military. The prohibition was to come into effect now, but the temporary stay was granted to the company for what it claimed was “arbitrary and capricious” that denied its due process. The threat was real and substantial as Xiaomi could have been de-listed from US exchanges and dropped from global benchmarks.

The presiding judge seemed skeptical that national security was at stake, though traditionally, the executive branch is given a wide berth here. Recall that latitude granted allowed steel and aluminum tariffs to be levied on long-time allies, including Canada, Europe, and Japan. Xiaomi is the world’s third-largest smartphone producer, and its Q3 20 sales surpassed Apple’s iPhone sales (according to International Data Corporation estimates).

The dollar rose about JPY109.35, its best level since last June in late Asian turnover before pulling back. It found fresh bids in early European turnover ahead of JPY109.00. Support is seen around JPY108.80, though last week, the greenback carved out a shelf near JPY108.35. The Australian dollar is consolidating and is little changed, around $0.7755.

A move above $0.7800, where it stalled at the end of last week, would lift the tone and signal a re-test on the $0.8000 area seen at the end of February. The PBOC fixed the dollar at CNY6.5010, slightly firmer than expected. The central bank’s injection of CNY100 bln via the medium-term lending facility matched the amount coming due tomorrow. It did the same with the CNY10 bln injection through the seven-day repo facility. The PBOC continues to with neutral policy.

Europe

Between the slow rollout of the vaccine, the extended lockdowns, the scandals, with the latest involving the CDU/CSU over a deal for facemasks, voters German voters are frustrated. Support for the CDU slipped by 2.9 percentage points compared with the last election in 2016 in Baden-Wuerttemberg to 24.1%. It managed to come in second behind the Greens (again). The Green’s support edged higher (+2.3 points to 32.6%), while the SPD, FDP, and AFD fought for third place. Still, the outcome may be good enough to keep the CDU in the state coalition lead by the Greens, but it seems more fluid.

In Rhineland-Palatinate, support for the CDU fell by 4.1 percentage points to 27.7%. The SPD’s slipped by around 0.5 percentage points to 35.7% in its stronghold and will likely continue to lead the governing coalition with the Greens and FDP. On the national-level, Bavarian Premier Soder and CSU leader appear to have a slight lead over the new CDU head, Laschet. The situation is fluid, and a decision on who will be the candidate for Chancellor in the September general election is expected to be made next month.

Sweden’s February CPI was softer than expected, and this kept the pressure on the krona. The 0.3% headline rise was half what economists projected, and the year-over-year rate was unchanged at 1.4% instead of increasing. The underlying rates, which use a fixed interest rate, and one that excludes energy, were softer than expected at 1.5% and 1.2%, respectively.

This contrasts with Norway, where the central bank meets later this week and is expected to reaffirm that it is likely to raise rates next year. Separately, Russia and Turkey’s central banks meet this week, as well. Russia may ratchet up its rhetoric and signal plans to adjust policy after higher than expected inflation readings. Many now look for a hike in Q2. Turkey’s central bank is expected to hike the one-week repo rate 100 bp to 18% when it meets on March 18.

Early last week, the euro bounced off the $1.1835-area but stalled at the end of the week, just shy of the $1.2000-level. It is trading heavily today but inside the pre-weekend range that extended to $1.1910. In early European turnover, the euro met sellers near $1.1940. This area will offer resistance in North American dealings. There is an option for 1.4 bln euros at $1.19 that expires Wednesday and another for 1.2 bln euros at $1.20 that expires the same day.

Sterling is also trading inside the range seen at the end of last week (~$1.3865-$1.4005). Today’s session high (~$1.3950) was seen in Asia and early Europe, and both times sellers lurked. The downside may be explored in early North American turnover. The Bank of England meeting is the UK highlight of the week. It is not expected to do anything, but Governor Bailey is expected to push against an early rate hike.

America

The busy week begins slowly with the March Empire State manufacturing survey (a slight rise is projected) and the Treasury’s International Capital (TIC) report. The data highlights are expected to include somewhat slower retail sales and industrial production in February from the surge (5.3% and 0.9%, respectively) in January. However, the focus is squarely on the midweek conclusion of the FOMC meeting. It is not so much what the Fed will do as what it will say. Treasury Secretary Yellen reiterated that the US may return to full employment with the new fiscal stimulus measures next year.

In the Fed’s December economic projections, only one official anticipated that a hike would be appropriate in 2022, and only five thought a rate would be appropriate by the end of 2023. Given the fiscal stimulus in the pipeline and the upward revisions to growth, the Fed’s view seems dated. Looking at the implied interest rate of three-month Eurodollar futures, the market appears to be pricing in the first hike in the second half of next year. The March 21 contract that expires this week implies a 19 bp yield, while the June 22 contract implies 25.5 bp, and the December contract is almost at 45 bp.

Canada’s February employment report released before the weekend was better than hoped. The pace of full-time growth accelerated (88.2k vs. 12.6k), and the lion’s share of part-time workers who could not work in January returned in February (171k vs. -225k). The participation rate was steady at 64.7%, while the unemployment rate dropped to 8.2% from 9.4%.

This week’s highlights will include firm February CPI and a soft January retail sales report. January’s underlying inflation rates (trimmed and median core) have already been revised to 2%. It is a helpful reminder that countries can experience price pressures at different stages of recovery. Although we waivered when Governor Macklem suggested that the zero bound was above zero, but below the current target of 25 bp, the Bank of Canada is likely to be among the first major central banks to taper its bond-buying this year.

The Canadian dollar is trading at new three-year highs against the US dollar as it extends last week’s 1.5% gain, the strongest among the majors. The strong employment data reinforced ideas that the Bank of Canada will provide new guidance next month. The US dollar closed below CAD1.25 last week, and there appears to be little chart support ahead of CAD1.2350, though CAD1.2400 may slow the move. The greenback is trading softer against the Mexican peso but above the MXN20.5850-MXN20.5900 lows seen at the end of last week.

Those lows correspond to roughly the (61.8%) retracement objective of the dollar’s rally since mid-February. A break could see MXN20.30 quickly. While many are debating whether Banxico can cut rates at the March 25 meeting, there is more agreement that Brazil’s central bank will hike the Selic Rate by 50 bp to 2.50% in the middle of the week.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

FX Price Action: Beginning or End of the Punch?

Although the price action has felt choppy, a few trend moves have been underway. Consider that US Treasury yields (3yr through 30yr) have moved higher for the sixth consecutive week. The CRB Index rose for the seventh consecutive week and has only fallen one week this year. It is up over15.5% so far this year. Crude oil consolidated in recent days after rising dramatically since the bottoming on November 2 (The outcome of Georgia’s special election that gave the Democratic Party its parity in the Senate is not even identifiable on the chart of oil or bonds).

The dollar finished the week on a firm note. Divergence has been underlined. The ECB’s intention to (significantly) step-up bond purchases, while the US goes from a $1.9 trillion fiscal stimulus measures to initiating infrastructure negotiations that could be as large as the stimulus. On top of that, an executive order forces states to ensure that all willing adults can be vaccinated in early May. Still, the dollar’s advance seems mature. Against many currencies, the nadir was reached in the first week of January.

Dollar Index:

On last week’s pullback, the Dollar Index largely held the (38.2%) retracement objective of this month’s rally, which came in near 91.40 (actual low ~91.36) and bounced. It stalled in front of 92.00. A move above there signals a retest on the 92.50 area seen earlier in March. We had suggested a 92.75 measuring target from a bottoming pattern and note that the 200-day moving average is near 92.85 now. The momentum indicators are elevated and may be rolling over but do not stand in the way of a marginal new high.

Euro:

The single-currency extended its post-US job report losses in the first part of last week, falling to almost $1.1835. It rebounded to about $1.1990, which corresponds with the (38.2%) retracement objective of the downtrend since the February 25 high near $1.2245. Ahead of the weekend, it tested the upper end of a band of support that is seen been $1.1895 and $1.1915. A break signal a test on the recent low near $1.1835 and the 200-day moving average (~$1.1840). Recall that around last November election was $1.16. The MACD and Slow Stochastic appear to be turning up from over-extended territory. It seems to be closer to the end of the boxer’s punch than the start of it.

Japanese Yen:

The dollar pushed to almost JPY109.25 early last week, backed off to around JPY1080.35, and made another attempt to establish a foothold about JPY109. However, for the second time last week, it failed to close above it. The MACD continues to trend higher, but the Slow Stochastic is rolling over. The 50-day moving average is poised to cross above the 200-day moving average (deadman’s cross or golden cross) around the middle of next week. The JPY110 area offers psychological resistance for the dollar.

It has not finished a month above it since April 2019. Rising oil prices impact Japan through the trade channel (boosting imports) and the exchange rate that appears sensitive to rising US rates. A break below the JPY108.30 area could signal a near-term top is in place and project initially toward JPY107.60. The BOJ may confirm a change in tactics in its ETF purchases, but the exchange rate seems to be more a function of international developments rather than domestic.

British Pound:

Sterling peaked around $1.4235 on February 24, solidified a shelf in the $1.3780-$13800 area at the start of last week. The subsequent buying lifted sterling briefly and marginally above $1.40. However, as part of the broad dollar recovery, sterling tumbled to around $1.3860 ahead of the weekend. The trendline drawn off the December lows and early February low begins the new week near $1.3850, and a convincing break could signal a 1.5-2.0-cent decline. The technical indicators are mixed.

The MACD has returned to neutrality and has gone mostly sideways in recent days. The Slow Stochastic, on the other hand, is curling up from oversold territory. The close before the weekend was near the middle of the session’s range. A convincing move above $1.40 would target the recent high. The Bank of England, like the other major central banks that have met since bond yields have risen, is expected to highlight the weakness of the labor market and the transitory and technical nature of the anticipated increase in prices.

Canadian Dollar:

The US dollar fell by about 1.5% against the Canadian dollar last week, the most among the major currencies and the largest weekly loss of the year. The jobs reports showed employment surged by nearly 260k last month, which was more than three times greater than the median forecast in Bloomberg’s survey. Unemployment fell to 8.2% from 9.4% even while the participation rate was steady. The greenback fell to a margin new three-year low, around CAD1.2460.

The snapback in the labor market, coupled with the spillover of the US fiscal stimulus, and progress with the vaccine, should allow the Bank of Canada at its April meeting to signal its intentions to taper its C$4 bln weekly bond purchases perhaps by the end of Q2. The momentum indicators favor further US dollar weakness. The next important band of support is CAD1.2250-CAD1.2350, and I suspect the CAD1.2400 area may be sticky. However, the immediate note of caution is that the US dollar finished the week below its lower Bollinger Band (~CAD1.2500).

Australian Dollar:

Ahead of the weekend, the Australian dollar tested the $0.7800 level and found sellers waiting that took it back down nearly 1% before bids were found just in front of the previous session’s low. The MACD and Slow Stochastic are turning up as the correction since the February 25 high above $0.8000 appears to have run its course (bottoming near $0.7625). A move above $0.7820 is needed to reanimate the uptrend. The pre-weekend activity may have been consolidative in nature. The Aussie rose a little less than 1% (more than all but the Canadian dollar and Norwegian krone, among the majors) to post its first increase in three weeks. Next week, Australia is expected to report a pick-up in job growth and retail sales in February.

Mexican Peso:

The US dollar began last week, extending its advance to almost MXN21.6360, its highest level since spike as US polls closed last November. The dollar’s four-day rally was followed by a three-day slide that saw it shed about 4.2% and saw it approach the previous week’s low near MXN20.55. Although the dollar consolidated ahead of the weekend against the peso, the momentum indicators suggest the path of least resistance is lower for the greenback. The next area of chart support is close to MXN20.35. For the first time in a year, the 60-day rolling correlation of the dollar-peso exchange rates and the 10-year yield has turned positive, and that correlation is the highest since early 2017 (0.83).

Chinese Yuan:

Chinese stocks are underperforming this year. Among the large markets, it is the only one that is down. An attempt to lend official support to stocks during the National People’s Congress was not successful, as reported in the press. The PBOC’s ability to manage the currency has been a bit more successful. The US dollar set new highs for Q1 last week (~CNY6.5440) and then pulled back to around CNY6.4775, just above the 20-day moving average (~CNY6.4760) which may mark the near-term range. A week before top Biden administration officials will meet with senior Chinese officials for the first time, the US deemed it necessary to tighten up the sanctions on Huawei.

It would seem to deter a goodwill gesture by Chinese officials of allowing the yuan to rise, even if the greenback is otherwise bid, for example. Meanwhile, while the interest rate premium offered by Chinese government bonds over Treasuries (10-year) has narrowed by more than 60 bp to about 160 bp this year, the low volatility contributes to portfolio construction decisions. The 3-month implied volatility for the yuan is about 5.5%, which is nearly a percentage point below the least volatile of the majors (euro).

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

German and Dutch Elections, and FOMC, BOE, and BOJ Meetings

The central bank meetings (FOMC, BOE, and BOJ) will command the most attention, but the elections come first chronologically. Two German states (Rhineland-Palatinate and Baden-Wurttemberg) will be held on March 14. They are important to global investors and businesses because of what they may portend for the national elections in late September. Rhineland-Palatinate is currently a center-left coalition by the Social Democrats, Free Democrats, and Greens. Baden-Wurttemberg is the only state the Greens lead, but they are in a coalition with the Christian Democrats.

Some suggest this “green-black” coalition could be replicated on the federal level. Indeed, as the presence of the Greens hints, they could become Germany’s second party in September by overtaking the SPD, which has been cohabiting with the CDU for so long that some think the distinction has blurred. On PredictIt.Org, the new head of the CDU, Laschet, formerly the head of North Rhine-Westphalia’s government, is trailing behind Soder, the head of the CDU’s sister party in Bavaria for Chancellor. The CSU has been critical of Merkel from the right, while Laschet represents greater continuity. The Green’s Baerbock is slightly ahead of the SPD’s Scholz but far behind the CDU/CSU.

The Dutch election will be held on March 17. While the two-party system has its critics, Dutch politics are so fragmented that after the last general election in 2017, it took 225 days to forge a new government. There are nearly 90 registered political parties, and more than a dozen have seats in the lower chamber (House of Representatives). For international investors and businesses, the election may be a test of the support for the nationalistic anti-immigration, populist message of the People’s Party for Freedom, the country’s second-largest party.

Even if monetary policy is exhausted, as some claim, next week’s central bank meetings are center stage. The FOMC meeting concludes on March 17, followed by the now customary press conference. It is possible that to distinguish monetary policy proper from the regulatory function, the Fed may choose to address the March 31 expiry of the exemption of Treasury holdings and excess reserves from the calculation of supplementary leverage ratio separately from the meeting. That exemption allows the banks’ balance sheets to be around $600 bln larger than otherwise, according to estimates. With record government deficits and large-scale asset purchases ($120 bln a month) by the Federal Reserve, bank capacity is a key part of the plumbing.

The other plumbing issue is the continued drawdown of the Treasury’s cash position with the Federal Reserve. As a result, fewer bills are issued, and funds with flexibility can shift and put downward pressure on other money market rates. The general collateral repo rate, for example, is so distorted (negative) that a bank is paid for lending Treasuries and taking cash. Those who must invest in government bills are pressing yields lower and already yield less than 10 bp annualized out a year. There is a risk that the Fed responds by tweaking the interest on reserves (Note: the Fed pays interest on all reserves, not just excess reserves) or the reverse repo rate.

The Fed’s stance on monetary policy proper has been well articulated and will most likely the statement will be unanimously approved. The economy is far from reaching the Fed’s targets; around 9.5 mln jobs have been lost during the pandemic, and more people are filing weekly initial jobless claims than at the peak of the Great Financial Crisis. The current settings, the Fed submits, are appropriate, and that includes the balance sheet expansion. The rise in yields is mostly a reflection of optimism about the future and that the resulting price pressures will likely be transitory.

The pace of the move did receive attention. The 10-year yield has risen by around 72 bp so far this quarter. It is the fifth-largest quarter since 1995. From the end of January through March 12, the 10-year yield rose six consecutive weeks from around 1.06% to 1.64% at the end of last week. With headline CPI at 1.7% in February, ad real growth anticipated to be more than three-times stronger, a 10-year yield of 1.6% cannot be considered high. In the last quarter before the pandemic, the 10-year yield averaged almost 1.80%.

Fed officials could be protesting the rise in rates more it wanted. The fact that it hasn’t seemed to reduce the risks that it will introduce yield curve control or some version of “Operation Twist.” The Fed might have preferred a more gradual pace, but it is likely not disturbed by the move’s magnitude. On the one hand, with the economy set to boom with the fiscal stimulus and vaccine, some argue that Fed ought to be tapering. On the other hand, some critics want it to take stronger action to “quell investor nerves,” as one journalist put it. Powell’s answer was clear and unequivocal. The bond purchases do not target an interest rate but financial conditions more broadly, which is the same essential point ECB President Lagarde made at the press conference.

