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.

Darkest Before Dawn

The MSCI Asia Pacific Index fell for the fourth consecutive session today and many markets (India, Shenzhen, Taiwan, and Korea) fell more than 2% and most others were off more than 1%. Europe’s Dow Jones Stoxx 600 is giving back the past two days’ gains. The S&P 500 could gap lower at the open. Benchmark 10-year yields are a little softer but have remained subdued in the face of the dramatic moves in equities.

The US yield is little changed near 0.66%. Practically no currency could escape the clutches of the rebounding dollar, though the yen and sterling are little changed. The JP Morgan Emerging Market Currency Index is lower for the fifth consecutive session. Gold remains heavy and is approaching the (38.2%) retracement of this year’s rally which is found near $1837. Crude oil is consolidating at lower levels. November WTI is in narrow range below $40 a barrel.

Asia Pacific

Hong Kong and New Zealand report trade figures. Economists did a good job forecasting New Zealand imports and exports. As expected, the formers rose a little and the latter slipped. The takeaway is that New Zealand reported its first trade deficit (~NZD353 mln), snapping a six-month period of trade surpluses. Economists had a harder time with HK figures. Exports pared their decline to 2.3% year-over-year from 3%, but the bigger miss was in the weakness of imports. These fell 5.7% year-over-year after a 3.4% decline in July. The net result was that HK’s trade surplus was halved from the HKD29.8 bln to HKD14.6 bln.

China continues to harass Taiwan with incursions into its air defense zone. The bullying practice has escalated in the past week or so. Beijing’s aggressiveness comes as the US some European countries have stepped up their interactions, including high-level visits. It is hard to say that it is having an economic impact but as a potential flashpoint, it is drawing attention.

Japan may have a new prime minister, but the government’s assessment of the economy remained little changed from last month. The economy is said to be in a severe place but some areas, namely, exports, production, business failures, and jobs, are improving (four of 14 categories). The median forecast in the Bloomberg survey expects the economy to expand 15% this quarter, the first expansion since Q3 19.

The dollar is in less than a third of a yen range today above JPY105.20. The $1.4 bln in expiring options between JPY105.10 and JPY105.25 have been neutralized. The next set is for almost the same amount at JPY105.70-JPY105.75. A four-day uptrend on the hourly bar charts comes in a little above JPY105.20 by the North American open. A break could see JPY104.60-JPY104.80. The Australian dollar is lower for the fifth consecutive session. It dipped below $0.7030 for the first in two months. A break of $0.7000 could see $0.6950 quickly.

The $0.7080 area now offer resistance. The PBOC set the dollar’s reference rate a little softer than the bank models in the Bloomberg survey anticipated. Although some observers see it as a sign that officials are seeking to stop the yuan from strengthening, the fact of the matter is that the dollar remained bid. The greenback is at its best level since the start of last week, a little below CNY6.83. Note that after the US market close today, FTSE-Russell will announce whether it will include Chinese bonds in its indices. A year ago, it refused, but China has reduced barriers to enter and exit.

Europe

European banks took 174.5 bln euros from the ECB’s latest Targeted Long-Term Refinancing Operation. These are loans that can have a rate of as much as minus 100 bp providing the funds are lent to households and businesses. It was at the high end of expectations and follows a 1.3 trillion operation a few months ago. This will lead to another jump in the ECB’s balance sheet. Recall that the ECB’s balance sheet has been slowing increasing as it continues to buy bonds under its APP and PEPP operations. The extra liquidity in the Eurosystem is a factor that is pushing three-month Euribor a little below the minus 50 bp deposit rates. When observers say that central banks are out of ammo, few anticipated the deeply negative loans offered and the introduction of the dual rates.

Neither the Swiss National Bank nor Norway’s Norges Bank altered policy at today’s meetings. The pullback in the Swiss franc in recent weeks is too small to register for officials, who remain concerned about its strength. The OECD regards it as the most over-valued currency in its universe. The threat of being identified by the US as a “currency manipulator” is not a strong enough deterrent as intervention remains one of its key tools. Some had expected the Norges Bank to bring forward its first hike from the end of 2022, but it did not. On the other hand, Hungary raised the one-week deposit rate 15 bp to 75 bp, catching the market by surprise and giving the forint a lift.

The German September IFO survey edged higher. The current assessment rose to 89.2 from 87.9, while the expectations component firmed to 97.7 from a revised 97.2 (from 97.5 initially). The overall assessment of the business climate rose to 93.4 from 92.6. The preliminary PMI data showed the manufacturing sector continues to rebound, while the service sector is stalled.

In the UK, Chancellor Sunak canceled the fall budget and is expected to present a new jobs support program to Parliament today. Speculation in the press is for a German-like arrangement, where the government picks up some of the wage bill for employees that are retained but on shorter hours. Meanwhile, the British Chamber of Commerce estimate suggest over half of UK firms have not completed the government’s recommended steps to prepare for the end of the standstill agreement with the EU.

The euro is extending its decline for a fifth consecutive session. It has dipped below $1.1635 in European turnover. For the first time this quarter, the skew in the one- and two-month options (risk-reversals) favor euro puts over calls. The $1.16 area corresponds to a (50%) retracement of the Q3 gains. The $1.1600-$1.1610 area holds about 1.6 bln euro in options that expire today.

There is another option for nearly 525 mln euro at $1.1625 that also will be cut today. A move above $1.17, where an 845 mln option is struck (expiring today) would help stabilize the tone. Sterling is firm within yesterday’s range, when it tested $1.2675. It is near $1.2750 in late London morning turnover. A push above $1.28 is needed to begin repairing some of the recent technical damage.

America

The US reports new home sale (August) and the KC Fed manufacturing survey (September), but it will be the weekly jobless claims that capture the attention. Seasonal factors encourage expectations for a continued gradual decline. However, note that around in November, the seasonal adjustment will add rather than subtract. The markets will be particularly sensitive to an unexpected increase in weekly jobless claims, especially given the lack of fresh measures by either the Fed or Congress. In fact, some observers attribute the Fed’s somber assessment to prompt more stimulus as a factor that helped spur the down move in equities.

Canadian Prime Minister Trudeau unveiled funding for a wide range of initiatives, including daycare, pharma, housing and environment. None of the three major opposition parties endorsed it. Trudeau leads a minority government and the budget needs to be approved or it could potentially trigger new elections.

Mexico’s central bank meets today. Yesterday’s retail sales report showed a solid 5.5% increase in July, but it was still less than expected. Inflation is running just north of the upper end of Banxico’s 2-4% target. The cash rate target is 4.5%. The peso’s six-week rally is ending with a bang this week and it is off over 5%. After five 50 bp rate cuts, Banxico is widely expected to cut 25 bp today. We suspect the odds of standing pat is greater.

The US dollar poked above CAD1.34 today for the first time since early August. The next important chart area is near CAD1.3440. Initial support is likely around CAD1.3360. If the equity market stabilize the Canadian dollar will likely strengthen. After jumping over 3% yesterday, the greenback extended its gains to MXN22.53 in Asian turnover but has gradually firmed through the European morning. The first area of support is seen in the MXN22.00-MXN22.20 area.

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

This article was written by Marc Chandler, MarctoMarket.

Dollar’s Bounce: Nearly Over?

Sterling’s weakness is a phenomenon of its own making. US-China tensions continue to run high as Washington has ratcheted up pressure on China and is insisting on the September 15 deadline for TikTok to change ownership or be banned. Beijing would rather see it shuttered than sold.

The high-flying US NASDAQ has pulled back from the record highs set at the start of the month by 10%, but bottom-picker have been met with overhead supply and profit-taking. Oil prices moved sharply lower for the second consecutive week. November Brent fell around 12%, and October WTI tumbled 14% over the past two weeks to levels not seen in three or four months.

Then there is the dynamic within the foreign exchange market itself. On September 1, the euro pushed above $1.20, sterling was approaching $1.35, and the Australian dollar poked above $0.7400. The greenback push below CAD1.30 for the first time since January. Comments by the ECB’s Lane about the role of the exchange rate as an input into its economic models and forecasts spurred a dollar short-squeeze rally.

We had anticipated that after the ECB meeting was out of the way, the market’s attention would turn to the FOMC meeting (September 15-16), where the outcome is likely to reinforce the dovish implications of adopting an average inflation target, around which there is extensive “strategic ambiguity.” Below we fine-tune this scenario.

Dollar Index

With a couple of minor even if notable exceptions, the Dollar Index has been confined to a 92.00-94.00 trading range since late July. It has been trending broadly sideways. It traded at its highest level in nearly a month in the middle of last week near 93.65, just above the upper Bollinger Band for the first time in several months.

The MACDs are trending higher, and the Slow Stochastic is just below overbought territory. The 92.70 level seen around last week’s ECB meeting corresponds to a (50%) retracement of the rally from September 1. A move above the 94.00 area would target 94.75-95.50.

Euro

The euro snapped a six-day slide in the middle of last week, a day before the ECB meeting. It will begin the new week with a three-day advance in tow. Lagarde’s effort to downplay the euro’s strength saw the market bid it a few ticks through the (61.8%) retracement objective of the slide that began after it poked above $1.20 on September 1. Both the MACD and Slow Stochastics have nearly completely unwound the stretched condition and appear poised to turn higher in the coming days. We continue to believe the break from this range takes place to the upside, but the range affair can persist a bit longer.

Japanese Yen

The dollar has been in an exceptionally narrow trading range against the Japanese yen. The nearly 60 pip range was among the smallest weekly ranges of the year. It did not stray more than 30 pips in either direction of JPY106.10. For the third consecutive week, the dollar recorded lower highs and higher lows. The momentum indicators do not appear helpful. More broadly, the dollar is hovering around the middle of a JPY105 to JPY107 trading range.

Britsh Pound

Sterling was pounded last week. It was marked down by almost 3.7%, the most in six months. Part of it was dollar strength. After all, the greenback strengthened against most of the major currencies. However, the real driver was reneging on the Withdrawal Agreement that is seen as making a disorderly exit from the standstill agreement more likely.

The Bank of England meets next week, and some groundwork for additional easing as early as November seems reasonable to expect. Sterling was pushing toward $1.35 on September 1 and made a low ahead of the weekend just below $1.2765. The 200-day moving average is near $1.2735, and the (61.8%) retracement of the rally since the end of June is about $1.2710. The (38.2%) retracement of the rally since the March low is a little below $1.2700. The next important retracement (50%) is closer to $1.2455. Initial resistance now is likely around $1.2950.

Canadian Dollar

The US dollar rose in four of last week’s five sessions to snap an eight-week slide against the Canadian dollar. It was only the second weekly advance here in Q3. The bounce faded in the middle of the week near CAD1.3260, a few ticks ahead of the (38.2%) retracement of the decline since the end of June. The next retracement objective (50%) is around CAD1.3320. The five-day moving average has crossed above the 20-day for the first time since July, and the momentum indicators are trending higher. A loss of CAD1.3100 would confirm the correction is over.

Australian Dollar

The pullback from the high above $0.7400 on (September 1) stopped at the (38.2%) retracement of the leg up from the end of June found near $0.7190. Initial support is now pegged around $0.7240. The MACD is still headed lower, but the Slow Stochastic appears to be bottoming. A move above last week’s high near $0.7330 would likely confirm the correction is over, and another run higher has begun.

Mexican Peso

The greenback’s slide was extended for the fifth consecutive week against the Mexican peso. In an outside down day on Wednesday, the dollar was pushed below the 200-day moving average (~MXN21.59) for the first time since before the pandemic. It has not been able to resurface above it. The next big target is MXN21.00. The momentum indicators are not helpful here, but it has been fraying the lower Bollinger Band (~MXN21.30). A modest bounce just to the 20-day moving average (~MXN21.82), the middle of the Bollinger Band, would be a large move of a couple percentage points.

Chinese Yuan

The greenback’s downtrend against the redback has now extended for the seventh consecutive week. It has risen in only one week so far in Q3. Since the end of June, the dollar has fallen by about 3.5% against the yuan. Given that it is so highly managed, one must conclude that officials see the modest strength as desirable.

Some benefits cheaper imports from the US may attract international capital, as market-liberalization measures, some of which are part of the US-China trade agreement, are implemented. It is difficult to know how far officials will allow things to go, but a near-term trading range between roughly CNY6.81 to CNY6.86 may be emerging.

Gold

The lower end of the recent trading range around $1900 was successfully tested last Tuesday, and the precious metal recovered to almost $1967 before consolidating ahead of the weekend. The MACD and Slow Stochastic appear poised to turn higher. While a gain above $1970 will appear constructive, gold has not been above $2000 for a month now.

Oil

October WTI fell for the second week for the first time since April. However, in recent sessions, a shelf has been carved in the $36.00-$36.60 area, and the Slow Stochastic appears set to turn higher. That area also corresponds to a (38.2%) retracement of the rally since those April lows. The next retracement target (50%) is around $33.50. It managed to finish the week above the lower Bollinger Band (~$37.05). The $39-$40 area may offer a formidable cap.

US Rates

Both the core PPI and CPI readings were above consensus forecasts, but it did not prevent the 10-year yield from falling five basis points last week to about 66 bp. In early August, the yield spent a few days south of 60 bp, but since the middle of June, it has mostly held above it. At the same time, it has not been above 80 bp either, which is well below the current rate of CPI (1.3% and 1.7%, for the headline and core, respectively).

The Treasury re-opens previously sold 20-year bonds and 10-year TIPS in next week’s auction. The 2-10-year yield curve eased to about 54 bp by the end of the week, which captures primarily the softer 10-year yield. The curve is at its 20-day average. The market anticipates a dovish Fed, noting downside risks and the lack of fiscal stimulus.

S&P 500

An outside down day on Thursday saw follow-through selling ahead of the weekend that took the S&P 500 to a new low since the record high on September 2. The benchmark bounced back after approaching 3300. It closed slightly higher ahead of the weekend, but not higher than it opened. The momentum indicators are still pointing lower.

The 3277 area houses the (38.2%) retracement of the gains since the mid-June low. Pushing through, there could signal another 2% decline. A move back above 3420 would stabilize the technical tone. A rally to new record highs was beyond the imagination in the dark days of March, and many have doubted it ever since–the gap between Wall Street and Main Street makes it unsustainable.

The question is whether this pullback marks the end of the rally, or is it a correction? While we still see it as most likely a correction, it does not mean that a bottom is in place.

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

This article was written by Marc Chandler, MarctoMarket.

Dollar Sits on the Precipice

However, profit-taking by momentum traders turned into a rout as some ECB officials seemed to push back, and the greenback ended on a firm tone.

Although equities continued to rise for a day or so after the dollar bottomed, broad corrective forces were unleashed. Three question face market participants: How deep is the correction? How long will it last? What are some events that could help facilitate a resumption of the underlying trend?

Dollar Index

The Dollar Index fell below 92.00 for the first time since April 2018. It rebounded to 93.25 ahead of the weekend. The 93.50 area capped upticks in the second half of August, and it did not trade above 94.00 in the first half of last month. The 94.00 is also a (38.2%) retracement of the DXY decline since the end of June. The next retracement objective (50%) is near 94.75. The MACD and Slow Stochastic have turned higher.

Euro

The euro’s shooting star candlestick on September 1, reversing lower after trading above $1.20 for the first time since May 2018, signaled the subsequent correction. In the sell-off before the weekend, the euro held above the previous week’s low (~$1.1765). The euro spent most of August in a two-cent range (~$1.1700-$1.1900).

The upside breakout was rejected, and a test on the lower end of the range ought not to surprise at this juncture, given market positioning. Stops are likely below $1.17, and triggering them could be worth another half-cent. The momentum indicators are moving lower. The downside pressure could persist until the middle of the new week or even into the ECB meeting, but once that is out of the way, the ball comes back to the US court with the FOMC meeting on September 15-16.

Japanese Yen

The dollar spent the entire week within the range set on August 28 (~JPY105.20-JPY106.95). Within the range, the dollar edged higher every day last week. The drama in the equity market did spur yen gains as it often does. Rising long-term US yields could support the greenback, but net-net, the 10-year yield was practically unchanged last week near 70 bp. The technical indicators do not appear to be generating robust signals. Unexciting as it may be, continued range trading is the most likely near-term scenario.