The Bank of England meets on March 18, the day after the FOMC meeting concludes. Former BOE Governor King was outvoted at least a couple of times, but it seems clear that the current governor speaks for the majority when he underscores the downside economic risks and the considerable slack in the economy. The furlough program may be hiding some unemployment that may become more evident later.

At the start of the year, the short-sterling market was pricing at negative rates. This was true of the December 2022 contract through January. Since early February, the rate has been positive and rose to 40 bp by the end of last month and is now near 35 bp. Perhaps some participants were inspired by comments from Haldane, the central bank’s chief economist. He does not appear to be singing from the same songbook as the other members of the monetary policy committee and has suggested the central bank may be complacent about the looming inflation risks. Even after Bailey’s efforts to counter such expectations, the contract was still implying a rate hike next year.

The Bank of Japan’s meeting concludes on March 19. It will have completed its formal review of the three elements of monetary policy: asset purchases, negative rates, and yield curve control. While the BOJ won’t back away from negative rates, there is speculation about the other two levers. After buying equity ETFs for more than a decade, the BOJ is sitting on more than $100 bln of profits and owns an estimated 7% of the stock in the Tokyo Stock Exchange first section. The BOJ limits itself to JPY6 trillion a year (~$56 bln) but during the chaos of last year, lifted it (temporarily) to JPY12 trillion.

With both of Japan’s main benchmarks, the Nikkei and the Topix, trading near the best levels since the 1990s, the BOJ is likely rethinking its equity purchase strategy. Some market observers suggest that officials may have already changed their tactics. The BOJ could jettison the annual target will preserve the ability to intervene in disorderly markets.

Under its yield curve control, the 10-year yield is allowed to move in a 20 bp range on either side of zero. The rise in global long-term rates has served to drag Japanese rates higher too. In late February, the 10-year JGB yield rose to a five-year of 18 bp. There was some speculation that the BOJ would widen the range. However, BOJ Governor Kuroda seemed to try to dampen such expectations. Instead, under the policy review, the goal is to make the policy framework more effective.

This suggests minor tweaks, like not preannouncing purchases, for example. However, comments early last week by Deputy Governor Amamiya seemed to keep the door ajar. Amamiya suggested that yields could fluctuate more provided that they did not disrupt the transmission mechanism of monetary policy.

In summary, of the three G7 central banks that meet next week, the Bank of Japan is the most likely to adjust policy. The Fed and BOE are unlikely to take fresh measures or alter forward guidance, and that itself is an important message. While both countries’ governments are boosting fiscal stimulus, the central bankers expect the inflationary bump to be modest and transitory. The high-frequency economic data poses headline risk but is unlikely to alter underlying views that the huge amount of stimulus the US is providing will create diverging economic outcomes. America’s sixth fiscal package during the pandemic is larger than the GDP of all but the nine large economies after the US. The Federal Reserve shows no intention to deviate from its long-term asset purchase program of $1.44 trillion annual rates.

Peak divergence is likely to be this quarter or next. By midyear, the vaccine rollout is likely to accelerate in Europe and Japan. The European Union Recovery Fund is expected to begin distributions. The base effect that bolsters the appearance of US price pressures in the March through May period is revered in June, July, and August, when the headline rate jumped by 0.4%-0.5% each month.

The US debt ceiling suspension ends in July, though Treasury Secretary Yellen, like several of her predecessors, can buy a few months through savvy cash management techniques. Before then, the US Treasury will have brought its cash balances down, which has been a critical factor driving some short-term rates below zero. The latest extension of federal unemployment compensation is also extended to early September and will begin the chins wagging about a fiscal cliff. The point is that this is not the time for linear projections for either inflation or the widening divergence in the US favor. The debt-driven growth will cause the current account deficit to yawn and fuel concern about the twin-deficits. As attention shifts from the stimulus bill to the infra+structure, a sense of a boundless America may both excite and scare investors.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Risk Extends Gains Ahead of the ECB

The Shanghai Composite’s 2.35% gain not only snaps a five-session slide but is the largest rally since last October. Europe’s Dow Jones Stoxx 600 is stretching its advance into a fourth session and is up around 3.5% this week. US futures are pointing to a gap higher opening. Meanwhile, benchmark yields are softer, and the US 10-year note yield is below 1.50% for the first time since the middle of last week. European yields are 1-3 basis points lower ahead of the ECB meeting. Australian and New Zealand bond yields, which had risen the most, are now leading on the downside with another 6-8 bp pullback today.

The US dollar is trading lower against nearly all the majors but the Japanese yen. Emerging market currencies are also mostly higher, and the JP Morgan index is extending its gains after yesterday’s advance of a little more than 1%, which was the largest since early November. Gold rose $10.6 yesterday and tested the $1740 level today, its highest level since the middle of last week. It bottomed on Monday near $1677. Oil prices are higher. April WTI bottomed yesterday near $63.15 and is testing the $65.50 area in Europe.

Asia Pacific

The dollar has risen by about 6.5% against the yen since the bottom on January 6, near JPY102.60. It has moved up alongside the US 10-year yield. The rolling 60-day correlation between the yield and the exchange rate reached a high since June 2019 (~0.92). This should not be dismissed as a dog-bites-man observation. The correlation was negative from October 20 through early last month.

In some ways, if the co-movement is so robust, it shifts the question about the yen to what is driving yields. Grand narratives are told about the vast fiscal stimulus ($5.4 trillion in the past 12-months) and the Fed’s balance sheet’s discovery and dramatic expansion. However, if there is a single quantifiable variable, at the risk of being reductionistic is the price of oil. The rolling 60-correlation of the US 10-year yield and the price of the front-month WTI futures contract is at its highest level since the Great Financial Crisis (~0.96). The correlation was negative from mid-July 2020 through mid-November.

Japanese investors sold a record amount of foreign bonds in the last two weeks of February (~JPY3.6 trillion or about $31 bln) but returned to the buy-side in the week ending March 5 (small at JPY99 bln), according to the weekly MOF data. In the first eight weeks of the year, Japanese investors bought an average of JPY49.5 bln a week. In the same period in 2019, they purchased an average of JPY631 bln of foreign bonds, and in 2018, JPY815 bln.

Foreign investors also bought Japanese after having sold in two of the past three weeks. In the first eight weeks of the year, foreign investors sold an average of JPY79 bln of Japanese bonds a week. In both 2019 and 2020, their purchases were averaging over JPY500 bln a week.

The yen is on the sideline. The dollar is consolidating in this week’s range (~JPY108.25-JPY109.25). It is in a tighter range still (~JPY108.35-JPY108.80). The Australian dollar is rising for a third consecutive session. It has met the initial retracement objective of the pullback since poking above $0.8000 on February 25 that came in around $0.7765.

The next retracement target (50%) is near $0.7815. The $0.7740-$0.7760 area offers initial support. The greenback is also lower against the Chinese yuan for the third consecutive session, the longest pullback in a month. The PBOC set the dollar’s reference rate at CNY6.4970, a bit weaker than the Bloomberg bank survey’s median (CNY6.4988). With today’s move, the US dollar is back within the range that has dominated since the start of the year.

Europe

When officials talk to the press off the record, it always makes sense to ask why or who benefits. Less than 24 hours before the ECB announces its new staff forecasts, one or more people told the press that the estimates will justify the stimulus efforts and does not see a sustained rise in price pressures. This is not surprising and could have been surmised by careful observers of the public record.

The near-term GDP forecast is expected to be shaved, reflecting the vaccine’s slow rollout, and this year’s inflation forecast may be increased a little, mostly reflecting the rise in energy prices. If there is a consensus among major central banks, it is precisely that base-effect, and some supply bottlenecks as the economies begin re-opening will lift measured inflation. There is nearly mathematical certitude that CPI will rise.

The judgment made by officials is that inflation will not run very high and will not be sustained. There will be much discussion of financial conditions and how they are best measured. Ensuring accommodative financial conditions is the key to transmitting the central bank’s policy stance.

That is the purpose of bond purchases, not targeting an interest rate per se (which is also essentially what Powell said last week about the Fed’s purchases). The Pandemic Emergency Purchase Program was designed purposely to maximize operational flexibility. It seems unreasonable to expect the ECB to now voluntarily move to limit this flexibility in any meaningful way. It appears that about half of the PEPP’s 1.85 trillion (~$2.2 trillion) line (“envelope”) has been used. The facility has been extended through March of next year, and there is talk that it may be extended, though it seems premature for such a decision today.

The euro tested the 200-day moving average (~$1.1835) on Tuesday and pushed to almost $1.1970 in last Asia. The $1.1975-$1.2000 holds retracement objectives and chart resistance. Initial support is seen in the $1.1920-$1.1940 area. We have noted that despite the general dovishness of the ECB, the euro has advanced on days of its meeting four of the past six times. It is not much better than 50/50, but one might have expected a downside bias. Sterling is also rising for its third session in a row that ends a four-session slide. It has moved above the 20-day moving average (~$1.3950) for the first time since reversing lower (outside down day) a week ago. Retracement targets are found near $1.3980 and $1.4030.

America

US February headline CPI was in line with expectations rising to 1.7% year-over-year. A little more than half of the increase was to gasoline prices, which seem to have little to do with monetary or fiscal policy. The core rate increase was less than expected, rising 0.1% for a 1.3% year-over-year rate. The cost of medical care increased, but the cost of pharmaceuticals fell. Ower-occupied costs rose sharply, while rents rose at a sub-2% pace for the first time since 2011. The deflation that hit with the pandemic’s onset last year means that the next three CPI reports may pose some “sticker shock” headlines.

Today, attention turns to the weekly jobless claims and the Q4 household net worth report. Weekly initial jobless claims are expected to continue to trend lower, helped, and a number in line with the median in the Bloomberg survey (725k) would be the lowest since early November. The early call is for another strong non-farm payroll report for this month.

American household net worth plunged by $6.9 trillion in Q1 20, which is roughly equivalent to a year’s output of Germany and France together. It was completely recouped in Q2 20 when household net worth rose by $8.3 trillion. It rose by another $3.8 trillion in Q3. In addition to personal income, the wealth may be driven by the equity market (the S&P 500 rose by 11.7% in Q4 20) and house prices (Case-Shiller house price index rose by about 4.2%. in Q4 20).

The most important takeaway from the Bank of Canada meeting is that the forward guidance is in transition, and the next meeting on April 21 will offer greater clarification. Its statement cited the January projections, and these are increasingly dated. The economy is proving more resilient than expected, and rather than contract, the central bank now anticipates expansion. A full recovery in the labor market will take a long time.

The critical change is taking place in confidence about the recovery. With its biggest trading partner stepping on the fiscal accelerator in a big way, Governor Macklem and the central bank will feel more confident about the Canadian economic outlook. A slowing of the Bank of Canada’s C$4 bln a week of bond purchases would be the first move in recognition of that confidence.

Meanwhile, speculation that Prime Minister Trudeau, who heads up a minority government, will take advantage of the stronger economy and vaccine progress to call for an early election. The speculation ebbs and flows and appears to have risen again, with a June timetable suggested.

The US dollar is approaching the month’s low against the Canadian dollar (~CAD1.2575). It is also a retracement objective of the two-day bounce on February 25-26 that saw it recover from the multiyear low near CAD1.2470 to CAD1.2750. The intraday momentum studies are stretched, but rising equities, falling yields, and firm commodity prices could make for only a shallow greenback bounce.

Resistance may be found in the CAD1.2600-CAD1.2620 area. Meanwhile, the US dollar continued to unwind its gains against the Mexican peso. It is the third day the dollar is falling, and near MXN20.75, it has shed around 3.4%. Yesterday’s pullback almost met the (38.2%) retracement of the gains since the MXN19.55 low was recorded on January 21. That retracement was near MXN20.84. The 50% retracement is closer to MXN20.53.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Markets are not Yet Convinced that Yesterday’s Move Signaled a Trend Change

China’s stocks tumbled yesterday, despite reports of official assistance, were mixed with the Shanghai Composite posting small gain and Shenzhen a small loss. South Korea and Australia’s benchmarks slipped lower. Europe’s Dow Jones Stoxx 600 is extending its gains for a third session, while US futures indices are narrowly mixed. The US 10-year yield is a few basis points higher at 1.55%, and most European benchmark yields are slightly firmer. Australian and New Zealand bonds rallied, and yields fell around seven basis points. The US dollar is mostly a little higher against the majors and mixed against the emerging market currencies.

The yen and Swiss franc are the laggards, nursing around a 0.2% loss near midday in Europe. The JP Morgan Emerging Market Currency Index rose by 0.7% yesterday, the most in two months, and has edged a little higher so far today. After rallying almost 2% yesterday, gold is consolidating in a narrow range, mostly between $1710 and $1720. April WTI initially slipped to a four-day low near $63.15 and recovered, rising to $64.35 in the European morning before the buying appears to dry-up.

Asia Pacific

China reported February inflation gauges and lending figures. Consumer price inflation remains below zero. The CPI rose to -0.2% from -0.3% and on a year-over-year basis. The 0.6% rise on the most is the least in three months. Consumer goods prices are off by 0.3% year-over-year, showing continued deterioration. However, prices of consumer services fell 0.1% after a 0.7% year-over-year plunge in January.

The decline in pork prices accelerated. The fading base effect will likely allow CPI to turn positive shortly. Producers prices jumped 1.7% year-over-year after a 0.3% rise in January. Rising commodity prices and the favorable base effect were the key drivers.

China’s lending figures slowed from the hectic pace in January but were stronger than expected. New yuan loans rose by CNY1.36 trillion after a CNY3.58 trillion surge in January when new lending quotas were available. Aggregate financing, which adds the shadow banking activity to traditional lending, rose by CNY1.71 trillion, nearly twice what was expected, but still a dramatic slowdown from the CNY5.17 trillion.

RBA Governor Lowe pushed against market expectations and appeared successful as the yield on the three-year note (targeted at 10 bp) slipped for the second day. It is the first back-to-back yield decline in more than a month, and the three-year benchmark yield eased below the target for the first time this year. Lowe warned the market was getting ahead of itself in pricing in a rate hike. He continued to signal that rates were unlikely to rise until at least 2024.

Lowe dismissed the increase in inflation expectations priced in as not exceptionally high or above the central bank’s target. He reiterated the evolution of its forward guidance, which emphasizes actual inflation over inflation forecasts, and continued to pin the outlook on wage growth. Wage growth, he says, needs to be above 3% or more than double the current record low of 1.4%.

The dollar is consolidating within yesterday’s range against the Japanese yen and has been mostly confined to a JPY108.50-JPY18.90 range. Yesterday’s high was almost JPY109.25. The greenback had finished the North American session near its lows against the yen but was bought in early Asia. With firm US yields, it would not be surprising to see the dollar probe higher in the North American morning./European afternoon. The Australian dollar is moving sideways in the roughly one-cent range established at the end of last week (~$0.7620-$0.7730).

The upper end was rejected in North America yesterday. After pulling back in early Asia Pacific turnover, it recovered, only to find more sellers in Europe above $0.7715. After falling by about 0.3% against the Chinese yuan yesterday, the dollar edged slightly higher today. The greenback has risen in four of the past five sessions and remained above CNY6.50 today. The PBOC set the dollar’s reference rate at CNY6.5106, which was a bit more than usual away from the Bloomberg bank survey that found a median of CNY6.5127.

Europe

French industrial output surged in January. The 3.3% jumped compared contrasted with a median forecast in the Bloomberg survey for a 0.5% gain. It was driven by coke and refinery and mining sector. Auto output and transportation material fell. France is the last of the big four EMU economies to report. Recall Germany’s industrial output unexpectedly fell by 2.5%, but the December gain was revised to 1.9% from zero.

Italy’s 1.0% gain was a surprise in the opposite direction, and the December series was revised to show a 0.2% gain (initially a 0.2% decline). Spain’s was a little weaker than expected at -0.7%, and adding insult to injury, December’s 1.1% gain was shaved to 0.8%. The aggregate figure for the eurozone is set for release on Friday.

The ECB begins its two-day meeting, and tomorrow’s announcement will be followed by the press conference. The ECB will be updating its forecasts, and near-term growth projections will likely be shaved while this year’s inflation forecast may edge higher.

The focus is not on exchange rates but yields. Officials seem to have signaled a desire to look past the near-term volatility. There is much expectation that it could increase its bond purchases, but to commit it would seem to remove an important element of flexibility. The Fed commits to buying $120 bln of long-term assets a month. The ECB does not commit to any size, and it will likely keep it this way.

The euro approached its 200-day moving average yesterday (~$1.1830) and rebounded smartly to about $1.1915. Although it finished the North American session near its highs, there has been no follow-through buying today, and the euro had found new sellers when it poked above $1.1900 in early European turnover. Initial support may be seen in the $1.1870-$1.1880 area.

The market appears to see asymmetrical risk from the ECB, and short-term participants may be reluctant to be long euros ahead of Lagarde’s press conference tomorrow. Sterling is also trading within yesterday’s range and is a little changed a little below $1.3900.

Initial support is found around $1.3880 and then $1.3845. The market seems content to consolidate and await fresh directional cues ahead of tomorrow’s data dump that includes January’s monthly GDP figures, where a large contraction is expected.