British Pound

Sterling peaked on September 1, near $1.3480. It fell to about $1.3175 before the weekend, a whisker below the 20-day moving average (~$1.3180). A trend line connecting the June and July lows since found near $1.3135 at the start of next week as sterling has a three-day losing streak into tow, its longest slump in a month. The lower end of the August range is near $1.30, and that (~$1.3015) corresponds to a (38.2%) retracement of the rally here in Q3. The momentum indicators did not confirm the new highs. The Slow Stochastic is moving lower, and the MACD has been moving sideways but is now softening.

Canadian Dollar

The Canadian dollar was the only major currency to hold its own against the resurging greenback. It was the eighth consecutive weekly slump for the US dollar. The US dollar’s bounce from the dip below CAD1.30 on September 1 fizzled near CAD1.3165 on September 3, just in front of the 20-day moving average (~CAD1.3175). The greenback has not closed above the 20-day moving average since July 14.

The MACD has flatlined, and the Slow Stochastic is turning higher from oversold territory. The Canadian dollar’s resiliency in the face of the dramatic drop in equities is noteworthy. The US dollar’s lows for the year was set on January 7 near CAD1.2955, and that is the next important target. The Bank of Canada meets on September 9. It is not expected to change policy but will confirm it is prepared to do so, if needed.

Australian Dollar

The move signaled by the shooting star candlestick pattern on September1, after briefly trading above $0.7400, may have ended with a hammer candlestick ahead of the weekend. The Aussie recovered from a low near $0.7220, near where a trendline off the late June, July, and August is found, to the $0.7290 area, despite evaporating risk appetites. The lower end of its previous range was closer to $0.7150. Momentum indicators warn that the correction may not be over, but a move above $0.7330-$0.7340 would suggest otherwise.

Mexican Peso

The Mexican peso was the second stronger currency in the world last week, gaining almost 1% against the US dollar. Only the Brazilian real was stronger, gaining nearly 1.5%. It was the fourth consecutive weekly advance. Ahead of the weekend, and despite the weakness in equities, the dollar traded below its 200-day moving average against the peso (~MXN21.5180) for the first time in six months.

The June lows in the MXN21.46-MXN21.47 region beckon. Below there, the next important chart area is near MXN21.22. The technical indicators look stretched, but there is no indication they are ready to turn higher. Resistance is now seen in the MXN21.70-MXN21.80 area.

Chinese Yuan

The dollar fell to new lows for the year against the yuan on September 1, near CNY6.8125. The broader dollar bounce saw it trade up to almost CNY6.8470 ahead of the weekend. Chinese officials have accepted the dollar to decline six weeks in a row and ten of the past 11 weeks.

While the strengthening of the yuan may go contrary to the direction of monetary policy, it would seem to serve its trade needs. The yuan’s appreciation could be confirmed that it plans to step up its imports, and, if true, could support commodity prices. The CNY6.90 area that served as support previously may now function as a near-term cap.

Gold

The record high was set on August 7, near $2075. The correction began. It was repulsed in the middle of August when it tried to recapture $2000, and in last week’s attempt was turned back from about $1992.50. Support is seen near $1900. The MACD and Slow Stochastic suggest the correction could continue. If the major central banks are engaged in an uncoordinated effort to convince investors that they are serious about pushing inflation higher and that in part, it means lower rates for longer, it is difficult to envision a deep or sustained decline in gold prices.

Oil

Oil had a tough week, even though US inventories continued to fall. At first, OPEC’s plan to boost output seemed to weigh on sentiment, and then at the end of the week, demand concerns and falling equity markets dragged prices lower. The outside down day ahead of the weekend was like an exclamation point for the price action.

The 6.7% drop in October WTI was the largest weekly loss since early June. It had been trading mostly between $41.50 and $43.50 since early August and bumping against the 200-day moving average (now near $42.85). It had posted its peak on August 26, nearThe momentum indicators are trending lower. A break of the late July low near $39.00 could spur losses toward $36.00.

US Rates

The US 10-year yields drifted lower for five sessions in a row through September 3, as what seemed like an exaggerated response to the FOMC’s average inflation target was unwound. However, the sharp drop in the unemployment rate to 8.4% from 10.2%, beyond what many economists forecast for year-end, saw the yield jump back and finished the week little changed.

The Treasury will auction $108 bln in coupons next week (roughly split between the three-year notes and 10- and 30-year bonds), and there are expectations for more investment-grade issuance. The 10-year break-even, which has been trending higher since bottoming in March, stalled around 1.80%, the high for the year. It has not been above 2.0% since late 2018.

S&P 500

From the midweek record high near 3588, the S&P 500 fell roughly 6.7% to about 3350 ahead of the weekend. At one point, the NASDAQ traded 10% below its record high. US equities began recovering around the time European markets closed for the week. The S&P 500 reached 3450 in late turnover. Its drop appeared to complete a (61.8%) retracement of the last leg up that began in late July (from around 3205).

The constructive close may encourage buyers after the long holiday weekend. A move above 3470 would lift the tone and above 3500, and a run to new record levels will be anticipated. The recovery bodes well for foreign markets at the start of the new week.

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

This article was written by Marc Chandler, MarctoMarket.

September Monthly

New lows for the year against the euro, Swiss franc, the British pound, Swedish krona, and the Australian dollar were recorded in recent weeks. The Dollar Index (DXY), which is heavily weighted toward Europe, fell by over 4% in July, the largest monthly decline in a decade, and another 1.25% in August. In fact, the Dollar Index has not risen on a monthly basis since March. The surge in gold (reached a record high near around $1975 an ounce) was also seen in some quarters as an expression of dollar bearish sentiment.

The interest rate support for the dollar has fallen. Of course, with around $14.5 trillion of negative-yielding bonds, mostly in Europe and Japan, the US still offers a premium, but the premium has narrowed, and when hedging costs are included, it has disappeared. Growth differentials also had favored the dollar, but it is not so clear anymore. The eurozone’s August Purchasing Managers Survey disappointed, and as the month ended, the virus appears to be growing faster in Europe than the US. Yet, as with the interest rate differentials, growth differentials are simply less dollar supportive, and that is the takeaway.

It is not as if all things were equal. The relevant pre-existing conditions in this context were two-fold. First, after trending higher for several years, by various metrics economists use, the dollar was over-valued prior to the pandemic. At the end of last year, according to the OECD’s measure of purchasing power parity (a rough approximation of value in a world of currencies that are no longer backed by gold), the dollar was terribly rich against most of the major currencies.

The euro was estimated to be a little more than 26% undervalued against the US dollar Sterling was next, nearly 11% undervalued. The Canadian dollar was almost 9% undervalued, and the Japanese yen was 7% cheap to the greenback. As of June, the Economist’s “Big-Mac” model of purchasing power parity had the euro more than 16% undervalued, and sterling was 25% undervalued.

The second pre-existing condition was that growth and interest rate differentials attracted significant portfolio flows into the US. US stocks have outpeformed European shares handily over the past 3, 5, and 10-years. The narrowing of yield differentials means that US Treasuries have outpeformed German, British, and Japanese bonds over the past couple of years. This suggests that many asset managers are overweight US exposure. One estimate (13D Global Strategy and Research) suggested is that there has been “nearly $10 trillion of global capital concentration into US assets in less than a decade.”

Still, European stocks (Dow Jones Stoxx 600) outperformed US shares (S&P 500) on the downside in the first three months of the year and has underperformed in the recovery. June was the only month so far this year in which the Stoxx 600 outperformed the S&P 500 (~2.8% to 1.8%). In August, the S&P 500 gained around 7.2%, more than twice the Dow Jones Stoxx 600 3% gain. Year-to-date, the S&P 500 is the only G7 equity market index positive for the year.

Equity portfolio investment tends to carry low currency hedge ratios, and the greenback’s decline adds a tailwind for dollar-based investors in European markets. The Swedish stock market, for example, performed marginally better for unhedged dollar-based investors than the S&P 500 so far this year (~8.6% vs. 8.2%).