America

There are two highlights for the US markets today aside from the formality of the House of Representatives approving the new stimulus package. First, the US reports February CPI. It is the last before the base effect surge that will extend through most of the spring. Last month, food and energy prices rose, which will lift the headline pace to around 1.7% from 1.4%.

The core rate was flat in January, and a 0.2% rise in February may keep the year-over-year rate steady around 1.4%. Barring a surprise, the market impact may be minimal, pending the second important event’s outcome. The US Treasury will sell $38 bln 10-year notes. Yesterday’s 3-year note sales was well received, with the highest bid-cover (2.69x) since mid-2018. However, the real test is with the longer-dated paper, including tomorrow’s $24 bln 30-year bonds sale.

Expectations for today’s Bank of Canada meeting are low. No policy change is expected, and the rhetoric has been rehearsed. The central bank is committed to maintaining the monetary stimulus for some time and well-beyond the immediate economic pick-up. Governor Macklem sees a role for monetary policy in helping to facilitate structural economic changes, like digitalization, which seem to be accelerated by the pandemic. The large fiscal stimulus in the US, which the OECD estimates will add three percentage points to its growth, will have a spill-over effect and likely help Canada as well.

That is to say that the US stimulus should make BoC officials more confident in the economic outlook. The Bank of Canada will provide a broader assessment in April, but some expect a hint that more tapering of its bond-buying is likely in the coming months. Canada’s 10-year bond yield has more doubled since the US election and vaccine announcement to almost 1.55% before pulling back. Yet, given that underlying core inflation was at 2% in January (February’s figures will be reported on March 17), rates are not high. The 10-year yield finished 2019 closer to 1.70%.

As North American markets are set to re-open, the US dollar is trading in the middle in the session’s range against the Canadian dollar (~CAD1.2630-CAD1.2685). It is within yesterday’s range. Indeed, the greenback has hardly traded outside of the range set during the last session of February (~CAD1.2585-CAD1.2750). The intraday technical readings may favor the greenback’s upside. The Mexican peso is holding yesterday’s gains but has been unable to extend them. The US dollar fell from above MXN21.50 yesterday to flirt with the 200-day moving average around MXN21.1560. A break of yesterday’s lows signals a test on the MXN21.00 area. Initial resistance may be near MXN21.30.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Markets Chill

However, the Shanghai Composite rose by about 0.5%, and a smaller increase was recorded in Taiwan and an even small gain in Australia. Europe’s Dow Jones Stoxx 600 is trading lower for the third consecutive session and closed the gap created by Monday’s sharply higher.

US shares are trading lower. Benchmark 10-year yields are edging up in Europe, though Italian bonds are resilient. The US 10-year Treasury yield is around 1.28%, off the 1.33% high seen yesterday, amid reports that several banks are recommending unwinding curve steepening trade.

The dollar is seeing yesterday’s gains pared against both major and emerging market currencies. Sterling is leading the way and is approaching the $1.3950 area seen two days ago, which was the highest since April 2018. Indonesia’s central bank cut its key seven-day reverse repo rate by 25 bp top 3.50% as widely expected, and in Turkey, the central bank kept the one-week repo rate at 17.00%, which was also anticipated.

Gold is trying to snap a five-day slide, but rising yields seem to be sapping it. Initial resistance is seen near $1790. April WTI rose to nearly $62.30 earlier today, a new high, but has pulled back within yesterday’s range when it recorded a high near $61.75. The price of WTI has fallen once so far this month (last Thursday). It settled last month a little above $52.

Asia Pacific

China returned from its extended holiday with little fanfare. The PBOC offered CNY200 bln (~$31 bln) of liquidity via its medium-term lending facility at an unchanged rate of 2.95%. That will help offset loans that are maturing this month. The move does little to ease concerns about the tightness of the PBOC’s stance. The PBOC offered CNY20 bln of sever-day repo funds, while CNY280 bln is coming due. The overnight repo rate rose by about 50 bp to around 2.35%, and the seven-day repo rose two basis points to 2.23%.

Australia’s employment report was mostly in line with expectations. It created 29.1k jobs, nearly the 30k that the Bloomberg survey (median ) forecast. The social restrictions may be behind the slippage in the participation rate (66.1% vs. 66.2%), helping the unemployment rate fall to 6.4% from 6.6%. The breakdown of jobs showed 59k full-time posts (35.7k in December), while part-time positions fell by nearly 30k.

As the pandemic struck last year, Australia lost about 380k full-time jobs, and with the January report, it has gained back a little more than 300k. Separately, Google struck a deal with News Corp and seems to be positioning itself to remain in Australia after threatening to leave. On the other hand, Facebook has moved to restrict news sharing in Australia and is resisting the government efforts to force compensation to news sources.

The US dollar reached the highest level against the yen since last October yesterday, a little above JPY106.20. It settled near its lows and tested support near JPY105.70 in local trading and again in the European morning. Many participants see the scope for higher US yields and see the yen as vulnerable in such an environment. The yen can also be used as a funding currency, and there is much interest in short yen long Chinese yuan positions.

The Australian dollar poked above $0.7800 on Tuesday and backed off to $0.7725 yesterday and bounced back today. It reached rose to almost $0.7785, where it has met sellers in Europe. Initial support is seen in the $0.7750-$0.7760 area. The PBOC set the dollar’s reference rate at CNY6.4536, a little higher than the bank models suggested. Before the holiday, the dollar settled near CNY6.4585 and is now near CNY6.4690.

Europe

Here is a shocking divergence. Europe reported the collapse of new car registrations in January, a useful proxy for auto sales. A 24% year-over-year decline was reported. Seasonally-adjusted figures showed month-over-month registrations were down by a third in Germany and two-thirds in Ireland. They were off by nearly half in Spain and the Netherlands.

Auto registrations fell by more than 30% in the UK. France and Italy bucked the trend, and registrations increased by 2.2% and 0.4%, respectively. In the US, January vehicle sales were off 1.3% from a year ago and were up 2.2% month-over-month (seasonally adjusted annual rate).

Separately, the semiconductor chip shortage is doing two things. First, the EU and the US are lobbying for industry and the Taiwanese government for help. Each seems to be seeking preference for its needs. One estimate suggested that the shortage may result in a million fewer light vehicle production here in Q1. The winter storm that has hit Texas has also crippled chip production in Austin. Second, it provides more fodder for economic nationalism as the EU and US want to be more self-sufficient in chip fabrication.

The EU Recovery and Resilience Facility, what some called Europe’s Hamiltonian moment, is technically operational today. It consists of more than 310 bln euros in grants and 360 bln euros in loans. The facility is expected to last six-years, but there are calls from numerous officials, including Italy’s new Prime Minister (who faces a confidence vote in the Chamber of Deputies today), to make it a permanent facility. It is not just about the recovery from the pandemic.

More than a third of the funds are to be used for “green” projects and a fifth for digital transformation. Countries will apply for funds (by the end of April), and the money is expected to be distributed beginning near midyear. There is still likely to be a fight about funds for Poland and Hungary given their reluctance to embrace the EU’s rule of law requirements.

The euro reversed lower after hitting a peak of nearly $1.2170 on Tuesday. It fell to almost $1.2020 yesterday and is consolidating within yesterday’s range today. Initial resistance near $1.2080 has been approached. There is an option for 1.3 bln euros at $1.21 that will be cut today. We see the North American market as more dollar-bullish than Europe and look for the euro to return to the $1.2030-$1.2040 area.

Sterling continues to march to the tune of a different drummer. Sterling is making new session highs in late morning turnover in London. It is approaching the high set earlier this week, near $1.3950. There is little chart resistance ahead of $1.40. The euro is trading near GBP0.8660. It peaked above GBP0.9200 in December. It trading at its lowest level since last March. Chart support is seen near GBP0.8600.

America

Could there have been a better mix of US data? Retail sales ended their three-month drought with a bang, jumping 5.3% compared with the Bloomberg survey’s median forecast for a still-respectable 1.1% gain. The downward revision in the December series to -1.0% from -0.7% simply underscores the rebound.

The components used for GDP calculation, which exclude autos, gasoline, building materials, and foodservice, surged 6.0% (median forecast was for 1.0%) and is more than the cumulative increase in H2 20. Stong consumption was complemented with robust output.

Last month, industrial production rose by 0.9%, more than twice what economists projected, and manufacturing output increased by 1%. Capacity utilization increased to almost 75.6%, the highest since the eve of the pandemic. Producer prices jumped 1.3% last month, lifting the year-over-year rate to 1.7% from 0.8%. Rising industrial goods prices may also reflect the actual demand from China and East Asia more broadly.

Today’s data does not have the same heft. January housing starts and permits are expected to have begun the New Year on a soft note. However, don’t confuse what may be a mild pullback with weakness in the sector. The housing market and residential investment, in general, is a bright spot. Weekly initial jobless claims are expected to have slipped a little, but the takeaway is that more people are claiming unemployment benefits for the first time than at the Great Financial Crisis’s peak.

Import prices are surging. After a 0.9% increase in December, a 1% rise is expected in January. Most of this is oil and excluding it, import prices likely matched the 0.4% increase at the end of last year. The February Philadelphia Fed survey is also on tap. Here the price component may overshadow the headline, which is expected to have softened to 20.0 from 26.5. Fed Governor Brainard speaks before the equity market opens, and Atlanta Fed’s Bostic addresses educational inequality shortly after the open.

The US dollar reversed higher from almost CAD1.26 on Tuesday and reached CAD1.2745 yesterday. It is consolidating in about a 20-pip range on either side of CAD1.2700 today. Support is seen near CAD1.2660. It has to get back above the CAD1.2740 area to be noteworthy. The greenback began the week near MXM19.90 and yesterday poked briefly above MXN20.38. A consolidative tone is emerging, and the MXN20.14 area is the middle of this week’s range. A break could signal a move toward MXN20.08.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Sterling Continues to Run Higher and US Winter Storm Gives Oil Another Boost

Korea’s Kospi advanced 1.5%, and Australia’s ASX tacked on 1%. The Dow Jones Stoxx 600 gapped higher in Europe, led by energy, communications, and financials. US futures are trading firmly, though the cash market will remain closed. The US 10-year yield remains at 1.20%, but the pre-weekend rise dragged global yields higher. Australia’s 10-year yield jumped 10 bp to 1.31%, while most yields in Europe are 3-4 bp higher. The yield on the UK benchmark is up basis points to 0.58%.

The dollar is heavy. Sterling poked above $1.39 for the first time since April 2018. Among the majors, only the yen is not gaining on the dollar today. Most emerging market currencies are higher as well. The JP Morgan Emerging Market Currency Index is extending its advance for the seventh consecutive session. Rising yields have sapped gold’s luster, but it is consolidating within the pre-weekend range (~$1810-$1830). Oil prices continue to surge. At the end of January, March, WTI settled at $52.20 a barrel. It approached $61 today.

Asia Pacific

Japan, the world’s third-largest economy, expanded by 3% quarter-over-quarter in Q4 20, which surpassed expectations after a 5.3% expansion in Q3. Private consumption rose 2.2%, helped by a rise in government spending (2.0%). Business spending jumped 4.5% after contracting 2.4% in Q3. Net exports fared a little better than expected, rising 1% (rather than 0.9%), but off from the 2.6% gain in Q3. Inventories were reduced by 0.4%, without which growth would have been a bit stronger.

While mostly better than expected, the state of emergency that started last month warns of new economic hardship this quarter and another contraction. The emergency is expected to be lifted on March 7. Separately, a 7.3-earthquake was recorded over the weekend near Fukushima.

Australia’s most immediate challenge may not be emanating from China but from the large internet platforms like Google and Facebook. The Australian government is close to approving a plan that will require payment to new publishers, mandatory arbitration, and forcing notification when there is a significant change in the algorithms for searches. Google had threatened to withdraw, but with Canada, the UK, and EU considering similar measures, its threats to be a negotiating ploy.

That said, when it pulled out of Spain in 2014, one study found that traffic to news sites fell 10%. There is some pressure for the US to take similar action. Still, it appears a deal may be reached that may build on Google’s News Showcase product that pays media outlets for curated content rather than forced through legislation.

The dollar is posting its third consecutive gain against the Japanese yen and has reached JPY105.40 in European turnover. The recent high has been a little above JPY105.75. Rising US yields and equities often coincide with a heavier yen. The 200-day moving average is near JPY105.50, and the dollar has not closed above it since last June. The Australian dollar is rising for the sixth session of the past seven to reach its best level (~$0.7790) in a month.

The Aussie’s advance appears to stand on two legs: the recovery in East Asian economies and what many call a super-cycle in commodities. Last month’s high was set near $0.7820. The dollar has fallen to new lows against the offshore yuan today (~CNH6.4010). It is also the sixth decline in the past seven sessions, and it is the lowest since June 2018. When the mainland markets closed for the extended holiday (February 10), the dollar was just below CNH6.43.

Europe

Draghi has become Italy’s 30th prime minister since the birth of the republic in 1946. It is the fourth technocrat government in three decades. It is not so much a question of which Draghi is the prime minister, the Prussian Roman as he was dubbed during his days as the head of Italy’s central bank, or the “save the monetary union at any cost” as ECB President. Why can’t there be a third Draghi? A different combination of skills and tolerances are needed. If the cabinet is any indication, there is indeed a third Draghi.

He brought over a former colleague from the BoI, Franco, to head up the economic ministry while retaining Di Maio as foreign minister. Net-net, the balance was 15 representative from political parties and 10 without. That the Five Star has four is not so surprising, but Berlusconi’s Forza Italia got three portfolios to enter government for the first time since 2012. The PD and the League got three apiece while Renzi got two, losing one from the Conte government, which it took down. Both chambers of parliament are expected to hold confidence votes this week, which now is a formality.

The eurozone reported industrial output tumbled 1.6% in December. It is twice as much as economists had projected and follows a 2.6% expansion in November. Weakness was in capital goods (-3.1% month-over-month) and non-durable consumer goods (-0.6%). The output of consumer durable goods rose by 0.8%, and intermediate good production rose 1%. Energy output increased by 1.4%. Separately, Eurostat reported that the December trade surplus rose to 27.5 bln euros from 25.8 bln in November.

Revisions to Q4 GDP (-0.7%) will be reported tomorrow. The data highlight of the week is the flash PMI. A small improvement in services is unlikely to lift the composite reading above the 50 boom/bust level, which it has not seen since last October.

The escalation of the US confrontation with China is not the only continuity in US foreign policy. It will continue to confront Europe over the Nord Stream II pipeline. Obama, Trump, and now Biden will seek to deter it. At least two senators had formally urged the State Department, which before the weekend, affirmed that it was a “bad deal for Europe” to implement the sanctions that were approved in the last days’ of the Trump administration. A State Department report to Congres is due tomorrow, but it is not clear that it is ready.

The short-squeeze into the European close ahead of the weekend saw the euro recover from about $1.2080 to $1.2135. The euro was bid in late Asia today to $1.2145, just in front of last week’s high and the key $1.2150 level. Provided the $1.2150 cap holds can grind a little lower in the remaining hours of today’s session, without the US market. Sterling is trading like a risk-on currency. It has risen in seven of the past eight sessions, including today’s advance above $1.39. There is little chart-based resistance ahead of $1.40. The session high is unlikely in place today. Initial support is now seen near $1.3880.

America

US markets are closed today for President’s Day, ironically two-days after the second impeachment of former President Trump failed to secure the necessary votes to convict. With the impeach trial over, the focus shifts back to the confirmation process and the fiscal stimulus. The Biden administration is still talking with 10 GOP Senators to see if there is sufficient common ground to have a bipartisan package.

However, the Democrats have made clear that they are prepared to use the reconciliation process, which has been used by the last few presidents, to pass a large stimulus bill. The risks, such as inflation, arguably can be managed. However, what may prove more difficult to manage is the appetite for a large infrastructure initiative, which is expected to follow the stimulus package. Separately, the winter storm has knocked out power for the equivalent of two million homes in Texas and taken off capacity of around one million barrels.

After today’s holiday, the US economic diary is chock full this week. The highlights include January retail sales and industrial production figures. An early look into this month’s activity comes in the way of the Empire State Manufacturing Survey, the Philadelphia Fed survey, and the preliminary PMI. The FOMC minutes from last month’s meeting are due in the middle of the week, and no fewer than nine Fed officials speak this week.

Arguably, with the rise in nominal rates being driven by an increase in inflation expectations, which the Federal Reserve encouraged by adopting the average inflation target, it cannot be surprised or disappointed with investors’ reaction function.

Canada’s data highlights this week include January CPI on Wednesday and December retail sales on Friday. While the month-over-month increase in CPI (~0.5%) may be offputting, the year-over-year rate may tick up to 0.9% from 0.7%, and the underlying measures are likely to be broadly stable. Retail sales are expected to have fallen by around 2.5% after rising 1.3% in November. Mexico has a light economic calendar this week.

However, the market is still digesting the implication of last week’s 25 bp rate cut. The Deputy Governor of the central bank, Esquivel, suggested that there may be scope for two more rate cuts this year at the end of last week. Most other emerging market central banks are thought to be on hold this year, though a few, including Brazil, are likely to hike.

Rising commodities and equities help underpin the Canadian dollar. The greenback is hovering around last week’s low (~CAD1.2660). There is little support ahead of the low set last month, near CAD1.2600, the lowest level for the US dollar since April 2018. A break would target CAD1.2500. The CAD1.2680 area provides the nearby cap.

The US dollar has slipped to new three-week lows against the Mexican peso below MXN19.90. There is little momentum of which to speak. Immediate resistance is seen in the MXN19.95-MXN20.00 band, while the next target is near MXN19.80.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Oil Set to Snap 8-day Advance while Consolidative Tone Emerges in FX

The settlements were just inside Tuesday ranges, though the Dow Industrials set a record close. Yet, the spillover to equity trading in the Asia Pacific region and Europe today. Most of the large Asia Pacific markets, including Japan, China, South Korea, and Taiwan, were closed. Europe’s Dow Jones Stoxx 600 is up about 0.35% in late morning turnover, though momentum is absent. US shares are trading with a firmer bias.

After seeing strong demand at the 10-year note auction yesterday, the US benchmark is yielding about 1.14% today. European yields are off 1-3 bp, with the Italian yield at a new record low below 50 bp. The dollar is narrowly mixed against the major currencies.

The dollar bloc and the euro are slightly higher, while the Scandis, yen, and sterling are somewhat heavy. Emerging market currencies are mostly higher, and the JP Morgan Emerging Market Currency Index is extending its advance for a fifth consecutive session. On the other hand, oil is threatening to snap an eight-day rally, leaving the March WTI contract in a narrow range above $58. After being rebuffed near the 200-day moving average yesterday (~$1855.5), gold is trading in about a $5-range on either side of $1840.

Asia Pacific

If the US-China relationship is the most important in the world, as has often been claimed, one would not know it from the communication over the past few weeks. President Biden has indicated that there “has not been an occasion” to talk to China’s leader Xi. He added that there “was no reason not to.” The highest communication so far has been a telephone call between Secretary of State Blinken and the top Chinese diplomat Yang Jiechi at the end of last week.

It was like two alpha dogs marking their territory and jousting over democracy and human rights. Biden found his occasion to talk to Xi for China’s New Year holiday, and not coincidentally, the call followed the first formal meeting between Biden and Taiwan’s de facto ambassador to the US (who, as we have noted, was invited to the inauguration for the first time since the one-China policy was adopted more than 40-years ago).

Biden and Xi apparently are engaging in subtle diplomatic messaging, like how partners in a bridge game may communicate. Biden promises a different kind of relationship with Beijing than the Trump administration, and of course, he has to say that. Some tactics may be different, perhaps it will be more multilateral, but it is not like a coalition of the willing just waiting for US leadership.

Europe’s willingness to block Huawei might have been somewhat less enthusiastic if it did not have homegrown alternatives. As the EU demonstrates with Russia, it can maintain trade ties while being critical of human rights violations. It also imposes sanctions to express its disapproval. Despite reports in the popular press about shifting supply chains out of China, German companies appear more likely to expand there than leave, according to recent surveys.

Perhaps, President Biden himself may have let the proverbial cat out of the bag about the lack of a call with Xi until now. Despite Biden being the most experienced President since Nixon, who was also the vice president, and his claim that he may have spent more time with Xi than any foreign leader, Biden has yet to formulate an operational policy as opposed to declaratory policy (rhetoric).

Yesterday, Biden announced a new Pentagon task force to review US defense policy toward China. The mandate looks broad and will extend well beyond military strategy to include technology and US alliances and partnerships in Asia. Biden has also ordered another policy review of Trump’s tariffs and efforts to block or force the sale of other Chinese companies (e.g., Tiktock and WeChat).

However, efforts to force the sale of TikTok have reportedly slowed. We had argued that the US’s bipartisan attitude toward Beijing changed when Xi suspended term limits and, in word and deed, pulled away from many of the liberalization efforts that had been evolving since the late 1970s. Until proven otherwise, the take away is that investors and businesses should expect greater continuity in the US stance toward China.

The dollar held support near JPY104.40 yesterday and is trading quietly about a fifth of a yen range below JPY104.75. Around $1.1 bln of options expire today at JPY105.00-JPY105.05. Tomorrow there are $2.7 bln in options at JPY105 that also expiring. The Australian dollar rebounded after briefly and marginally slipping below yesterday’s low (~$0.7715). The bounce stalled in front of yesterday’s high (~$0.7755), which is also roughly where the downtrend line off last month’s highs is found. With the onshore market closed, the focus is on the offshore yuan. The dollar finished yesterday near CNH6.4290 after falling to almost CNH6.4125. It has been mostly within yesterday’s range today.

Europe

The EC has formally rejected the UK request to reset the post-Brexit trade relationship and opposed delaying border checks. This has been tipped previously. Separately, but related, Bank of England Governor Bailey said that the requirement for EU access for UK financial services was unrealistic and that no other country could agree. Financial services, a key comparative advantage for the UK, were not covered in the trade deal struck at the end of last year. Meanwhile, figures out earlier today showed that Amsterdam overtook London last month in European share trading. Roughly, turnover in the UK fell by half.

This chapter of Italy’s political drama appears to be winding down. The Five Star Movement is holding an online vote today to determine if Draghi will receive its backing. There are almost 120k members, and the results may be known in the North American afternoon. The party’s leadership is encouraging members to support Draghi. Regardless of the outcome, Draghi is expected to meet with President Mattarella tomorrow to confirm that he has majority support in parliament, and most importantly, present a list of ministers in the new government.

The euro is in about a 20-tick range above $1.2115 and inside yesterday’s range ($1.2110-$1.2145). We had anticipated a move into the $1.2100-$1.2150 range this week. The euro’s decline from early January through early February may have run its course, but it is not yet clear. Although the five-day moving average is about to move back above the 20-day moving average for the first time in a month, we suspect it requires a move above $1.22 to confirm the euro’s downside correction is complete.

Sterling set a new high yesterday since May 2018 near $1.3865 but is consolidating, like the euro inside yesterday’s range. Initial support is seen in the $1.3790-$1.3800 area. Tomorrow, the UK reports December trade., industrial production, and service figures, but the highlight is Q4 GDP. The UK economy is expected to have grown by 0.5% quarter-over-quarter, which would leave it about 8% smaller year-over-year.

America

The first two legs of the US quarterly refunding were well received, and today, the conclusion with a $27 bln sale of 30-year bonds. Yesterday investors learned that headline and core CPI converged at 1.4% rather than1.5%. We don’t think that is a significant deviation and reiterate that the base effect means that US measured inflation will rise after the February CPI. Headline will likely rise above 2% in Q2.

However, while not breaking new ground in his assessment that the labor market remains distressed, Federal Reserve Chair Powell continued to play down the risk of sustained elevated inflation. Today’s weekly initial jobless claims will bear out his point. Even though they may decline for the fourth consecutive week, more than 750k people are expected to have filed for benefits for the first time. Lastly, reports suggest that the White House may soon formally nominate Professor Lisa Cook from the University of Michigan to the Fed’s Board of Governors’ open seat. Note that over the next year, the leadership terms of Powell, Clarida, and Quarles end.

Yesterday we mistakenly had Mexico’s central bank meeting, but it is today. The analysis is the same. A 25 bp rate cut is widely expected, and it will bring the target rate to 4%. With January CPI at 3.54%, its perceived room to maneuver is limited. Before the outcome of the meeting, later in the North American session, it will report December industrial output figures. A marked slowing after the 1.1% gain in November is anticipated.

Tesla’s announcement earlier this week that it purchased $1.5 bln of bitcoin and may buy more and accept bitcoin payment for cars, as well as willingness to buy gold and gold exchange-traded funds, drew a great deal of interest. If it is going to be something other than an oddity, it has to be duplicated. Yet, there is a reason why most corporations are not going to follow suit.

Corporate treasurers would generally recognize that taking on a volatile asset that does not grow out of business is speculative, and that is not their function. What if Tesla accepted bitcoin for payment? That is something corporate treasurers know about: fx risk. You receive payment in one currency, yet costs of production are in a different currency.

And what about paying bitcoin for a new car? It might be a nice marketing plug, and crypto fans like it, but will anyone really do it? Telsa will not be the first to let a customer pay with bitcoin, and it begs the question of why bitcoin is not used for consumer transactions. The answer is one word: volatility. Imagine paying in bitcoin only to see it rise by nearly 100% like it did from the middle of December to the middle of January. It is like the urban myth of the unlucky fellow who bought a pizza with a bitcoin back when.

The US dollar is trading heavily against the Canadian dollar. There was not even an attempt of follow-through greenback buying after yesterday’s firm close. A break now of CAD1.2660 could signal a return toward the multi-year low set last month, a little below CAD1.26. For the first time in two-and-a-half weeks, the greenback is being sold below MXN20.00. The MXN19.95 area represents the (61.8%) retracement objective of the dollar’s bounce off the MXN19.55 area on January 21. Initial resistance may be seen in the MXN20.00-MXN20.10 area.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

China’s Expansion Does not Prevent Deflation

Officials gave approval for a new game from Tencent, which helped lift the Hang Seng. Europe’s Dow Jones Stoxx 600 slipped fractionally yesterday but has recouped it and more today, led by utilities, information technology, and materials. US shares are trading with a firmer bias.

Bond markets remain quiet. Ahead of today’s US auction of $41 bln 10-year notes, the benchmark yield is near 1.16%. European yields are mostly little changed, with a slight upside bias. The dollar is mixed. The Scandis and sterling are leading the way higher. Sterling is new highs after punching through $1.38 yesterday. The dollar bloc and yen are softer. Emerging market currencies are also mostly firmer, and China’s yuan is a notable exception as trading winds down ahead of the holiday.

The JP Morgan Emerging Market Currency Index is rising for the fourth consecutive session. However, it is oil that is enjoying the longest streak. Today is the eighth session in a row that oil prices are rising, though the upside momentum may be fading. March WTI is near $58.60, after finishing last week a little below $57.00. Gold is firm within yesterday’s range, meeting resistance near $1850.

Asia Pacific

China’s economic recovery is well known, but it has not been accompanied by price pressures. Its headline CPI fell 0.3% year-over-year in January. Core inflation slipped below zero (also -0.3%) for the first time since 2010, dragged down by weak household demand for services. Part of the issue is the base effect. Headline inflation rose 1% on the month in January after a 0.7% gain in December. Food prices rose 1.6% year-over-year, down from a double-digit pace through last summer.

Pork prices, a key driver of headline inflation, fell 3.9% from a year ago, following a 1.3% decline in December. Separately, rising commodity prices lifted PPI above zero (0.3%) year-over-year for the first time since last January. The soft inflation readings are unlikely to impact PBOC policy but underscore why fears of an imminent tightening are exaggerated.

Rising commodity prices did little for Japan’s PPI. The 0.4% gain in January lifted the year-over-year rate to -1.6% from -2.0%. Meanwhile, Japan’s Summer Olympics remains up in the air. It has been riddled with numerous problems even before the pandemic. Former Prime Minister Mori’s recent comments, insulting women, has produced a new backlash, and the corporate sponsors are complaining, and nearly 400 (of 80,000) volunteers have reportedly resigned.

Pressure will mount on Mori to resign, and Prime Minister Suga has not called for his resignation either. Recent polls suggest 80% are opposed to holding the Olympic games on schedule (opening ceremony July 23). The corporate sponsors are planning on meeting ahead of the weekend to take a united stance. The theme of the Olympics ironically is “Unity in Diversity.”

The dollar is recovering from the test on JPY104.40, the lower end of our target (JPY104.40-JPY104.60). Nearby resistance is seen in the JPY104.90-JPY105.10 area. Yesterday’s loss (~0.60%) was the largest so far this year, and a higher dollar close today would be the first in four sessions. The Australian dollar extended its recent gains and poked above $0.7750 before sellers emerged. Support is seen near $0.7700, yesterday’s low, and a close below it would weaken the technical tone, hinting that the upside correction has run its course.

The PBOC set the dollar’s reference rate at CNY6.4391, a little higher than the Bloomberg survey of bank models. As the Lunar holiday is about to begin, note the dollar has been confined with a couple of minor exceptions to the range set in the first couple sessions of 2021: roughly CNY6.43 to CNY6.51. Also, the offshore yuan (CNH) has once again risen past the onshore yuan (CNY), and the gap is the widest in a month.

Europe

Sweden’s Riksbank did not surprise. There was no change in policy. It does not expect that inflation will sustainably reach its target until 2023. Officials acknowledged that the changing consumption patterns and changes to the labor market data methodology complicate the economic analysis. Sweden’s economy was among the best performers in Europe last year was a 2.8% contraction. The eurozone’s output appears to have shrunk by more than twice that.

Of the large countries in the euro area, French industrial output was the biggest negative surprise. Ironically, the Bloomberg survey’s median forecast was for a 0.4% gain, which was more than it had expected from Germany, Italy, and Spain. Instead, output fell by 0.8%, and even worse, manufacturing output collapsed by 1.7%, while economists had anticipated a 0.3% decline. Production in Germany, Italy, and Spain was expected to rise by 0.3%. Germany’s was flat, Italy’s fell by 0.2%, and Spain surprised with a 1.1% increase. The aggregate figure is due on February 15, followed by the preliminary Q4 20 GDP the next day.

The euro approached our $1.2150 target in late Asian turnover. We suspect the market may try to retest the highs, though a break of $1.2100 would suggest it has been rejected. The euro has risen for three sessions coming into today after falling in the previous four. A move above $1.2150 brings $1.2200 into view. Sterling is making new highs today, a little above $1.3850. It has held above $1.3800 so far today. Recall that a week ago, sterling had briefly traded below $1.3570. There is little chart resistance ahead of the $1.40 area.

America

The US reports January CPI today. The headline pace may tick up to 1.5% from 1.4%, while the core rate is expected to slip to 1.5% from 1.6%. It is unremarkable, but the calm is almost over. After February, the spring inflation scare will properly begin. In March 2020, headline CPI fell by 03%, in April by 0.7%, and by 0.1% in May. As these negative prints drop out, the base effect will lift the year-over-year rate. The scare will subside in June-August as the CPI in 2020 rose 0.4%-0.5% a month.

Although Mexico’s January inflation, reported yesterday, was a little firmer than expected at 3.54% (vs. the median forecast in Bloomberg’s survey of 3.45%), Mexico’s central bank is widely expected to deliver a 25 bp rate cut today will bring the overnight rate to 4.0%. The pandemic has hit Mexico particularly hard, and by some metrics, among the hardest hit in the world. The AMLO government has been reluctant to provide much fiscal support, which puts more weight on monetary policy.

Through the power of appointment, AMLO has secured a majority of the Banixco board. While today’s move is one thing, the real issue is the forward guidance about the possibility of another cut. It looks difficult without inflation falling further.

Rising oil and equities support the Canadian dollar, but it typically underperforms in a soft US dollar environment. Yesterday, it gained a little more than a third of a percent. Among the majors, only the New Zealand dollar did worse (+0.25%). The US dollar slipped through support in the CAD1.2680 area today to record its lowest level since January 23.

It snapped back above CAD1.27 in late Asia/early Europe turnover and is straddling that area. Initial resistance is seen in the CAD1.2720-CAD1.2740 area. The greenback peaked near MXN20.60 at the end of January. It settled last week a slightly below MXN20.09. Yesterday, it recorded its low so far here in February, just above MXN20.01. Resistance is seen in the MXN20.15 area. The rate decision may inject some volatility into the peso trading. It may require a break of MXN19.95 or MXN20.20 to be significant from a technical point of view.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Limited Follow-Through Dollar Selling to Start the Week

Easing pressure from the pandemic as the surge in cases after the holidays may also be encouraging risk-taking to extend the global equity rally. Several markets in the Asia Pacific region, including Japan, China, India, and Thailand, rose by more than 1%. That was sufficient to lift the Nikkei and the Topix to their best levels since the early 1990s. Led by materials and financials, Europe’s Dow Jones Stoxx 600 is extending last week’s nearly 3.5% advance. US shares are enjoying a firmer tone, as well.

Benchmark 10-year bond yields are 2-3 bp higher in the US and most of Europe. Italian bonds are a bit more resilient, and the premium over Germany is near 95 bp, a new 11-year lows. The US 10-year reached almost 1.20%, its highest since the chaos last March. Gold marginally extended its recovery off last week’s two-month low, near $1785. A move above $1820 could spur another $10 rally. Meanwhile, oil continues to march higher. March WTI is up for the sixth consecutive session to build on last week’s nearly 9% advance. It has reached about $57.70, and there is little resistance ahead of $60.