In a nutshell, the dollar’s main supports have weakened, it was overvalued, and it was a crowded trade. The adjustment has been nearly relentless. The euro has fallen in only five weeks since the end of April (19 weeks). Speculators in the futures market have amassed record net and gross long euro positions, and still, the biggest pullback has been limited to about 2.5-cents.

Most of the major central banks did not meet in August, and their September meetings will draw attention. Several central banks, including the Federal Reserve, the European Central Bank, and the Bank of Japan, will update their economic forecasts. The Federal Reserve may be the most likely to adjust policy as a follow-up to its formal decision to target the average rate of inflation.

Still, on balance, it might not be prepared to move quite yet to cap interest rates or boost it bond-buying, even though Congress has been unable to provide fresh fiscal stimulus. The Fed has not achieved its 2% inflation target since 2012. As of August 25, the Fed’s balance sheet was nearly $180 bln (~2.5%) below its peak in mid-June.

Many emergency measures were initially for six months or so, and governments and central banks will face some difficult choices. Most of the Fed’s facilities, though used less than anticipated, have been extended until the end of the year. The ECB has extended its Pandemic Emergency Purchase Program. The thrust of monetary policy is shifting from its initial efforts to ensure orderly markets to supporting the recovery.

Without a vaccine, a partial and uneven recovery may be the best that can be expected over the coming months. This means that elevated unemployment levels will prevail, even if partially hidden or socialized through furlough and short-time schemes. Canada has announced both a four-week extension of its emergency income program (through mid-September) before modifying initiatives to put them on a more sustainable basis. It has also extended its loan program for businesses.

In Germany, Finance Minister Scholz, who will be the Social Democrat candidate for chancellor next year, has pushed through an extension of its short-term work program (~government picks up about 2/3 of the wages for households with children) for 24 months from 12. France is preparing a large stimulus effort. UK Chancellor Sunak is under increasing pressure to extend funding for the furlough program that is supporting around four million people, but parts of Her Majesty’s Treasury is pressing for some funding through new taxation.

That said, with numerous vaccines in various stages of development, optimism is running high. Many governments are relaxing some of the procedures around creating vaccines to expedite the process. Until a vaccine is available of which people can be confident, flare-ups may be unavoidable, but they can be minimized and limited in scope. That will be the challenge in September. As the US flare-up appears to be being brought under control in late August, the contagion is rising in the Asia Pacific region and parts of Europe.

The US-Chinese relationship has deteriorated on many fronts, two issues that had been flashpoints, trade, and currency, have become less so. China has stepped up its imports of US agriculture goods, and with 19 tankers carrying a combined 37 mln barrels of oil from the US (~$1.55 bln), its energy imports will surge in September. Although many observers have emphasized that China is far behind its numerical commitments, top US officials (including Navarro, Lighthizer, and Kudlow) all publicly stated that the agreement was intact, and China was adhering to the deal.

A year ago, the US was citing China as a currency manipulator as the dollar rose above CN7.0. However, the link between the geopolitical competition and the yuan has loosened. The yuan traded at seven-month highs against the dollar at the end of August. Its nearly 2% gain makes it the strongest in the region last month. The JP Morgan Emerging Market Currency Index fell a little more than 0.5% in August, paring July’s roughly 2.4% rise. Regionally, South America underperformed, alongside the Turkish lira, which fell to new record lows in August (~-5.2%). After the lira, the next three emerging market currencies were Brazil real (~-4.7%), Argentine peso (-2.5%), and the Chilean peso (~-2.2%).

Dollar:

After trending lower since March, the dollar traded weakened broadly in the second half of August. Sentiment remains bearish as growth and interest rate differentials supports have been undermined. Although there has been some impact of the loss of the $600 a week in federal unemployment insurance and the fading effect of other fiscal efforts, the economic data have been mostly better than expected. Estimates for Q3 GDP around a little above 20% at an annualized rate. That said, there is concern that a quarter or more of the jobs there were lost temporarily will turn into permanent losses.

The Federal Reserve meets on September 16. The steepening of the yield curve through a relative increase in long-term yields cannot come as a surprise to Fed officials after adopting the average inflation rate target. Yet, on balance, it does not seem quite ready to move to cap rates either through yield curve control or through increased bond buying. The political campaigns get into full swing after Labor Day (September 7). It has yet to become much of a market factor except that investors appear to be buying options for protection, and this is seeing the volatility curve steepen.

Euro

The euro has not been the best performing major currency this year, this quarter, or last month. Its 6.6% advance through the first eight months puts in fourth place within the top ten major currencies against the US dollar. Most of those gains were registered here in Q3, where it is in fifth place. It was appreciated by a little less than 1.5% in August. Speculators have amassed a record net and gross long euro positions in the futures market.

The ECB meets on September 10 and is not expected to take new action. The economy has generally performed in line with the staff forecasts last updated in June when it forecast an 8.3% expansion here in Q3. The WTO may announce its preliminary ruling on EU charges that Boeing received illegal government assistance and could be a new flashpoint in the evolution of the trade relationship. In late August, the EU ended its controversial tariff on US lobster in exchange for reduced levies on around $200 mln of EU consumer goods.

(end of March indicative prices, previous in parentheses)

Spot: $1.1935 ($1.1780)
Median Bloomberg One-month Forecast $1.1905 ($1.1570)
One-month forward $1.1945 ($1.1785) One-month implied vol 7.9% (7.8%)

Yen

The dollar traded between JPY104 and JPY108 in July and a narrower JPY105-JPY107 range in August. On a purely directional view, the yen tends to weaken when US yields rise and/or when the S&P rally. The three-quarter contraction that began in Q4 19 with the sales tax increase and typhoon appears to be ending here in Q3.

Prime Minister Abe will step down due to health reasons around the middle of September when the LDP picks his successor. The situation is still fluid, and Cabinet Secretary Suga seems may get the not, which would underscore the continuity we see as the most likely outcome. The Diet’s term is up in a year, but the LDP may want a sooner election.

While there may be an alternative to Abe, there may not be for Abenomics, which is arguably the traditional policy thrust of the Liberal Democrat Party of loose monetary policy, deficit spending, and raise the consumption tax. A supplemental budget for the second half of the fiscal year (begins October 1) seems more likely that fresh initiatives from the Bank of Japan, which meets on September 17. BOJ Governor Kuroda is seen likely to fulfill his current term, which ended April 2023.

Spot: JPY105.90 (JPY105.85)      
Median Bloomberg One-month Forecast JPY105.95 (JPY106.50)     
One-month forward JPY105.90  (JPY105.90)    One-month implied vol  7.4% (7.3%)

Sterling

The pound fell by about 6.5% in H1 20 and rebounded by about 7.8% through the first two months of Q3.  Sterling made a new marginal high for the year in late August, a little below $1.34 on the back of a softer US dollar. The UK economy shrank by a fifth in Q2, the most in the G7, but appears to be gaining traction, though there is still pressure to extend the employee furlough program.  There has been little progress in trade negotiations with the EU.
A break-through is needed in the coming weeks in time for the mid-October EU summit and allow members sufficient time to ratify the agreement. This continues to seem unlikely. The potential disruption may already be a factor underpinning implied volatility.  Yet, August was the second consecutive month that sterling rose against the euro, and is near its best level in two-and-a-half months at the start of September.
Spot: $1.3370 ($1.3085)   
Median Bloomberg One-month Forecast $1.3285 ($1.2820) 
One-month forward $1.3370 ($1.3090)   One-month implied vol 8.7% (8.6%)

Canadian Dollar

The Canadian dollar was one of the strongest major currencies in August, appreciating about 2.9% against the US dollar.  Rising equities speaks to the elevated risk appetites that are correlated with the Canadian dollar. Rising commodity prices (CRB Index rose about 6.8% in August, its fourth consecutive monthly gain and now is above its 200-day moving average for the first time since January) have also been supportive.
Since the middle of March, the US dollar has fallen by about 11.3% against the Canadian dollar, but speculators in the futures market continue to carry a net short futures position. The Canadian dollar is the only major currency that is depreciated against the US dollar this year.  A scandal over favoritism and a dispute over fiscal policy led to the resignation of Finance Minister Morneau, but it did not derail the Canadian dollar’s recovery.
Canada has been more cautious than the US in lifting containment measures while seeing a slightly higher percentage of returning workers. The Bank of Canada meets on September 9 and is not expected to change policy. New fiscal initiatives are likely to be outlined on September 23, when the new session of parliament begins.  Ottawa’s decision about Huawei, on the one hand, and how to respond to the new US tariffs on Canada’s aluminum, on the other hand, risks escalating tensions with both Beijing and Washington.
Spot: CAD1.3045  (CAD 1.3410)
Median Bloomberg One-month Forecast  CAD1.3100 (CAD1.3515)
One-month forward  CAD1.3000  (CAD1.3415)    One-month implied vol  6.5%  (6.3%) 

Australian Dollar

The recovery of the Australian economy seemed to lag behind others even before the flare-up that led to the lockdown in Victoria.  Australia lost about 375k full-time positions between February and June and only gained 43.5k back in July (~11%).  However, the government has reduced the JobKeeper and JobSeeker payments.  Still, in the fiscal year that began July 1, the government anticipates a boost in spending and a reduction of tax revenues of around A$185 bln.