Asia Pacific

China reported that its reserves unexpectedly slipped last month. A small increase from the year-end valuation of $3.216 was anticipated. Instead, reserves fell to $3.210, the first decline since October, but are $95 bln higher than a year ago. The decline may be a function of valuation adjustments. Major reserve currencies, outside the dollar, fell, and main investments, bonds, fell.

The PBOC estimates the value of its gold holdings fell by about $1.5 bln. Nevertheless, the yuan remains a heavily-managed currency. The large trade surplus and portfolio capital inflows are associated with an appreciating currency. Many suspect the yuan would be rising faster if it were not being checked. Pressing for greater transparency is the first step.

Japan’s December current account surplus eased to JPY1.17 trillion ($11 bln) from JPY1.19 trillion last November. The decline contrasts with the JPY350 bln increase in the trade surplus (JPY965 bln from JPY616 bln). Japanese investors stepped up their purchases of French and Italian bonds in December. Its French bond purchases of almost JPY450 bln was the most in more than a year. They also bought JPY424 bln of Italian bonds, the most in four months.

For the year as a whole, Japanese investors bought JPY3.75 trillion of Australian bonds and JPY1.48 trillion Canadian bonds. Both appear to be the highest on record. On the other hand, Japanese investors for net sellers of foreign equities for the first time since 2013. In 2020, foreign investors sold JPY2.79 trillion of Japanese bonds, the first annual net sales since at least 2014, but bought a record JPY21.4 trillion T-bills.

Taiwan reported record exports and imports last month to drive the trade surplus to $6.19 bln, about 20% more than economists forecast. Exports rose 36.8% year-over-year (12% in December), while imports jumped almost 30% (less than 1% in December). Exports to Hong Kong and China rose 57.0% year-over-year. Exports to the US and Japan rose 21.9% and 21.5%, respectively. Shipments to Vietnam increased by nearly 82%. On the import side, China and Hong Kong rose by almost 47%, almost 77% from South Korea and 66% from Thailand. Intra-Asian trade is impressive.

The dollar held above JPY105.30 support and continue to flirt with the 200-day moving average (~JPY105.60). The pre-jobs data high was a little above JPY105.75. Rising yields and rising equities are often seen as negative for the yen. The Australian dollar briefly and marginally rose above last week’s high but stalled a little above $0.7680. An option for A$1 bln at $0.7650 expires today and may attract prices. The PBOC set the dollar’s reference rate at CNY6.4678, a touch softer than expected. The yuan has traded broadly sideways so far this year. The offshore yuan has also been rangebound, mostly between CNH6.44 and CNH6.50.

Europe

Following last week’s disappointing factory orders (the 1.9% decline in December was nearly twice what was expected), Germany reported no change in industrial output. The median forecast in the Blomberg survey was for a 0.3% gain. The disappointment was mitigated by the revision in the November series to 1.5% from 0.9%. In contrast, Spain reported a 1.1% jump in industrial output in December. Economists had expected a 0.3% increase after a 0.9% decline in November. Italy reports its figures tomorrow, and the aggregate report for the euro area is due in a week.

Italy’s Draghi is holding the second round of talks, but it is increasingly likely that he will lead the next government. A cabinet could be named later this week, and confidence votes held in parliament next week. The Five Star Movement, the largest party in the lower house, initially seemed opposed, but going to the polls now would have dealt a blow to the party that grew out of the crisis a decade ago. The (Northern) League, on Italy’s political right, has also indicated support after initial hostility.

Several small and moderate parties also support Draghi. The far-right Brothers of Italy appears to be the notable holdout. A poll over the weekend found more than half of Italy wants Draghi to be prime minister until 2023, when the next parliament election is due.

The euro initially extended the pre-weekend recovery but stalled near $1.2055 before pulling back toward $1.2020 in the European morning. There are two option expirations of note today. One is at $1.20 for 1.1 bln euros, and the other is at $1.2050 for a little more than 625 mln euros. The limited follow-through buying after the key upside reversal after the US jobs data is somewhat disappointing.

However, so far, the price action is consolidative in nature, confining the euro to a relatively narrow range near the pre-weekend high. Sterling saw the least possible follow-through (it was worth 1/100 of a cent) and struggled to sustain a foothold above $1.3700. The pre-weekend low was a little under $1.3665, and a break of $1.3635-$1.3655 would weaken the technical tone. Of note, the euro is gaining on sterling for the second consecutive session. It does not sound like much, but it is the first time this year that the euro could post back-to-back gains.

America

While the rise in long-term US yields has captured market participants’ imagination, less noticed has been the slippage of short-term rates. The two-year yield fell to a marginal new record low ahead of the weekend, just above 10 bp. The Eurodollar benchmark rate is also at record lows. Other money market rates are lower, The system is awash with cash. The Treasury is drawing its cash balances at the Fed down, and this is expected to be a trend in the coming months.

Partly this is to pay for the stimulus, and partly it is a function of the budget process and the pending debt ceiling, which requires the cash holdings be reduced to a little less than $120 bln from over $1 trillion. One implication is that the US 2-year premium over Germany has fallen to almost 80 bp, the lowest level since last August. In contrast, the US 10-year premium over Germany has edged up to 1.61%. A 10-month high was set last month near 1.68% before falling to around 1.56% at the end of January. Another implication is that US T-bill yields may dip below zero.

Separately, the US quarterly refunding kicks off tomorrow. It will sell $126 bln in coupons. The backing up of yields offers a concession to investors. Demand at the long-end will be closely monitored, but recall that demand last month was robust. Assuming that these sales go off without a hitch, some post-auction bounce cannot be ruled out.

The US 10-year yield is higher for the eighth consecutive session. The yield has risen around 17 bp during this run. Most explanations focus on inflation expectations driven by the $1.9 trillion stimulus proposal that follows on the heels of the $900 bln packaged at the end of last year. Noted economists Summers and Blanchard seemed to play up the inflationary risks, even though inflation spurred by overheating of the economy has not been seen in more than 30 years, the link between deficits and inflation is far from clear, and that is before a discussion about modern monetary theory.

Meanwhile, oil prices are higher for the sixth session and have risen by about 10% during this run. It looks like it has been driven primarily by supply considerations, which will wane. Indeed, that is what the backwardation in the oil market means (higher prices near-term, lower prices medium-term).

The economic calendar of North America is light today. The week’s highlights include the US and Mexico’s January CPI and Mexico’s central bank meeting (February 11). The market expects a 25 bp rate cut that will bring the overnight target to 4%. The Fed’s Mester speaks today and Bullard tomorrow, but the highlight is Chair Powell on Wednesday at the Economic Club of New York.

The US dollar is pinned near the pre-weekend low against the Canadian dollar. It has not been able to distance itself much from the CAD1.2755 low, which is slightly above the 20-day moving average (~CAD1.2745). Initial resistance is seen around CAD1.28. Similarly, the greenback has held above the MXN20.08 area seen after the US jobs disappointment (and the 20-day moving average is around MXN20.02). Initial resistance is seen in the MXN20.20-MXN20.25 area, but only a move above MXN20.50 is noteworthy.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Even When She Speaks Softly, She’s Yellen

After posting the first back-to-back decline this year, the MSCI Asia Pacific Index bounced back today, led by a 2.7% gain in Hong Kong (20-month high) and a 2.6% rise in South Korea’s Kospi. The Nikkei and Taiwan’s Stock Exchange rose by more than 1%. Europe’s Dow Jones Stoxx 600 eked out a small gain yesterday and is a little higher today. The S&P 500 fell in the last two sessions for a loss of a little more than 1% and is trading about 0.6% better now.

The US 10-year is firm at 1.11%, while European bonds are little changed, and the periphery is doing better than the core. Of note, France’s 50-year bond sale was greeted with a record reception. The dollar is lower against all the major currencies, but the yen. Most emerging market currencies are firmer as well. We see the dollar’s pullback as part of the larger correction that began almost two weeks ago.. Gold recovered smartly from yesterday’s test on $1800 to return to the 200-day moving average (~$1845). February WTI reversed lower ahead of the long holiday weekend and made a marginal new low today (~$51.75) before recovering nearly a dollar.

Asia Pacific

According to the recent government data, China’s rare earth exports fell by more than a quarter to what Reuters estimates are the lowest in five years. China attributed it to weaker global demand, but there is something else going on. Yesterday, China indicated that a new mechanism will be created to decide, coordinate, and regulate the rare earth supply chain (including mining, processes, and exporting).

Rather than exporting rare earths, China’s industrial policy aims to export products containing rare earths. Move up the value-added chain. The big push now apparently is for batteries for electric vehicles. The PRC has become a net importer of rare earths that it processes. Its imports often come from mines it owns outright or has an important stake. For example, the Democratic Republic of Congo is responsible for 60% of the world’s cobalt.

There are 12 mines, and reports suggest China has a stake in each, and more than 85% of the cobalt exports are headed to China. In 2018, China provided around 80% of US rare earths, and at least one mine in the US sends the material to China to be processed.

For the past several sessions, the dollar has forged a base in the JPY103.50-JPY103.60 area and is probing the JPY104.00 level. The high from January 14 was about JPY104.20, and there is an option for roughly $360 mln at JPY104.35 that expires later today, just shy of last week’s high near JPY104.40. The Australian dollar closed below its 20-day moving average yesterday (~$0.7100) for the first time in a little more than two months.

It rebounded earlier today to $0.7725. The session high may not be in place, and we suspect there is potential toward $0.7740. The dollar’s reference rate was set at CNY6.4883, practically spot-on median expectations in the Bloomberg survey of bank models. The dollar’s four-day advance was snapped today. It has risen from almost CNY6.45 and stalled in front of CNY6.50. Faced with an increase in interbank borrowing costs for the ninth consecutive session, the PBOC injected CNY75 bln in seven-day cash via repo agreements.

It is the first injection after draining for the past six sessions, and it was the largest supply of funds this month. Some liquidity appears to be going into equities, and Chinese traders reportedly bought a record $3.4 bln of HK shares today.

Europe

Despite Germany’s social restrictions, which may be tightened and extended, business sentiment held in better than feared. The ZEW survey assessment of current conditions did not deteriorate as economists expected, though it did not really improve, either. The -66.4 reading compares with -66.5 in December. However, the expectations component rose to 61.8 from 55.0. This is the highest since September and more than anticipated.

The UK Prime Minister, who holds the rotating G7 presidency, has invited South Korea, India, and Australia to the summit in June. Moreover, reports suggest Johnson intends on getting them involved right away, which seems aggressive. It appears to be causing some consternation among other members. Germany, Japan, France, and Italy are opposed.

Italy’s Prime Minister Conte survived the vote of confidence in the Chamber of Deputies yesterday, and today’s challenge is in the Senate. The government support is thinner. However, the ability to secure a majority is somewhat easier given that Renzi’s party will abstain, though it will still be close. A defeat could see Italian bonds sell-off, but Conte will seek to broaden the coalition in the existing parliament before elections are required. This could include independents or members of center-right parties.

Two central bank intervention announcements last week caught our attention. First, Sweden’s Riksbank announced a three-year plan to purchase SEK5 bln a month. The purpose is to fund reserve purchases in SEK and pay down the SEK178 bln fx loans from the National Debt Office, which is thought to be about 70% in US dollars.

The krona was trending lower this year against both the dollar and euro, which follows the krona’s appreciation in the last few months of 2020. The impact is minor in terms of average daily turnover, estimated to be around SEK300-SEK320 bln almost equally divided between euros and dollars.

Second, the Israeli shekel soared in recent months and reached levels not seen since Q1 1996. The Bank of Israel intervened and bought $21 bln in all of 2020, with almost $4.5 bln in December alone, and still the shekel appreciated by 7.5% and nearly 3%, respectively. Businesses and investors were crying for relief. The central bank announced it would buy $30 bln this year, which triggered a powerful short-covering rally that carried the dollar from nearly ILS3.11 to almost ILS3.29 by the end of last week.

Dollar sellers emerged yesterday. It is steadier today, but in wider ranges than typically seen before. Its preannounced intervention war chest may ultimately prove insufficient to prevent shekel appreciation. The $30 bln is roughly twice its current account surplus, but foreign direct investment inflows are nearly the same size as the current account surplus. And yet, net portfolio inflows should be expected, but most importantly, how Israeli offshore investment is managed can be impactful.

Profit-taking on foreign investments or hedging the currency risk, even on a small fraction of the roughly $470 bln of foreign stocks and bonds owned by Israelis, can be a significant force rivaling the current account and direct investment-related flows.

The euro was sold a little below $1.2060 yesterday, its lowest level since December 1st. It reached $1.2130 in the European morning, and the $1.2140 area is the halfway point of last week’s decline. The bounce has left the euro’s intraday momentum indicator stretched.

We expect North American dealers will take advantage of the upticks for a better selling opportunity. Also, note there are around 4.1 bln euros of $1.2190-$1.2200 options that roll-off today. Sterling recovered a little more than a cent from yesterday’s lows (~$1.3520) to today’s high. It faces resistance near $1.3635. Tomorrow the UK reports December CPI figures, and a small uptick is expected.

America

The Senate holds the confirmation hearing for Yellen. She was the first woman to head the Federal Reserve, and she will be the first woman to lead the US Treasury, and the first person to have held both posts. It is a reflection of our age. Like the current Federal Reserve, the former Chair can be expected to recognize the need for fiscal support, while at the same time acknowledging that deficits will decline on the other side of the emergency.

The stock of debt is elevated, but it not extreme in relative or absolute terms. Despite higher debt in 2020, the servicing costs appear to have fallen. Moreover, as the economy grows faster than the level of interest rates, debt will decline as a percentage of GDP. Her remarks on the dollar will be scrutinized. To demonstrate the Biden Administration’s multilateral thrust, at this juncture, it is sufficient for Yellen to acknowledge the G7/G20 position that exchange rates are best set by the market.

At the end of last year, the US Treasury cited Switzerland and Vietnam as currency manipulators. She may be asked about those, and of course, the yuan. The new US Treasury model had the yuan a few percentage points undervalued. However, it is interesting to note that when adjusted for GDP per capita, The Economist Big Mac index of purchasing power parity has the yuan slightly (~2.5%) overvalued.

The economic calendars for North America are light today. The Treasury’s International Capital (TIC) for November will be reported today at the end of equity trading. Capital flows were volatile at the onset of the pandemic, but long-term inflows averaged $23.56 bln in the first ten months of 2020 compared with an average of $27.21 bln in the same period in 2019 and $54.32 bln in the Jan-Oct period in 2018.

The week’s highlight includes the January Philadelphia Fed survey Thursday and weekly jobless claims, as well as Friday’s preliminary PMI. Canada reports the December CPI tomorrow, shortly before the outcome of the Bank of Canada meeting is announced. Although the consensus is for a standpat outcome, a “mini-cut” cannot be ruled out given the official rhetoric. The current overnight target rate is 25 bp. The main feature for Mexico is the December unemployment figures on Thursday. Brazil’s central bank meets tomorrow, and the is little chance of a change in the 2% Selic rate.

Last Thursday, the US dollar recorded its lowest level against the Canadian dollar since April 2018 (~CAD1.2625). Between the modest greenback strength seen yesterday and expectations that Biden cancels the XL pipeline, the US dollar tested CAD1.28. It has come back offered today and is testing the CAD1.2720 area in the European morning.

It can fall a bit further in the North American session, but we look for support in the CAD1.2690 area to hold. That said, a break could signal a move toward CAD1.2640. The greenback held below MXN20.00 yesterday and reversed lower, closing a little under MXN19.69. It has taken out yesterday’s low (~MXN19.66) but struggles to maintain the downside momentum. A move above MXN19.75 would suggest a return to MXN20.00 is likely.

The dollar fell from BRL5.5160 last week, its highest level since mid-Movember, to BRL5.20. The low from earlier this month was around BRL5.12, and there is scope for a re-test.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Darkest Before Dawn

This includes the release of the preliminary January PMI figures at the end of the week. Japan is extending its national emergency to another five prefectures, which collectively account for over half of the nation’s GDP. Germany’s Merkel, not given to hyperbole, warns that the lockdown may last ten more weeks. The Dutch do not appear far behind. England is talking bot tightening its restrictions. Even China appears to be experiencing a flare-up. The pandemic is out of control in the US, although the curve appears to be flattening in some areas.

It was widely recognized that the virus and vaccine are going to dictate the economic story in 2021. The new variant of the virus is more contagious and the roll-out of the vaccine has been frustratingly slow in most countries. The recovery in Q3 seen among the high-income countries was a dramatic snapback but for many, it was not the beginning of a sustained recovery. That recovery may be several months away. The point is that the economic risks for the remaining Q4 20 data and for Q1 21, which just began, are on the downside.

If that is indeed the case, then why have bond yields risen? Is this another disconnect between Main Street and the House of Finance, like stocks rallying during the pandemic? It is darkest before dawn and whether it is four months or six months, the investors expect better news in the second half of the year. At the same time, there will be a new stimulus push in the US. The UK Chancellor of the Exchequer will have to extend aid as the lockdown is extended and intensified. It is likely Germany will have to, as well. Italy’s projected debt issuance is a third higher than it was a couple of weeks ago.

At least four Fed officials have said they could consider tapering before the end of the year. To be specific, the four are regional presidents, while the governors, including Powell and Clarida, have played this down. Currently, the Fed is buying $80 a month of Treasuries (about 55% have been notes of 4.5-years or less before maturing and about 13% in the 20-30 year bucket) and $40 bln a month in Agency mortgage-backed securities. No one is saying that tapering is imminent and a majority of officials that have spoken suggest it does not look particularly likely this year at all. That was also the thinking in last month’s primary dealer survey conducted by the Federal Reserve.

Yet if tapering is not the real culprit for the sharp rise in US yields this year, what is the driver? Where you begin your narrative points you in the direction of the answer, In one telling, the US 10-year yield has risen by around 45 bp since the election as investors discounted greater supply and became more committed to the reflation trade, which means higher real rates, and arguably a sensitivity for higher inflation. At the same time, the price of oil has surged.

The February WTI futures contract closed in October near $36.5. It approached $54 a barrel before profit-taking kicked-in ahead of the weekend. Recall that end of last January it was around $50.50. The deflationary thrust from oil prices has ended. Inflation expectations often track significant moves in oil prices.

Asian demand, including China’s apparent inventory accumulation, drove industrial metal prices higher at the end of last year. On the other hand, supply concerns following last week’s disappointing report on US plantings saw corn and soy prices rise to 6-7 year highs, and cotton traded at a two-year high. The CRB index has risen by over 22% since the end of October.

Even the coming Treasury supply may be exaggerated by partisans. The idea from both sides is that Biden will press ahead with the Democratic control of the legislative branch to push through the rest of the $3.2 trillion bill passed by the House of Representatives last year. However, we suspect it is more likely that Biden, judging from his disposition and that he learned from his experience with Obama, will avoid antagonizing the opposition and souring the relationship from the get-go. Instead, he is likely to find a compromise and make it bipartisan even if it results in a small package. In appointments and temperament, Biden is moderate.

Biden will be inaugurated on January 20. The day before, Yellen will speak at her confirmation hearings. In addition to broad economic issues, she will likely be asked about the dollar. As an economist, she recognizes that ideally one wants the currency to move in line with policy, otherwise it blunts or undermines it. At the Federal Reserve, she recognized that dollar policy is a Treasury remit. That makes it her call now.

The “strong dollar” mantra that existed before 2016 cannot simply be returned to now. A new formulation is needed to confirm that the US will not purposely seek to devalue the dollar to reduce its debt burden or for trade advantage. To signal a multilateral spirit, Yellen may be best served by reiterating the G7 and G20 stance that markets ought to determine exchange rates, that they should move in line with fundamentals, and avoid excess volatility. It does not have to be the final word, but as the first word, it would be reassuring.

Four G10 central banks meet in the coming days. The gamut of outcomes is likely, with the ECB, ironically, being the least perhaps the least interesting. Since it met on December 10, the pandemic has gotten worse and social restrictions and lockdowns have intensified and lengthened. The uncertainty of the US election and UK-EU trade negotiations has been resolved. Key hurdles to the EU’s budget and Recovery Fund were lifted.

The day before the last ECB meeting, the euro settled near $1.2080. It settled last week around $1.2150. March Brent was trading a little below $49 is rallied to almost $57.5 last week before consolidating. The 10-year German Bund yield has risen around 10 bp (to around minus 50 bp) and Italy’s premium has softened from almost 120 bp before the December meeting to almost 100 bp before widening again (115 bp) amid the political challenges in Rome. There is little for the ECB to do now.

The extension of the emergency in Japan to cover the area which generates more than half of the country’s output raises the downside risks. The central bank is likely to formally recognize this in one or two ways. It may shave its downgrade its qualitative assessment. It could also adjust its forecasts. In its last forecasts, issued in October, it anticipated the economy to contract 5.5% in the current fiscal year. Its previous forecast was for a 4.7% slump. The BOJ could also reduce the projection of growth for the next fiscal year, which was seen at 3.6%, up from 3.3% last July.

While peak monetary policy may generally be at hand, the Bank of Canada may be an exception. The overnight target rate sits at 25 bp. It is clear that officials do not want to adopt a negative rate, but Governor Macklem has suggested the lower bound for Canada maybe a little lower than where it is now but still above zero. Given the economic consequences of the spreading virus and some disappointing high-frequency data, the market (overnight index swaps) has a few basis points of easing discounted. It may not exactly be clear what a small rate cut achieves, but last year, the Bank of England and the Reserve Bank of Australia delivered small moves of 15 and 10 bp respectively.

Before this intensification of the virus, the Bank of Canada had seemed to be a candidate for an early exit from emergency policies. Now Norway’s Norges Bank appears at the front of the line. At its last meeting in the middle of December, the central bank brought forward its anticipated first hike to the first half of 2022. Since the December meeting, the high-frequency data points suggest that economic activity and prices are more resilient than feared.

The economy contracted by 0.9% in the three months through November. It was also half as bad as economists projecting. Underlying CPI, which adjusts for tax changes and excludes energy, rose by 3% year-over-year in December. The record drawdown from the sovereign wealth fund provided an early and strong fiscal cushion.

Two emerging market central banks of note meet as well next week. Turkey’s new central bank governor Agbal has made several steps that have given notice that there is a new economic regime. On Christmas Eve he delivered a 200 bp hike outstripping median forecasts for a 150 bp move. The one-week repo rate now stands at 17%. Inflation reached 14.6% last month.

Since the end of last October, the Turkish lira has been the strongest currency in the world, appreciating by about 13.4% against the US dollar. It is still off a little more than 19% since the end of 2019. Over the past three months, the yield on its 10-year dollar bond has fallen by about 105 bp to 5.60%. The market is signaling another rate hike is not needed.

The South African Reserve Bank can also stand pat, though for different reasons. SARB cannot afford to cut any further. Its repo rate is at 3.5% and December CPI stood at 3.2%. After cutting by 300 bp last year, the central bank held steady at the last two meetings of 2020. The implied policy path of SARB’s projections points to a rate hike in Q3 and Q4 this year., though we are a little skeptical that it can be delivered.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Asia, Brexit, Sterling, the Euro, and Dollar

We had a broad chat about the dollar, Brexit, and the euro.  He gave me the opportunity to sketch out my views:

The dollar’s entered a cyclical decline, and the “twin deficit” issue will likely frame the narrative.

Many observers do not use that particular phrase now, but their arguments seem to rest on one if not both of the legs.

Sterling gains appear to be more short-covering than the establishment of new longs.

Like Sri, many seem to think it is nearly a foregone conclusion that officials will fail to strike a deal.  I suggest sterling could fall a 2-3% in a knee-jerk reaction to no deal. Some observers see the risk that the BOE would adopt a negative bank rate in such circumstances.

The euro’s strength is not about the economic performance in Q4

Investors seem to be looking past it and into next year.  It is partly a reflection of a dollar-bearish view, but also ideas that European equities can outperform the US have returned after again being disappointed.  I have previously suggested that I thought the euro could trade into the $1.25-$1.30 area next year.  Although I was early on the dollar bear call, the call is rather modest, compared to some of the large banks and Stephen Roach, who sees a record 35% appreciation of the euro based on low US savings.  The median forecast in the Blomberg survey is for the euro to finish 2021, near $1.24.

Here is a link to a roughly three-minute clip.   

This article was written by Marc Chandler, MarctoMarket.

Beware of the False Break

The major currencies remained within well-worn ranges. The JP Morgan Emerging Market Currency Index rose by around 1%, for its third weekly gain. It is at its best level in eight months. The Bannockburn World Currency Index rose by more than 0.5% to new two-year highs.

Equities were generally higher, and benchmark 10-year yields were mostly lower. China’s 10-year government bond was an exception. The yield rose a few basis points on the week to poke above 3.3% for the first time in over a year. The recovery has advanced to the degree that Chinese officials warn that monetary policy may need to adjust.

That said, it did sell a 5-year euro-denominated issue with a negative yield for the first time. Still, a string of high-profile failures continues, including a car manufacturer, real estate developer, and chipmaker last week suggests there may not be much appetite for any aggressive measures to tighten financial conditions.

Talking points in the foreign exchange market are still dominated by the virus and vaccine. Thin trading in the US afternoon seemed to have been subject to exaggerated responses to headlines (e.g., Shelton’s nomination to the Fed and stimulus talks). Turkey’s central bank delivered a strong statement to the market, and the lira tested two-month highs. South Korean officials’ verbal intervention reinforced the importance of the KRW1100 level, while Thailand’s resistance to baht strength prompted officials to relax rules on capital outflows.

Dollar Index

The Dollar Index hovered around the trough a little above 92.00 last week. It barely held above the month’s low set on November 9, a little below 92.15. It probably takes a break of the spike low on September 1 to about 91.75 to signal a breakout. The momentum indicators show room to the downside, albeit limited before getting stretched. Perhaps a macro development, like a trade agreement between the UK and EU, could be the spark. Still, with the virus continuing to ravage Europe, three-month Euribor at record lows, and the implicit threat of verbal intervention if the euro approaches $1.20, it does not seem time for a sustained breakout.

Euro:

Within the $1.16-$1.20 range that has confined the euro for a few months, the euro looks comfortable in a narrow $1.1750-$1.1900 range. It spent last week on the $1.18 handle. The MACD and Slow Stochastic show momentum still favoring the upside, and the five-day moving average is about the 20-day. However, we expect the market to be reluctant to push the euro much higher. The speed to which it came off after seeing $1.1920 on November 9 warns of possibly weak conviction. A weak preliminary PMI will increase concerns of a new economic contraction after the Q3 rebound.

Japanese Yen:

The dollar takes a seven-day decline into next week. The dramatic short squeeze lifted the dollar from eight-month lows near JPY103.20 to around JPY105.65, sparked by Pfizer’s news on November 9, has almost been completely unwound. The greenback spent the pre-weekend session near JPY103.60. While the technical indicators point lower, the selling pressure appears to have dried up in recent days. A break of JPY103 would likely spur some official comments, but it may take a move above JPY104.20 to stabilize the tone.

British Pound:

Sterling rose by about 0.75% last week, its third weekly advance in a row. It met selling pressure a little over $1.33 like it did earlier the month. Another trade talk deadline is seen early next week, and we suspect there would be a larger market reaction if there was no deal than if there were. Many talk about the potential for as much as a 5% swing in either direction, which seems exaggerated. The momentum indicators are at a mature part of their cycles, and sterling is up around 2.5% so far this month.

The one-week implied volatility finished the week near 10.25%, its lowest weekly close in four weeks. Sterling has also gained around 1% against the euro over the past two weeks. Our thought is to fade dramatic moves.

Canadian Dollar:

The greenback’s gains scored in the wake of the Pfizer news against the Canadian dollar were partly unwound last week. In fact, the US dollar had approached the (61.8%) retracement objective found near CAD1.3020. The momentum indicators did not move much last week as the US dollar traded within the previous week’s range.

Next week, the light economic calendar reinforces our sense that the main drivers of the Canadian dollar are not to be found in Canada but the broader appetite for risk. Although the US fell to lows for the year on November 9 near CAD1.2930, initial support is still seen around CAD1.30. The CAD1.3100-CAD1.3120 area may provide the nearby cap.

Australian Dollar:

The Australian dollar finished its third consecutive weekly advance on a firm tone above $0.7300. However, it spent the week in a narrow band around there and could not take out the previous week’s high near $0.7340, despite a larger than expected jump in employment. The Australian dollar has appreciated by 4% this month, and the momentum indicators are getting stretched. While a marginal new high is possible, the September 1 and year-high near $0.7415 seems too far.

Mexican Peso:

The dollar posted its lowest weekly close since early March against the Mexican peso, below MXN20.10. Since the end of July, the greenback has managed to close higher on a weekly basis only three times. It is not Mexico’s macro situation that underpins the peso and has driven nearly 5.5% already this month. Portfolio capital flows, drawn to its relatively high yields (e.g., ~4.25% on three-month bills), appear to be the main considerations on top of a trade surplus and strong worker remittances.

The peso is also a favorite of the speculative community and carry-trades. A break of MXN20.00 is possible near-term, and the pressure is relentless. The momentum indicators stretched and reflect that the dollar has fallen from the MXN22.00 spike high on November 4.

Chinese Yuan:

The yuan strengthened by about two-thirds of a percentage point last week to make it about 2% richer on the month. Year-to-date, its 6.1% gain leads the emerging market currencies. Even shallow pullbacks are bought. Old support for the US dollar, near CNY6.60, now serves as resistance. Given China’s importance as a trading partner, it was thought the yuan appreciation would give scope for other emerging Asia currencies to appreciate.

South Korea and Thailand showed that this might not be the case and dollar invoicing is still common even when a US company is not involved. If the yuan’s adjustment is on par with the one in 2010-2011 or 2017-2018, the dollar could be headed toward CNY6.40. Alternatively, the US Treasury opined that the yuan was 5% undervalued. If this was corrected, the dollar would be near CNY6.20.

Gold:

The combination of the prospects for a vaccine and that Shelton looks unlikely to join the Fed sent gold down for a second consecutive week and the first back-to-back weekly loss in three months. Support was found a little above the previous week’s low near $1850. The upticks were not impressive, and the bounce stalled near $1880. A break of $1850 could open the door to $1800, but we suspect bargain hunters are lurking and are looking for some sign that the selling pressure has abated and will likely react strongly to any reversal pattern in the price action. A move above $1900 would begin healing the scar tissue,

Oil:

If the prospects of a vaccine weighed on gold prices by reducing the perceived need for a safe-haven, it helped oil by strengthening the case for demand. January WTI rose a little more than 4% last after surging around 11.5% over the previous two weeks. Except for a brief and limited disruption in the middle of the week, the price of oil stayed within Monday’s range (~$40.40-$42.35). The November 9 high was set near $43.35, and that remains the near-term objective. Initial support is seen near $41.80. The MACD is trending higher, but the Slow Stochastic is flatlining near its highs.

US Rates:

The US 10-year yield slipped six basis points last week to finish near 0.83% and is four basis points lower than the end of last month. Speculation that the Fed will shift its purchases to the longer-dated maturities countered the “reflation trade” that has helped lift the yield to 0.97%, where it stalled. With the two-year anchored by the Fed’s steady rate policy, the lion’s share of the decline in the 10-year yield filtered to the 2-10-year yield curve.

Despite the rise in oil prices, and commodity prices more broadly (including soy and copper), with the CRB Index at eight-month highs, inflation expectations softened as reflected in the five-year forward forward and the 10-year breakeven. The 10-year note futures’ momentum indicators suggest there is more upside potential, but prices are stalling around 138-16, a (61.8%) retracement objective of the decline since the November 5 high.

S&P 500:

The high for the week was set last Monday after a gap higher opening, and a new closing record high was set near 3627. The gap was closed the following session, and prices did not bottom until Thursday around 3544. Price reversed higher, but there was no follow-through buying, and the pre-weekend session was spent in a narrow 15 point range, the smallest range in three-months.

When Pfizer’s news first broke, there was a rotation, and the NASDAQ underperformed the other benchmarks and the Russell 2000, but last week, the NASDAQ gained while the Dow and S&P 500 slipped. However, the Russell 2000 beat the NASDAQ again (~2.3% to 0.8%). Indeed, the Russell 2000 is up 14% over the past three months while the S&P and NASDAQ are up 5.6% and 5.8%, respectively. Near newly minted record highs, resistance is not meaningful. Support is seen near 3500.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Markets Remain Unsettled

Emerging market currencies and the majors that benefit from world growth outperformed the perceived safe-havens, like the yen and the Swiss franc. The euro rose above $1.19 briefly before selling off to trade below $1.18. Gold collapsed.

Yesterday’s violent moves may have been an overreaction, but today’s action is more consolidative than a reversal. Most Asia Pacific markets rallied, led by 3-4% gains in Singapore, Malaysia, and Thailand. China and Taiwan were exceptions with their losses. Europe’s Dow Jones Stoxx 600 is firm as it consolidating yesterday’s is nearly 4% gain. US shares are mixed with the tech-heavy NASDAQ looking at additional steep losses, while the S&P 500 is trading about 0.5% lower.

Australia and New Zealand saw big jumps (13-15 bp) in their 10-year yields as they catch-up to yesterday’s move in the US and Europe. Europe’s benchmark yields are firm, and the US is firm with the 10-year Treasury yield changed around 0.94%, having reached an eight-month high near 0.97% yesterday. The dollar is trading firmly against most of the major currencies, with sterling a notable exception.

It extended yesterday’s gains and traded around $1.3260, its best level since September 7. The JP Morgan’s Emerging Market Currency Index is snapping a five-day advance. The Turkish lira and South African rand are paring yesterday’s gains. Gold has steadied after yesterday’s 4.5% shellacking, its biggest loss in three months. The attempt to resurface $1900 was rebuffed. Oil prices are holding on to yesterday’s gains. The December WTI is around $40.65 a barrel in the European morning after reaching almost $41.35 yesterday. Recall that early last week, it hit a low near $33.65

Asia Pacific

While Pfizer‘s vaccine and Eli Lilly’s antibody therapy appear promising, Brazil’s testing of China’s Sinovac’s Coronavac was halted due to an “adverse event.” What needs to be kept in balance is that there are still many steps before a vaccine is available, and the most pressing health issue is the surge in the infection. Vigilance is still needed.