The Australian dollar gained about 3.3% in August, its fifth consecutive monthly increase, and is up about 5.1% for the year.  Reserve Bank Governor Lowe admitted to preferring a weaker currency, but suggest intervention would only be effective if there was a valuation misalignment. The OECD’s model of Purchasing Power Parity puts fair value at closer to $0.6950 (~5.7% over-valued), which represents a relatively modest deviation.

Spot:  $0.7375 ($0.7145)       
Median Bloomberg One-Month Forecast $0.70315 ($0.7035) 
One-month forward  $0.7380  ($0.7150)     One-month implied vol 9.8%  (10.4%)   

Mexican Peso:

The peso gained about 1.8% against the dollar in August, making it among the strongest of the emerging market currencies. The peso is off around 13% year-to-date, and the substantial depreciation that could still feed through to domestic prices.  Consumer prices have firmed in recent weeks and are now at the upper-end of 2%-4% target range.  After cutting the overnight rate by 50 bp at the past five meetings to 4.5%, Banxico sees itself with limited scope for additional easing.
The next meeting is on September 24, and it will likely standpat.  Outside of the auto sector, Mexico’s economy is still reeling from the virus and the limited policy response.  A new corruption scandal in President AMLO’s family may complicate next year’s local and state elections, but had little impact on the Mexican peso.

The dollar has been trading between MXN21.85 and MXN23.00 since the middle of June.  It edged lower to MXN21.74 into the end of the month before bouncing back to nearly MXN22.00 where it finished the month.  In the low interest-rate environment, the 4.5% available on short-term Mexican bills (cetes) is attractive and keeps the peso stronger than the macroeconomic considerations would suggest.

Spot: MXN21.89 (MXN22.27)  
Median Bloomberg One-Month Forecast  MXN21.92 (MXN22.12) 
One-month forward  MXN21.96 (MXN22.37)     One-month implied vol 13.4% (14.7%)

Chinese Yuan

The recovery of the world’s second-largest economy is being stymied by floods and weak domestic demand. The floods are disrupting food supplies and elevating prices.  By late August, and estimated $26 bln of damage has been inflicted and four million people displaced.
Agriculture imports have been boosted to meet the shortage of domestic supply.   Many expect the PBOC to continue to ease policy in a targeted way while holding back from the asset purchases that other major central banks are undertaking.  Since late May, the dollar has depreciated by around 4.7% against the Chinese yuan.   Chinese officials have allowed the yuan’s exchange rate to become decoupled from the ongoing political tension.
The yuan strengthened in seven of the nine weeks of Q3 through the end of August to finish near seven-month highs.  We suspect there is a limit to how much Beijing will allow the US to depreciate the dollar, but the 1.7% depreciation thus far this year is modest by any measure, and still fits the official rhetoric about the yuan’s stability.
Spot: CNY6.8485 (CNY6.9750)
Median Bloomberg One-month Forecast  CNY6.8815 (CNY7.0165)
One-month forward CNY6.9050  (CNY7.0795)    One-month implied vol  4.9% (4.4%)
For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

A Look at the Price Action

Make no mistake about it. After a wobble, the dollar fell. It recorded new lows for the year against the British pound, Australian dollar, and Swedish krona ahead of the weekend. New lows for the month recorded against the Canadian dollar and Norwegian krone. The euro and yen flirted with the edges but remained within their well-worn ranges.

It is the interest rate markets that saw a more nuanced response. The implied yield of the December 2022 Eurodollar futures contract rose 1.5 bp last week. The five-year yield also rose (less than a basis point), as the Fed signaled it would be more accepting of an inflation overshoot as a type of forward guidance meant to underscore its commitment to keep rates low for the foreseeable future.

The long-end of the curve backed up, with the 10-year yield rising 10 bp, and the 30-year yield increased 13 bp. However, the upside momentum was unsustainable, and yields pulled back from their best levels ahead of the weekend despite stronger than expected income, consumption, and deflator numbers.

Dollar Index

Ahead of the weekend, the Dollar Index approached the two-year low set in the middle of the month near 92.00. There was no meaningful bounce, and the broad sideways movement seen in the past few weeks has alleviated the over-extended momentum indicators.

A break of 92.00 would set the stage to test the 91.00 area, which has more technical significance. It is also the initial (38.2%) retracement of the rally in the Dollar Index from the historic lows in 2009 (~70.70). A move above 93.50 is needed to neutralize the negative technical tone.

Euro

Here in August, the euro has traded above $1.19 in six sessions and closed above it exactly twice and once was before the weekend. Perhaps it is a question of market positioning, where speculators in the futures market had amassed a record-long gross and net position and extended it further in the week ending August 25.

The broad, sideways movement in recent weeks ($1.17-$1.19) has seen the momentum indicators trend lower, but the firmer tone in recent days has steadied the MACD and Slow Stochastic, which now appear poised to turn higher. The upper Bollinger Band will begin the new week near $1.1925. A close above $1.20, is probably needed to signal a breakout. Support appears to have been carved around $1.1755-$1.1760 area.

Japanese Yen

The combination of the FOMC and Abe’s resignation saw the dollar transverse nearly its entire month’s range (~JPY105-JPY107) ahead of the weekend. Momentum traders have been whipsawed. The outside up day on August 27 was followed by an outside down day on August 28. The momentum indicators are not particularly helpful now. The dollar spiked to about JPY104.20 at the end of July, which was a four-month low and that is the obvious target on a break of JPY105.00, but the measuring objective of the chart pattern may be closer to JPY103.00.

British Pound

Sterling motored to new highs for the year ahead of the weekend a little above $1.3350. It has not ended a month above $1.33 since April 2018. The strong close leaves it in good shape to continue its run (three consecutive weeks and it has only fallen in two weeks here in Q3). While the MACD is uninspiring, the Slow Stochastic is turning higher after correcting from over-extended levels. The next important technical area is near $1.35. A caveat is it closed well above its upper Bollinger Band (~$1.3280).

Canadian Dollar

Nothing has been able to derail the greenback’s steady decline against the Canadian dollar, which has now been stretched into the seventh consecutive week. It has risen in one week here in Q3 and that was by about 0.3%. The US dollar pushed through CAD1.3050 briefly to fall to its lowest level since January, but it recovered a traced out a possible bullish hammer candlestick.

The long downtrend has left the momentum indicators stretched and do not appear to have confirmed the pre-weekend low. The downtrend line from March’s high will begin the new month near CAD1.3215. Only a break of this trend line is noteworthy, while CAD1.3000 has psychological significance and about CAD1.2985 is $0.7700. The lower Bollinger Band begins next week near CAD1.3080.

Australian Dollar

The Aussie was nearly flat coming into the start of last week and it gained almost 2.6% in the five-day rally that lifted it to almost $0.7360. It has not been at such levels since mid-December 2018. The next important technical objective is near $0.7500. It has fallen in only one week of the past 10 and that was by less than 0.2%. The Slow Stochastic corrected and is now turning higher. The MACD appears to be turning higher from its lowest level in a couple of months. On the other hand, the Australian dollar closed well above it upper Bollinger Band (~$0.7290), which also looks to be initial chart support.

Mexican Peso

The dollar appeared to have staged a key upside reversal on August 27 in the aftermath of the Fed’s statement. However, as cooler heads prevailed, the prospect of a faster-growing US economy and a softer inflation target by the Fed was understood to be good for emerging market currencies in general.

The JP Morgan Emerging Market Currency Index rallied a little more than 1% before the weekend, the most in a month. Its 1.5% gain for the week was the largest in nearly three months. The dollar lost about 1.4% against the peso ahead of the weekend to ensure its third consecutive weekly decline. The next target is the June low near MXN21.4650, around where the 200-day moving average is also found. The technical indicators offer little insight. Resistance is seen near MXN22.20.

Chinese Yuan

The dollar fell nearly 0.8% against the Chinese yuan last week. It has fallen in all but one week here in Q3. We had thought Chinese officials would have resisted more strongly the persistent demand for the yuan, which is at its strongest level since January. The dollar closed a gap left on the charts from the higher opening on January 21 near CNY6.8670.

The low for the year was set the previous day near CNY6.84. Technically, the CNY6.80-CNY6.82 would appear to offer support. It represents a retracement objective of the rally from the March 2018 low around CNY6.24 and the 200-day moving average.

Gold

The pre-weekend rally of about 1.3% prevented gold from falling for the third consecutive week. After testing $1900 in the middle of the week, gold rebounded initially in response to the Fed’s statement. It made it to almost $1977 before dramatically reversing back to $1910 before catching the bid ahead of the weekend that carried to nearly $1974. In the waning hours of activity, support was found ahead of $1960. Both the Slow Stochastic and MACD have corrected lower and now appear poised to turn higher. Initial resistance is in the $1995-$2000 range and then $2015.

Oil

The price of October WTI continues to trade broadly sideways in the $42-$43.50 range. It has progressed sufficiently for the contract to flirt with its 200-day moving average (~$43.15) without the kind of momentum that would usually signal a further advance. That said, October crude oil prices rose by about 1.5% to post the fourth consecutive weekly increase. A year ago, oil was a fifth higher.

US Rates

The US 10-year yields pulled back a couple of basis points ahead of the weekend to stop the four-day increase. Still, on the week, the 10-year yield rose 10 bp to around 73 bp, having traded a little above 78 bp. The 30-year yield edged up before the weekend to complete the fifth session higher. It reached 1.57%, the highest in a couple of months before settling back a little above 1.51%.

The September futures note tested the (50%) retracement of the rally from the June low around 138-22 at the end of last week and bounced off it. Are long-term interest rates on the rise? The technicals suggest otherwise. That said, the 10-year breakeven (spread between the conventional and inflation-linked bonds) rose to 1.77 bp, the most since April. Other market-based measures of inflation expectations are also elevated. The University of Michigan’s survey for 5-10-year inflation was confirmed at 2.7% in August, matching the high for the year.

S&P 500

The S&P 500 gapped higher to start the week and never looked back. The benchmark rose every day last week to bring its streak to seven sessions. The 3.1% rally was the biggest weekly rally of the month. As we have seen with some of the currencies, the S&P 500 has only fallen in one week over the past two months.

It began the week gapping above 3400 and finished the week poking above 3500 for the first time, which is just above the upper Bollinger Band. The trendline off the secondary low in March begins next week near 3400, which is also the bottom of the gap created by Monday’s higher opening.

This article was written by Marc Chandler, MarctoMarket.

Canada Shrugs Off Loss of Morneau and Gold Reclaims $2000 Threshold

Still, its 6.2% advance this month is the best among the G10. Chinese equities posted small gains, but amid rising infections and anticipating new lockdown measures, South Korea’s Kospi took it on the chin, falling nearly 2.5%. New US actions against Huawei took a toll on Taiwanese chip makers and weighed on the broader index. India’s 1% gain led the region.

European shares are flattish, and the Dow Jones Stoxx 600 remains within the range set before the weekend. US shares are also little changed. Benchmark 10-year yields are mostly 1-2 bp softer, which puts the US 10-year yield near 67 bp. The dollar is under modest pressure, falling against nearly all the currencies today. Among the majors, sterling, the yen, and the Canadian dollar are up just shy of 0.5% to lead.

Russia, Mexico, and South Africa lead the emerging market currencies higher. Turkey stands out as a notable exception. Gold has re-taken the $2000 level. The next technical target is near $2025. Oil is firm but flat within its recent ranges. The $43.50 capped the rally earlier this month in the September WTI contract.

Asia Pacific

The US tightened its attempt to isolate Huawei. It extended its sanctions to cover 38 more affiliates in 21 countries. The goal is to cut its access to semiconductor chips. This hit Taiwanese chip producers. Separately, and contrary to the assessment of many private economists, US trade adviser Navarro said in an interview yesterday that China is “absolutely” keeping its word on purchases of US goods. President Trump has also praised Chinese agriculture purchases. Separately, reports suggest some 14 mln barrels of oil in seven super-class tankers are on their way to China now.

The minutes from the recent meeting of the Reserve Bank of Australia confirmed it did not see the need for additional measures. However, there were two mitigating factors. First, officials were concerned that cheap funding was not leading to new credit expansion, though it was not clear on whether it was a supply or demand challenge. Second, the latest outbreak and lockdown in Victoria will push up unemployment and weigh on economic activity.

The dollar stalled just above JPY107 last week and is retracing the gains scored in the first half of August. It has traded at an eight-day low near JPY105.40 today, just above the (61.8%) retracement of the bounce off the JPY104 level seen on July 31. Resistance is seen around JPY105.80, and there is an option for about $480 mln at JPY106 that expires today. The Australian dollar is firm and approached the month’s high set on August 8, near $0.7245. A move above $0.7255 targets $0.7300.

Note that the Aussie continues to march higher against the New Zealand dollar. With today’s gains, the 11-day streak seems to match record moves of 1985 and 1991. The RBNZ seems more aggressive than the RBA, and this appears to be the main driver. The PBOC set the dollar’s reference rate at CNY6.9325, in line with bank model projections. The greenback traded down to almost CNY6.92, a fresh five-month low.

Europe

Rising new virus cases in Europe have begun to have an economic impact according to some high-frequency data. In the first two weeks of August, activity slowed in France, Italy, and Spain. Germany, which is reporting the most cases in four months, and Sweden and Norway are seeing more sluggish results. There is risk that these developments are picked up on the preliminary August PMI releases at the end of the week. If reflected, the service PMI appears more vulnerable than the manufacturing PMI.

The top UK and EU negotiators (Frost and Barnier) have dinner tonight to kick-off the week of staff negotiations. Frost and Barnier will meet again at the end of the week. To ensure that the treaty can be ratified, it is generally understood that it needs to be concluded by the end of September or early October at the latest. Often in such circumstances, officials bring in the goalposts, as it were, and reduce their ambitions and could settle for a smaller and narrower deal to secure an agreement.

In addition to UK trade talks, the EU is being challenged on two other fronts. The first is Belarus and the risk that Russia provides military/police support. The second is Turkey, which appears to be set to begin drilling for oil off the southwest coast of Cyprus and says it will continue to do so for the next month (September 15).

Nevertheless, euro has resurfaced the $1.1900 area and reached $1.1915 in early European turnover, just shy of the August 6 high, which is also a two-year high. Above there, the $1.20 area offers psychological resistance, and as we have pointed out previously, it is the euro’s average since its launch. Initial support is around $1.1880 and then $1.1860. Sterling is also firmer and knocking against this month’s high (~$1.3185). It has seen $1.3200 in March before collapsing, and the high for the year is closer to $1.3280. We have noted that 50 and 200-day moving averages (Golden Cross) for the major currencies have crossed. Sterling is the last, and it is happening today.

America

In and of itself, the Empire State manufacturing survey means little. However, the disappointment was palpable. Economists had expected a decline, but the deterioration of sentiment was notable and worrisome if it is representative. Roughly a third saw conditions improving, and almost a third saw deterioration. New orders contracted, and the six-month outlook eased. The Philadelphia Fed survey will be released on Thursday at the same time was weekly jobless claims. The results will be compared.