Falling pork prices saw Chinese CPI fall below 1% for the first time in three years in October. The 0.5% year-over-year CPI was lower than expected and follows a 1.7% gain in September. Pork prices fell by 7% in October. The 2.8% decline year-over-year is the first since February 2019. Food prices as a whole rose 2.2% year-over-year after 7.9% in September. Non-food prices were flat, and core prices were unchanged at 0.5% from a year ago. Producer prices remained 2.1% lower than a year ago, the same as in September. Economists had expected a little improvement. Chinese officials do not seem ready to respond, and deflationary pressures on consumer prices will likely continue.

Japan reported a smaller than expected September current account surplus of JPY1.66 trillion down from JPY2.11 trillion. On the other hand, Japan’s trade surplus grew, practically doubling month-over-month to JPY918 bln from JPY413 bln. In the past six months, Japan’s trade surplus has swung from a JPY929 bln deficit to the September surplus of nearly the same magnitude reported today. Separately, as has been well telegraphed, Prime Minister Suga ordered the compilation of a third supplemental budget.

The dollar soared against the Japanese yen yesterday, rising from around JPY103.20 to about JPY105.65. It is consolidating in the upper end of that range today (~JPY104.80-JPY105.45). There is an expiring option for $980 mln at JPY105.50 and a smaller option for JPY375 mln at JPY106 that also rolls off today. Initially, it looks like Tokyo sold into the dollar’s surge, but buyers returned, and the dollar was recording session highs in the European morning. The Australian dollar reached nearly two-month highs yesterday near $0.7340 and retreated to almost $0.7265.

It has been unable to distance itself much from those lows today and has held below $0.7300. A break of the $0.7250 area may signal a move toward $0.7200. The PBOC set the dollar’s reference rate at CNY6.5897, near what the bank models expected. The dollar is trading within yesterday’s range (~CNY6.5640-CNY6.6350)

Europe

Germany failed to convince the other EU members to postpone WTO-sanctioned tariffs on US goods in retaliation for improper subsidies for Boeing. The new EU tariffs on $4 bln of US goods will be formally announced today. While it is perfectly within its legal rights to do, the risk is that the US makes good on its threat to boost the levies that it was allowed to impose because of Europe’s improper subsidies for Airbus. Regardless of the election outcome, Trump is still the US President, and the office is still powerful. For example, new sanctions were announced on four more Chinese officials for the dissent crackdown in Hong Kong.

The UK employment report was weak. The unemployment rate jumped to 4.8% from 4.5%. It is the highest for a three-month period in four years. Employment has fallen by 164k in the three-month through September. The government’s extended furlough program was not announced in time to impact this time series. Separately, the House of Lords removed the most controversial clauses in the government’s Internal Market Bill, but it will be reinserted by the House of Commons.

There is some speculation the new US administration is considerably more skeptical of the merits of Brexit that it could impact the UK-EU negotiations, as the Irish foreign minister suggested. However, it seems like a stretch, and the deadline for the trade deal is less than a week away.

The euro briefly traded above $1.19 yesterday before selling off and dipping below $1.18. After struggling to sustain even modest upticks, it has been sold in the European morning to around $1.1780. The halfway point of the rally from the test on $1.16 last week to yesterday’s high is near $1.1760, and the next retracement (61.8%) is closer to $1.1725. There is an option for 1.5 bln euro at $1.18 that expires today and another for about 665 mln euros at $1.17. Sterling is the strongest of the major currencies.

While sterling was firm the Asia Pacific session, it pushed higher in the European morning. The next chart target is near $1.33. Sterling strength appears to be coming from the cross against the euro. The euro broke down yesterday, and the follow-through selling has driven the single currency below its 200-day moving average (~GBP0.8925) for the first time in six months. The next target may be the September low near GBP:0.8865.

America

The US quickly took credit for the Pfizer vaccine, but it got no funds from Operation Warp Speed for the trial, testing, and manufacturing. Pfizer’s partners, BioNTech SF, did receive almost $450 mln from Germany. What the US did was agreed to pay $2 bln for 100 mln vaccines and an option for another 500 mln doses. The US does get to decide who gets the vaccine first. Reports suggest Pfizer will handle the distribution directly and has designed reusable contained to keep the medicine at the cold temperature necessary. Moderna uses an approach similar to Pfizer’s, and the results are expected in the coming weeks.

While the JOLTS report is the economic data highlight, no fewer than five Fed officials will talk through the day today. Governor Brainard, who is seen as a possible candidate for Treasury Secretary, discusses the Community Reinvestment Act and could draw extra attention. Mexico and Canada also have light economic calendars today. Mexico’s slightly higher than expected headline inflation but slightly lower core inflation keeps the market favoring a rate cut late this weeks.

The US dollar was sold to new lows for the year yesterday against the Canadian dollar (~CAD1.2930), but the greenback recovered to close above CAD1.30, which is now support. It is firm today, having reached CAD1.3040 in the European morning. Yesterday’s high was near CAD1.3070. The greenback is was testing CAD1.34 at the end of October, and some near-term consolidation is likely. The US dollar fell to almost MXN20.00 yesterday after finishing last week near MXN20.60. It, too, is consolidating today. It is near the middle of today’s range in late morning dealings in Europe (~MXN20.35)

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Bears Drive the Greenback Lower, but was it Too Quick?

Many participants were caught wrong-footed by the dollar’s drop and the sharp drop in US yields. Equities were unexpectedly strong, and impressively, the Nikkei posted its highest close since 1991 ahead of the weekend, despite the yen’s strengthening to its best level in eight months.

The macro news stream will be considerably light next week. Even if nothing changes, the sharp moves in recent days have left some momentum indicators stretched, and many participants may be reluctant to simply extend trends. The lockdowns and other measures will interrupt the economic recovery. The ECB will ease ahead of the Federal Reserve, though both the Australian dollar and British pound extended their gains after the respective central banks eased policy.

While the RBA more or less matched expectations, the BOE boosted its Gilt purchase by 50% more than expected (GBP150 bln vs. GBP100 bln). The US October employment report exceeded forecasts, and the solid details likely set the tone for a resilient month of high-frequency data. More people working a little longer workweek for a little more pay should help underpin output as well as consumption. On the other hand, the lame-duck Congress may find it still difficult to reach common ground on a new stimulus package.

Dollar Index

With a few exceptions, the Dollar Index has traded between 92.00 and 94.00 since late July. On September 1, when the euro pushed above $1.20, the Dollar Index briefly traded to 91.75, a two-year low. Momentum indicators have turned lower, but the pace of the drop has seen it trade below the lower Bollinger Band (~92.25). This area also holds a trendline on the weekly charts drawn from the 2011 and 2014 lows. A convincing break opens the door to a move into the 90.00-91.00 area, but the medium-term target is the 2018 low near 88.50 when the euro was around $1.25.

Euro

In those brief, chaotic moments when US polls began closing, the euro seemingly inexplicably fell to almost $1.16, key support, and then launched a rally that carried it to almost $1.19 ahead of the weekend. It closed the week near the highs, and the momentum indicators are moving higher. The upper Bollinger Band begins the new week near $1.1905.

Momentum traders may see risk-reward considerations change as the single currency approaches that September 1 high (~$1.20), which saw some jawboning by ECB officials. Implied euro volatility seems cheap, around 6.75% (three-month). The 50, 100, and 200-day moving averages converge around 7.3%. The put-call skew has moved in favor of euro calls.

Japanese Yen

After several successful tests, the JPY104-level yielded to the bears, and once broken, the support now acts as resistance. However, this reflected the broad-based dollar weakness. In fact, the yen was the weakest of the major currencies gaining only about 1.25% against the dollar. Although three-month implied yen vol is at the lower end of where it has been over the past three months, Japan’s Prime Minister and BOJ Governor warned of the importance of stable markets.

The momentum indicators give scope for further dollar weakness. The market may fish for the bottom end of the range. Technically, the JPY100-JPY101 area has much to recommend itself, while there may be intermittent support near JPY102.60.

British Pound

Ahead of the weekend, sterling posted its highest close in more than three months and continues to flirt with the (61.8%) retracement objective of the loss since September 1. A move above $1.3200 would signal a new test on that September 1 high (~$1.3480), though initial resistance may be seen in the $1.3280-$1.3300 area.

The momentum studies are constructive, but the pace of the recent rally has sterling kissing the upper Bollinger Band (~$1.3170). Initial support is pegged around $1.3100. Sterling’s 1.6% gain last week against the dollar makes it the second-worst performing major currency after the yen.

Canadian Dollar

In absolute and relative terms, the Canadian dollar has a solid week, rising slightly more than 2% against its southern counterpart. Apparently, improved risk appetites, the recovery in oil prices, and the US dollar’s broad weakness were the chief drivers.

After testing the CAD1.34 the previous week, the greenback posted a big outside down day on Monday, before the US election day, and proceeded to fall to nearly CAD1.30 before the session ended ahead of the weekend. A convincing break of CAD1.30 (~CAD1.2995 on September 1) would target CAD1.28 and possibly CAD1.26 over the medium-term. Momentum is clearly on the downside. The CAD1.3100-CAD1.3130 offer nearby resistance.

Australian Dollar

Even with the RBA’s rate cut and stepped up bond-buying and China’s import ban widening, the Australian dollar rallied strongly last week. Its nearly 3.5% rally put it behind the Norweigan krone’s 4.2% advance to lead the majors. The Aussie consolidated in a narrow range near the week’s highs (~$0.7285), and momentum indicators give it scope to run.

However, it too is numbing against its Upper Bollinger Band (~$0.7270). The $0.7300 area offers psychological resistance, maybe, but the $.07325-$0.7350 area is more important technically. The high for the year was set on September 1, near $0.7415. Initial support is likely in the $0.7175-$0.7200 band.

Mexican Peso

The US dollar will take a four-day skid against the Mexican peso into next week. The peso’s 2.6% gain against the dollar, which took it to its best level in eight months, was the least among the Latam currencies. The Brazilian real led the world’s currencies with a 5.3% surge against the greenback. The Colombian peso gained 4%, and the Chilean peso rose by almost 2.7%.

The dollar shot up to nearly MXN22.00 late on November 4 before reversing dramatically and slipped through MXN20.90 by the end of the session. The greenback continued to sold and fell to MXN20.57 ahead of the weekend. The downward momentum is powerful, but the dollar finished the last two sessions below the lower Bollinger Band (~MXN20.68). The MXN21.00 area may cap a bounce, while the market seems to be looking for MXN20.00.

Chinese Yuan

The dollar fell by about 1.2% against the Chinese yuan last week and returned to levels near CNY6.6050 that it had not seen since early Q3 18. The broad dollar weakness is making it difficult for the PBOC to resist a stronger yuan. The fix before the weekend seemed to contain an element of protest. If the currency floated and was convertible, would we note that the dollar fell to the (61.8%) retracement objective of the rally from the 2018 low (CNY6.2430). The retracement objective is near CNY6.6030.

It is difficult to talk about support for the heavily managed currency pair, and in 2018 the dollar rally so quickly from CNY6.40 to CNY6.60 that there does not appear to many chart points before the low is revisited. We suspect the CNY6.70 area may act as resistance if that has meaning.

Gold

The yellow metal had its best week in nearly 3 1/2 months, rising nearly 4%. Rising equities and a weaker dollar helped lift gold above $1950 for the first time since September 21. It broke the downtrend line we have been monitoring (drawn off the mid-August, September, and October highs found around $1913 on November 5. It closed above it and saw a little follow-through ahead of the weekend to a little above $1960.

It is not quite off-to-the-races and a rechallenge of $2000. First, it must overcome the $1962 area, which is the halfway mark of the decline from the early August record high and then the (61.8%) retracement near $1989. The momentum indicators look constructive, but the speed of the move pushed gold above the upper Bollinger Band (~$1946). Support may be seen in the $1930-$1935 area.

Oil

It was a week of two halves for crude. The week began off with a slump to about $33.65, the lowest level since May, before posting a key reversal by closing above the previous session’s high. Follow-through buying saw the contract rally to $39.25 in the middle of the week, which corresponded with the 20-day moving average. The momentum stalled.

Even though a marginal new high was made on November 5, it finished lower and sold off to almost $37 ahead of the weekend. The surging virus raised questions about demand, even though the US (and Canadian) employment reports were solid. The retreat pared the gains and met the (38.2%) retracement objective near $37.15. The next retracement objective (50%) is closer to $36.50.

US Rates

The election whipsawed the US 10-year yield on November 4. It first spiked higher to almost 0.95% before beating a retreat to nearly 0.71% by the next day. The better than expected jobs data helped yields correct higher, reaching almost 0.84%, recouping roughly half the decline. The December 10-year Treasury note futures contract’s momentum indicators seem to favor a return the lower yields. Perhaps a little concession for the quarterly refunding.

The October CPI report on November 12 may pose headline risk. The Fed is comfortable with its current purchases of $80 bln of Treasuries and $40 bln of Agency MBS a month. The two-year yield was virtually flat at 15 bp, so the 2-10 year yield curve flatted by the roughly six basis point net decline in the 10-year yield.

S&P 500

Equities had a good week. It began off slowly with gains with the recent ranges on Monday before gapping higher on Tuesday (election day proper) and on Wednesday. It nearly gapped higher on Thursday and consolidated on Friday (inside day). The net gain of 7% last week was the largest weekly advance since April.

The high near 3530 could be the third point in the trendline drawn off the record high in September and the secondary high on October 12. The momentum indicators have turned up, and a break of the trendline could signal a run at the highs. If the first gap was a breakaway gap, leaving a four-day island in its wake, then the second gap may be a measuring gap, in which case it projects toward 3600.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

November Monthly – Forex

The underlying drivers of the $6.6 trillion-a-day turnover in the foreign exchange market are about the broad monetary and fiscal policies in both absolute and relative terms. The policy mix in the US will remain the same in 2021 of easy monetary and accommodative fiscal policy. Meanwhile, the mid-October deadline for the UK-EU trade talks was extended.

The rhetoric is not nearly as bellicose as it was, and the atmosphere appears to have improved. The new deadline is the mid-November EU summit, to give the 27 EU countries and the EU Parliament time to ratify an agreement.

The optimists hope that an effective vaccine can be announced in the coming weeks. However, the most immediate concern is the surge in the virus in Europe and the United States. Low nominal and often negative real rates coupled with government borrowing has helped support aggregate demand with few exceptions.

Regardless of the scale, countries, companies, households, and individuals are vulnerable to another shock. The bar is low, and the pandemic’s extension well into next year would likely be sufficient. The month-long new social restrictions in Europe, for example, way cut quarterly growth by around 0.5%. At the same time, the game of great powers continues, and potential flashpoints in Asia, the Caucuses and Northern Africa have not been resolved.

Based on the projected policy mixes and other considerations, we expect the dollar to depreciate on a trend basis. The dollar was little changed at mid-year against the euro and yen and was about 1.4% higher against the Chinese yuan. Now, through ten months, the euro is about 5.3% higher, the yen 3.6%, and the yuan has appreciated by almost 3.8% against the dollar. However, this may be somewhat misleading.

The dollar has been range against both the euro and yen. Since the last week of July, the euro has been confined to roughly a $1.16 to $1.20 trading range. The 50-day moving average is flat near the middle of the range. The contagion, the new restrictions, and the ECB’s commitment to ease in December warn of downside risks in the euro.

For nearly as long, the dollar has been in a JPY104-JPY107 range, as well. The recent range is even smaller, as the dollar has been below JPY106 since the middle of September, with a brief exception earlier in October. Nevertheless, October was the fourth consecutive month that the dollar recorded lower highs and found bids near JPY104.00. A move back toward JPY106 is likely in the weeks ahead.

The Chinese yuan has been trending higher. Indeed, it has only declined in four of the past eighteen weeks. After falling by about 6.25% to levels not seen since mid-2018, the dollar consolidated in late October. If the managed currency has strengthened, it must be assumed that Beijing allows it. Some currency strength is consistent with the “dual circulation” drive, but more importantly, maybe a signal for global investors.

As China’s markets are integrated into global benchmarks, and its sheer size will boost its weight over time. This is going on while trade tensions remain elevated. Both impulses, the decoupling on trade and China’s inclusion in international capital markets, will likely continue regardless of the US election results.

This is a different kind of internationalization of the yuan than an offshore currency (CNH) and bond market (Dim Sum) entailed. Attractive economic fundamentals, coupled with improved access, and inclusion in industry benchmarks, encourage capital inflows from foreign investors. In turn, the combination of the large current account surplus and the portfolio capital inflows should exert upward pressure on the exchange rate.