Ahead of it, though, the US reports July housing starts today (another month of solid gains are expected), and the FOMC minutes from the July meeting will be released (tomorrow). Those, like ourselves, who expect fresh policy move next month, would hope to seem some groundwork being laid in the minutes. There are also expectations that at the September FOMC meeting, a formal recognition that the inflation target is symmetrical, meaning that the undershoot will allow it to encourage an overshoot.

Canada’s Finance Minister Morneau resigned. There are a couple of flashpoints, including Prime Minister Trudeau’s fiscal response to the pandemic and desire to get more directly involved. Also, both Morneau and Trudeau have been caught up in a scandal involving a favoring a charity to which both had ties. Former Bank of Canada and Bank of England Governor Carney has been consulting with Trudeau, and some see him as a likely successor to Morneau. Deputy Prime Minister Freeland is also seen as a candidate.

The political developments in Canada have done no harm to the Canadian dollar, which has continued to march higher. The US dollar has slipped below CAD1.3160 in the European morning to trade at fresh seven-month lows. The intraday technicals are stretched. A bounce toward CAD1.3180-CAD1.3200 would likely be seen as a new opportunity to sell the greenback. The next chart support is seen a little above CAD1.3100. The US dollar low for the year was set in January near CAD1.2960.

The greenback is also offered against the Mexican peso as it yields yesterday’s gains. Support is seen in the MXN21.85-MXN21.95 area, as the broad dollar weakness and Mexico’s attractive rates blunt concerns about its domestic economy. The Brazilian real will be in focus today. It was the weakest currency in the world yesterday, and the dollar settled above BRL5.50 for the first time since the end of June. Concerns about fiscal policy plans with low real rates provided a weak backdrop for concerns over the futures of the market-friendly finance minister (Guedes).

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

This article was written by Marc Chandler, MarctoMarket.

Gold and the Dollar are Sold while Stocks March Higher

The Dow Industrials and S&P 500 rose, the high flying NASDAQ fell for the second consecutive session for only the second time since May. However, today, the “rotation” seems to be only impacted gold, which is off for the third consecutive session, its longest decline in three months, helped by sales from the ETFs, which have been significant buyers.

The yellow metal is off almost 2% to around $1983. The technical target we suggested was $1950 on a break of $2000. Equities are rallying. Japan returned from yesterday’s holiday and took the Topix up 2.5% (Nikkei 1.95) and Hong Kong’s Hang Seng tacked on 2.1%, amid optimism Beijing preparing new tourist visas to Macau.

European shares are up for a third consecutive session, and the Dow Jones Stoxx 600 has advanced around 2.0% through the European morning. US shares are firmer with the S&P 500, about 0.65% better. Benchmark bond yields are a little firmer, though the European periphery bonds are more resilient (likely owing to the Eurosystem purchases). The US 10-year yield, which had flirted with 50 bp last week, is approached 60 bp now. September light sweet oil is confined to about a 50-cent range above $42. US inventories are expected to have fallen again. Key resistance is seen near the 200-day moving average (~$43.70).

Asia Pacific

The US is continuing to ratchet pressure higher on China. Following the latest sanctions and actions against two Chinese apps, the US has indicated that after late September, goods made in Hong Kong will be labeled “made in China” and subject to the same tariff schedule as the mainland. This measure, like sanctioning HK Chief Executive Lam, is about signaling, as there is little real substance in terms of inflicting pain or disruption. As we have noted before, most goods the US imports from Hong Kong have been re-exported from China, and the goods actually made in Hong Kong are less than 1.5% of US imports from it.

Meanwhile, China appears to be reining in the strong lending seen earlier this year. Indeed, the July lending figures were weaker than expected. New yuan loans, which is what the formal banking system generates, rose by CNY992.7 bln, and economists were looking for something closer to CNY1.2 trillion after CNY1.8 trillion in June. Aggregate financing, which includes non-bank financial institutions (shadow banking), rose by CNY1.69 trillion, less than half of the CNY3.43 trillion in June.

Japan reported June balance of payments and trade figures. Japan’s balance of payments in surplus (JPY167.5 bln) but considerably smaller than May’s JPY1.18 bln surplus. However, Japan continues to run a trade deficit (on BOP basis JPY77.3 bln in June after a JPY557 bln deficit in May. Japan’s broader surplus is a function of its capital account and income from dividends, royalties, licensing fees, profits, and earnings from operations abroad. In contrast, consider German trade numbers that were out last week. Its trade surplus drives its current account surplus (15.6 bln euro trade surplus in June and a 22.1 bln current account surplus.

The dollar traded at new six-day highs against the yen near JPY106.20. Last week’s high was a touch below JPY106.50, and trendline resistance is seen closer to JPY106.70. The option expiring today for about $765 mln at JPY106.00 may still cause some angst if the dollar pulls back in early North American trading. Initial support is pegged near JPY105.70.

The Australian dollar is coming back bid after posting a small loss yesterday, its first back-to-back loss in a month. It has found support around $0.7140 and appears set to re-test the $0.7200-$0.7220 area. The dollar is about 0.2% weaker against the Chinese yuan (~CNY6.9475). The reference rate was set at CNY6.9711, compared with the median bank model collected by Bloomberg of CNY6.9693.

Europe

The German ZEW investor survey showed minor deterioration in the assessment of the current conditions, but optimism over the future continued to improve. The August survey showed the view of current conditions slipped to -81.3 from -80.9. Recall it bottomed at -93.5 in May. Expectations, on the other hand, rose to 71.5 from 59.3. This is a particularly strong reading and is the highest since 2003. Between loan guarantees and actual spending, Germany has been more aggressive than most other European countries in responding to the pandemic. We can’t help but wonder if this lays the foundation for new divergence in the coming years, even though the EU has a recovery fund and will issue a common bond.

The UK’s employment data may spur pressure to increase the furlough program. In Q2, employment fell by 220k, and the claimant count rose 94.4k in July. July payrolls were about 770k lower than in March. Many people are discouraged from looking for work in current conditions, and this is helping keep the unemployment rate at 3.9% (three-months to June according to the ILO). It has been at 3.9% all year, except in February, when it briefly rose to 4.0%.

Separately, reports suggest that the UK’s try to get better terms than Japan gave to the EU is jeopardizing being able to conclude a trade agreement by the end of this month. The issue, which the UK appears to put pride and spin ahead of substance is over blue cheese. Note that the free-trade agreement with Japan, which phases out UK tariffs on autos and auto parts, is estimated to boost UK’s GDP by 0.7% over the long-term while leaving the EU costs an estimated 5% of GDP.

The euro recorded a five-day low a little above $1.1720 before rebounding to $1.1785 in the European morning. Yesterday’s it briefly poked above $1.18, where there is an option for roughly 675 mln euros that will be cut today. An option for 2.1 bln euros that expires tomorrow is struck at $1.1875. The intraday technical readings are stretched, and this may encourage early North American dealers to sell into the euro’s upticks. After bottoming near $1.3055 in late Asian turnover, sterling is testing the $1.31 area, where it peaked yesterday. The intraday technical readings are not as stretched as the euro’s, but gains are likely to be capped in front of the $1.3140 area.

America

Ahead of the review of the Phase 1 trade agreement later this week, reports suggest China is stepping up its purchases for US soy. Six cargoes for November and December shipments apparently were bought yesterday. Reports suggest the new soy orders may be coming at the expense of Brazil.

President Trump opined that Q3 GDP could be 20%. While this could simply be a case of cheerleading and aspirational, it is notable that the Atlanta Fed’s GDP tracker currently puts it at 20.5%. The NY Fed’s model is at 14.6%. Trump has said he is considering a capital gains tax cut. While the executive branch does not have that authority, it could index capital gains to inflation, which has long been advocated by some Republicans.

The US reports July producer prices today. They are not typically a market-mover even in the best of times. The headline year-over-year rate will remain in deflationary territory, (-0.7% likely instead of -0.8%). Even when energy (and food) are dropped, the core PPI is expected to have remained near zero. Still, the week’s data highlights, which include CPI, retail sales, and industrial production, lie ahead. Canada reports July housing starts. They may ease after jumping by more than a quarter in the May-June period. Like the US, housing and autos, appear to be leading the Canadian recovery.