Beijing uses such periods of upward pressure on the yuan to relax some rules that discourage capital outflows, like the quota for the Qualified Domestic Institutional Investors for overseas investments or the reserve requirement on forwards. In late October, the PBOC adjusted how the dollar’s reference rate was set, making it somewhat more transparent. In the weeks ahead, Beijing’s intentions may become clearer, and investors will have a better idea of the extent of that of the yuan’s appreciation that will be sanctioned. The currency may become more volatile than it has been.

Dollar

The dollar generally trended lower from late September through the first of October against most of the major currencies and but turned higher against as the virus surged in Europe and policymakers from Australia and Europe signaled a policy response, while the Federal Reserve expounded on its new average inflation target without committing to fresh actions. More fiscal stimulus is likely to be forthcoming. The election will determine the extent and priorities. Next year, as was the case this year, the US will again likely have the largest budget deficit among the high-income countries. The Federal Reserve meets on November 5. It does not seem prepared to take new measures.

The possibility of yield curve control appears to have been eclipsed by signals suggesting officials, at some point, may extend the duration of the $80 bln a month of Treasuries currently being purchased. The decision does not appear imminent. The Bank of England, the Reserve Bank of Australia, and the European Central Bank are likely to move before the Federal Reserve. This implies that the dollar may be stronger than we previously anticipated into early next year. However, when the situation stabilizes, we still expect the twin-deficit meme to frame a trend lower for the dollar.

Euro

After falling to nearly $1.16 in late September, the euro trended higher to around $1.1880 in the third week of October. The surging pandemic, which led to new social restrictions that even if they last a month, will sap the recovery that had already appeared to be stalling. As a rough estimate, a month-long closure may reduce Q4 GDP around 0.5-0.7 percentage points. The ECB has all but formally committed itself to ease policy in December, which could very well include a rate cut in addition to new low rate loans and more bond-buying for longer. The much-heralded joint fiscal initiative (750 bln euro, Recovery Fund) appears bogged down in political negotiations at the European Parliament.

Even after the technical details are agreed upon, the use of the funds to enforce the “rule of law” practices will still encounter objections (e.g., Hungary, Poland). The summer’s bullishness toward the euro that had lifted it to $1.20 has been undermined by the virus. Speculators in the futures market have trimmed their net long euro position, but it remains at a record high but this recent period. We see these recent developments as tempering the pace of the euro’s uptrend we expect, but at this juncture, we do not see it changing the trend.

(end of October indicative prices, previous in parentheses)

  • Spot: $1.1645 ($1.1720)
  • Median Bloomberg One-month Forecast $1.1725 ($1.1785)
  • One-month forward $1.1655 ($1.1735) One-month implied vol 7.9% (6.5%)

Yen

The Bank of Japan now projects the world’s third-largest economy will contract by 5.5% in the current fiscal year that runs through March 2021. Previously it forecast a 4.7% contraction. Part of the growth was shifted to FY2021, which is now expected to expand by 3.6% rather than 3.3%. Prime Minister Suga appears to be preparing for a third supplemental budget for this year that could be formally announced in the weeks ahead.

Talk is of a JPY10 trillion package, of which nearly three-quarters may come from re-directing unspent funds from past budgets. The US 10-year premium over Japan has trended higher since early August when it was below 50 bp. Although it is near 80 bp now, it has rarely been lower over the past 30 years. Moreover, for yen-based investors hedging the dollar currency risk is expensive. After spending most of the August-September period inversely correlated with the S&P 500 on a purely directional basis, the dollar-yen exchange rate spent most of October positively but albeit slightly, correlated.

  • Spot: JPY104.65 (JPY105.50)
  • Median Bloomberg One-month Forecast JPY104.85 (JPY105.70)
  • One-month forward JPY105.00 (JPY105.60) One-month implied vol 8.0% (5.7%)

Sterling

After falling by about 3.35% in September, sterling rebounded by about 1% in October. Sterling proved resilient in the face of the brinkmanship tactics that had seemed to end the talks in the middle of the month and rallied when the talks resumed. While many are still hopeful of an agreement, it is not at hand yet, and might not be until closer to the next brink (middle of November).

The implied volatility curve peaks in November and then gradually falls almost two percentage points over the next year. We remain concerned that many businesses are unprepared, and even with an agreement, disruptions can be significant. For businesses that rely on product either directly from the UK or EU goods via the UK, inventory management for some industries may be a way to minimize disruption.

The Bank of England meets on November 5 and if it does not extend is Gilt buying, the market will be disappointed. The bank rate is set at 10 bp, but the bills and Gilt yields through five-years remain below zero. A ten basis point rate cut is also a possibility. The BOE has purposely not ruled out adopting a negative interest rate target but has clearly signaled it is not ready. The UK’s budget deficit is expected to be near 14% of GDP this year, among the largest in the G7. Improvement depends on the course of the virus.

  • Spot: $1.2950 ($1.2920)
  • Median Bloomberg One-month Forecast $1.2975 ($1.2950)
  • One-month forward $1.2950 ($1.2930) One-month implied vol 11.3% (10.7%)

Canadian Dollar

The New Democrat Party came to the minority Trudeau government’s support twice in recent weeks. Neither the Liberals nor Conservatives are prepared to go to the polls. However, minority governments do not typically last more than a couple of years in Canada and the current government has begun its second year. There is political pressure for Trudeau to re-introduce a new fiscal anchor, but the pandemic does not make it practical. Finance Minister Freeland is expected to provide her first fiscal update in November.

The last estimate in July put the deficit at near 16% of GDP, but the new initiatives suggest it may be closer to 18%-19%. The Bank of Canada pledges to keep the target rate at 0.25% until the economic slack is absorbed, which it does not anticipate until 2023. It no longer will buy mortgage-backed securities. Perhaps, most importantly, the Bank of Canada will reduce its government bond-buying program to CAD4 bln from CAD5 bln and shift its attention to longer-term bonds.

  • Spot: CAD1.3320 (CAD 1.3320)
  • Median Bloomberg One-month Forecast CAD1.3285 (CAD1.3275)
  • One-month forward CAD1.3300 (CAD1.3325) One-month implied vol 8.3% (6.2%)

Australian Dollar

The Australian dollar underperformed last month. Although the loss was small (~0.5%), it was the only major currency that falls for the second consecutive month. In addition to the virus, which is daunting enough, Canberra also must cope with expressions of China’s displeasure that has impacted trade. The Reserve Bank of Australia has downplayed the efficacy of negative interest rates but has mused aloud about other measures it can take to provide more stimulus.

The next RBA meeting is November 3, and many participants expect a move. It targets a 25 bp cash rate and three-year bond (yield curve control). However, the three-year yield is about 11 bp, and the effective cash rare is 13 bp. The RBA indicated that targeting a longer-dated rate was a possibility. Although it also cited the possibility of buying foreign bonds, this may be too controversial to venture now.

  • Spot: $0.7030 ($0.7160)
  • Median Bloomberg One-Month Forecast $0.7115 ($0.7175)
  • One-month forward $0.7030 ($0.7165) One-month implied vol 12.0% (10.0%)

Mexican Peso

The Mexican peso was the strongest currency in October, appreciating nearly 6% against the dollar to pare its year-to-date loss to about 9.3%. The peso’s gains are driven by a large trade surplus, strong worker remittances, and portfolio flows attracted by relatively high-interest rates. The central bank has been signaling that after nearly halving its target rate to 4% and inflation probing the upper end of its 3% +/- 1% target, it was running out of room to cut interest rates further.

However, with President Andres Manuel Lopez Obrador (AMLO) reluctant to use fiscal stimulus, which entails borrowing and boosting debt, it leaves monetary policy as the main tool. The central bank’s decision is finely balanced. Two of the board’s five members thought there is no room to cut rates, and two saw additional scope, leaving one as the tie-breaker.

  • Spot: MXN21.18 (MXN22.11)
  • Median Bloomberg One-Month Forecast MXN21.60 (MXN22.07)
  • One-month forward MXN21.25 (MXN22.19) One-month implied vol 20.5% (18.2%)

Chinese Yuan

The yuan has been adjusting higher for several months. It finished October near its best level in two years. The increasing integration of China into the global capital markets means that strong portfolio capital inflows compound the yuan’s upside pressure stemming from the growing trade surplus. Beijing’s strategy appears to be two-fold: accept some appreciation of the yuan and reduce some (not all) regulatory hurdles to capital outflows.

We suspect many market participants do not trust the price action and focus instead on the precise mechanism by which the PBOC has managed the pace of the yuan’s appreciation. The median year-end forecast in the Bloomberg survey is for CNY6.75. This may overstate the case. If, on the other hand, the integration into the global capital markets has required a change in Beijing’s strategy, there could be potential toward CNY6.6500 before year-end.

  • Spot: CNY6.6915 (CNY6.7900)
  • Median Bloomberg One-month Forecast CNY6.7210 (CNY6.8125)
  • One-month forward CNY6.7150 (CNY6.7935) One-month implied vol 6.6% (5.9%)

This article was written by Marc Chandler, MarctoMarket.

A Technical Word Ahead of Macro Events

Nevertheless, the dollar’s strength was more than we anticipated.

While the Reserve Bank of Australia and the Bank of England are expected to ease policy in the coming days, the larger focus swings back to the US, where national elections, the FOMC meeting, and October employment report are the highlights. None should be particularly bullish for the dollar.

A solid showing for the Democratic Party has been favored by polls and surveys using traditional and non-traditional approaches, like Ravenpack. They don’t appear to have changed very much recently. Although there is angst over the possibility of a protracted period of uncertainty as the results are challenged, we suspect that the risk is exaggerated.

The actual results could expedite some M&A activity, corporate tax planning and spur industry-specific (e.g., health care, energy) reactions. The Federal Reserve is not going to do anything, but its somber economic assessment and forward guidance cannot be construed as favorable for the dollar. The risk may be on the downside of the median forecast in the Blomberg survey of a 600k increase in non-farm payrolls given the recently announced lay-offs, the little change in weekly jobless claims over the survey period, and seasonal adjustments.

It is always interesting to look at the technical condition ahead of what are obviously significant macro events. Broadly speaking, the momentum indicators favor additional dollar gains, but as sketched above, we are less sanguine. Still, we will seek here to identify levels that would be technically significant and could accelerate moves.

Dollar Index

Pushing above 94.00 last week was more than expected last week, but there was not much follow-through, and a softer tone was seen ahead of the weekend. The momentum indicators are pointing higher, and a convincing break of 94.00 could spur a move to the September high near 94.70. The 93.00 area may provide support, which is the middle of the 92.00-94.00 range that has dominated since the end of July, save those few days in late September.

Euro

The one-two punch of the escalated social restrictions in the face of the surging pandemic and the dovish ECB saw the euro buckle to $1.1660, a new low for October, though above the September low (~$1.1610). The push above $1.17 ahead of the weekend was repelled. The Slow Stochastic is trending lower while MACD has softened slightly but is little changed. A break of $1.1600, which the euro has held above since late July, would give immediate scope for another cent decline. A move above $1.1700 would help stabilize the tone, but resistance around $1.1750-$1.1760 needs to be overcome.

Japanese Yen

As stocks were selling off hard on October 29, the dollar tested key support near JPY104.00. It held like a rock, and the greenback recovered to JPY104.70. This marks the lower end of as bad of resistance that extends a little above JPY105.00. The MACD and Slow Stochastic look poised to cross higher. A move above JPY105.00 would still be constrained by the larger range with intermittent resistance near JPY105.50.

British Pound

There has been no major breakthrough in UK-EU trade talks, and a German official from the finance ministry was quoted on the news wires expressing disappointment. The broader dollar gains set the tone, and sterling has recorded lower higher for the past four sessions. If sterling’s trend higher from late September’s low (~$1.2675) is being retraced since October 21, then it neared a (61.8%) retracement objective (~$1.2865).

A move now above $1.3000-$1.3030 would lend credence to this scenario. Recapturing the $1.3065 would improve the technical tone. The euro was sold through GBP0.9000 ahead of the weekend for the first time since September 8. Although it bounced back, it found new sellers near GBP0.9030 and finished on a soft note. The next area of chart support is seen around GBP0.8965.

Canadian Dollar

The US dollar rose by about 1.6% against the Canadian dollar last week, the most since March. The risk-off mood, sharp drop in oil prices, and the greenback’s broader strength were the main driving forces. The Bank of Canada will reduce its bond-buying but extend maturities leaving the broad impulse in favor of accommodation.

The US dollar’s high for October was set on the 29th, a little shy of CAD1.3400. A break of the CAD1.3450 area would target the 200-day moving average (~CAD1.3550) and then CAD1.3600. The momentum indicators are moving higher. Initial support is seen near CAD1.3280, and if a consolidative phase emerges, the greenback can pullback to CAD1.3200.

Australian Dollar

The Aussie held important support at $0.7000 last week, but the subsequent price action was not inspiring, and it finished the week near $0.7030. The RBA meets and is expected to ease policy, including a small rate cut and more bond-buying. It probably requires a break of the $0.6965 area to confirm a downside break, in which case the 200-day moving average around $0.6800 offers an initial target.

The MACD is bouncing along its trough, while the Slow Stochastic has turned down from mid-range. The $0.7080-$0.7100 area now offers resistance, but overcoming the weekly downtrend line from the August high (~$0.7160 next week) may be the key to the medium-term outlook.

Mexican Peso

The dollar snapped a four-week slide that saw it lose around 7% against the Mexican peso. Its nearly 1.9% gain is only the third weekly increase since late July. Last week’s bounce appeared to lose momentum in front of the minimum retracement objective (38.2%) of the latest leg down, which started in late September, found near MXN21.55. The peso’s pre-weekend gain was impressive because it took place even amid the continued retreat from risk assets more broadly. Initial support for the dollar is seen in the MXN21.10-MXN21.20 area.

Chinese Yuan

The dollar furnished virtually unchanged against the Chinese yuan last week near CNY6.6915. This is a bit misleading as the greenback strengthened to almost CNY6.73 in the middle of the week when the PBOC announced that banks no longer had to use a counter-cyclical function when submitting bids to set the daily reference rate for the dollar. The dollar weakened in the second half of the week and posted its lowest close of the week on Friday. Broad consolidation appears to be the most likely near-term scenario. The market may get cautious near CNY6.65 while attracting investment flows in the CNY6.73-CNY6.75 area.

Gold

The 1.1% decline in gold prices last week was sufficient to ensure the third consecutive losing month. The price tumbled with stocks in the middle of the week but traded firmer ahead of the weekend even as equities headed south. The Slow Stochastic is falling, and the MACD is softened at low levels. September’s low was around $1848, and last week’s low was about $1860. A recovery above $1900 would solidify the base. At the same time, it has been over a month since gold was above $1935.

Oil

December crude oil prices had a tough week. It fell 10.5%, the most since April. It was off about 1.5% for the month coming into last week. It briefly traded below $35 a barrel for the first time since the end of May. The momentum indicators are headed down but getting stretched. A convincing break of $35 could spur losses toward $33.50. Demand concerns mount, and market talk suggests Saudi Arabia is likely to cut its official selling price for Asia for December when a decision is made in the coming days. Previous support around $37 may now be resistance.

US Rates

The US 10-year yield rose three basis points last week, but the fact that it rose at all in the face of the biggest slide in stock since March is notable. Moreover, it finished at 0.87%, the highest in nearly five months, and closed above the 200-day moving average (0.83%) for the first time since late 2018. The yield bottomed near 0.50% in August, the chaotic low in March near 0.30% notwithstanding. The market is looking stretched, and the 10-year note futures contract finished the week below the low er Bollinger Band. Some observers attribute the sell-off to election positioning.

Still, we would expect the Fed to be dovish and the employment data to show that the labor market’s improvement is slowing. With the two-year yield virtually unchanged on the week at 15 bp, the long-end accounts’ backing up accounts for the steeper curve. It finished at 72 bp, the steepest since early 2018. The fact that the 10-year breakeven is about 10 bp lower than at the end of August suggests that the yield curve’s steepening may not result from elevated inflation expectations.

S&P 500

The index fell 5.6% last week and offset the earlier gains to finish the month with a nearly 2.8% decline. It had fallen by almost 4.0% in September, snapping the five-month recovery from the 20% decline in Q1. The key technical development last week was the gap lower opening on Wednesday that remains unfilled. Gap theory, which helped us anticipate and identify the month’s high on October 12 (third consecutive gap exhausts the market), suggest that area (~3342.5-3388.7) has technical significance now.

Prices may be attracted to the vacuum of the gap, but it may also act as resistance. Even though the month’s low was set before the weekend near 3234, the selling pressure abate ahead o the September low and support closer to 3200. A break of 3200 would have negative technical consequences for likely the remainder of the year. It would boost the chances that a significant high is in place.

A potential double top could be confirmed on the break of 3200 that projects toward 2800-2900, which corresponds to a (50%) retracement of the gains rally from the March lows. Yet, the momentum is clearly on the downside. The MACD and Slow Stochastic have entered the overextended territory, Remember lows even after smaller pullbacks often take a couple of days or so to forge.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.