Mexico is expected to announce that the four-month slide in industrial output came to an end with a bang in June. The median forecast in the Bloomberg survey projects a 17.1% increase in the month, as the manufacturing sector got some traction even though the pandemic continues to hit hard.

The highlight for Mexico will likely be the rate cut later in the week (from 5.0% to 4.5%). Minutes from last week’s Brazil’s central bank meeting, where a 25 bp rate cut was delivered. These may prove more important than usual as investors try to work out how much easing is left and the chances that the central bank uses its recently granted powers to buy long-term assets (government and corporate bonds).

The US dollar has given back the gains against the Canadian dollar scored in the last two sessions. The greenback is pushing through CAD1.33, where a $712 mln option is set to expire today. Last week’s lows were set near CAD1.3235-CAD1.3245. That is the next target. That said, the intraday technicals are stretched. Resistance is seen in the CAD1.3340-CAD1.3360 area. The US dollar is at the lower end of the five-day range (MXN22.30-MXN22.32).

While there is some scope for intraday penetration, the market does not appear to have much conviction. Here, too, the intraday technicals are a bit stretched, suggesting limited scope for follow-through dollar selling in the North American morning. The dollar settled yesterday at its best level against the Brazil real in over a month (~BRL5.48). Nearby resistance is seen in the BRL5.50-BRL5.53 area. Support is pegged around BRL5.34-BRL5.35.

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

This article was written by Marc Chandler, MarctoMarket.

About that Dollar Bounce

The price action lends credence to our view that a technical consolidative/corrective phase is at hand. Further near-term dollar recovery looks likely but does not change our longer-term bearish outlook.

Dollar Index

A bottom was carved and tested near 92.50. It is potentially a double bottom. A move above 94.00 is needed to confirm it, though others might not be convinced until 94.50 area (20-day moving average) is surpassed. The measuring objective of the double bottom is around 95.50, and the 95.80 is a retracement objective. The MACD appears poised to turn higher while the Slow Stochastic bottomed late last month, setting up a modest bullish divergence.

Euro

A potential double top is in the euro. It checked the air above $1.19 at the end of July and made a fractional new high in recent days. In between, it had fallen a little through $1.1700. That is the neckline of the double top and implies a measuring objective of near $1.15. We had offered a $1.1650 target last week. The 20-day moving average (~$1.1630) and the halfway mark of the rally off last month’s low ($1.1640) are near there as well. The next retracement (61.8%) is found closer to $1.1550. The MACD and Slow Stochastic are rolling over. Note too that implied vol rose along with the euro, and as the single currency corrects lower, vol will likely ease. The chart here since 2008 illustrates the importance of the area euro has approached. The fate of the 12-year downtrend is at stake.

Japanese Yen

The dollar posted its first leg up against the yen in dramatic fashion, with a key reversal from JPY104 on July 31. Follow-through buying lifted it to nearly JPY106.50 at the start of last week. There were a few days on consolidation, and the next leg up appears to have begun before the weekend. We suspect it can rise into the JPY107.00-JPY107.50. The 200-day moving average lies a little above the JPY108, around the upper end of its previous range. The Slow Stochastic turned higher at the end of July. The MACD is also edging higher.

British Pound

A double top also may be in place for sterling. The pound reached a high on the last day of July near $1.3170, and on August 6, a little above $1.3185. In between, it slipped to around $1.2980. The break confirms the pattern with a measuring objective of the $1.2780 area. The 20-day moving average and the 50% retracement of the last leg up of sterling that began near $1.1520 on July 20 also comes in near there. The next retracement (61.8%) comes in a little below the double top objective (~$1.2770). The momentum indicators are just begun rolling over.

Canadian Dollar

The US dollar fell to six-month lows against the Canadian dollar around CAD1.3230 in the middle of last week, but rebounded back to CAD1.3400 amid the wider greenback recovery ahead of the weekend. The 20-day moving average is found near CAD1.3435, and the high from late last month is a little higher (~CAD1.3460). A push there would signal a test on the CAD1.3500-CAD1.3530, and near the upper end of that range, the 200-day moving average is found. The momentum indicators are floundering in over-extended territory and have yet to convincingly curl up.

Australian Dollar

The potential topping pattern is not as aesthetically pleasing as the euro or sterling. It made a high at the end of July a little above $0.7225. It fell to about $0.7075 before rebounding and reached nearly $0.7245 before the pre-weekend cent sell-off. The greenback’s recovery saw the Aussie fall through and close below the previous day’s low, for a key reversal. A break of the $0.7075 area would confirm the topping pattern and project toward $0.6925. There are several areas of intermittent support. The $0.7040 area is the (50%) retracement of the rally that began in early July. The $0.7000 area is of modest psychological importance, and the next retracement (61.8%) objective is also there. The MACDs are not helpful now, and the Slow Stochastic has turned lower.

Mexican Peso

Emerging markets, for which the Mexican peso often serves as a proxy, seemed to turn lower against the dollar before the majors. Leaving aside the Turkish lira, where officials have finally appear to abandon their ill-conceived currency strategy, emerging market currencies remained under pressure, with the JP Morgan Emerging Market Currency Index falling for the second consecutive week.

Last week’s 1.5% decline is the largest decline in three and a half months. The dollar rose around 3.3% against the rand last week after gaining 2.4% in the prior week. Last week, the dollar’s nearly 4% gain against the Brazilian real was the most among emerging market currencies. The greenback looks poised may be range-bound between around MXN22.30 and MXN23.00. Our near-term bias is for a stronger dollar, but it closed softly ahead of the weekend.

Chinese Yuan

The yuan looks rich, given the dollar’s recovery ahead of the weekend and given the escalation and broadening tensions with the US. It traded at its best level since March (with the dollar at a low ~CNY6.9360). A trendline drawn off the late May high (~CNY7.1770) comes at the start of next week near CNY6.9860, but a move back to if not above CNY7.0 seems likely. Around 4.75% three-month implied vol is low compared with other currencies, but it is above its 200-day moving average (~4.4%). The skew in the options market (three-month risk-reversal) favoring dollar calls edged up slightly last week. While the skew is still low, it did increase more than the one-month tenor and could be picking up some risks around the US election.

Gold

New record highs were seen before the weekend near $2075.50, but then gold reversed lower and fell below the previous day’s low (~2034.55), though closed slightly above it. The bearish price action is intuitively consistent with the dollar’s bounce and the signal from the momentum indicators. The Slow Stochastic is poised to turn lower and did not confirm the new price high. The MACD is poised to cross down. Initial support is expected in the $1980-$2000 area. The rally has been so sharp that even a modest (38.2%) of the recent rally from early last month is closer to $1955.

Oil

The September WTI contract reached a five-month high (~$43.50) in the middle of last week, just shy of the 200-day moving average (~$43.80). This marked the end of a four-day net (close-to-close) rally of nearly 5.7%. Crude trade heavily in the second half of the week. It tested the upper end of a band of support that extends from around $39.80 to $41 before the weekend. The MACD has been trending lower since early/mid-June. The Slow Stochastic has actually turned up from mid-range. Still, our bias is lower.

US Rates

The US rates have found a near-term floor. The 2-year has held the 10 bp record low. Traders may have thought about pushing the 10-year yield below 50 bp, but have pulled back. The 30-year yield held 1.15% and recovered to almost 1.25%. There is some thought that with a weak dollar environment and near-record low-interest rates, some concessions may be needed to induce a robust reception to the US quarterly refunding. It is as if the inventory must be distributed to make room for new product.

The Treasury will raise $112 bln ($48 bln 3-year, $28 bln 10-year, and $26 bln 30-year) in coupon sales, which is about 16% more than the previous quarterly refunding. The Treasury has announced intentions to sell $132 more coupons in the August-October period than it did the last three months as it seeks to fund the huge gap between revenues and expenditures. One implication is that it would seem to boost the chances that the yield curve steepens. The 2-10 year curve briefly dipped below 40 bp last week, a low since late April. There is scope to claw back toward 50 bp in the coming weeks. The 2-30 year curve has been bouncing off 107 bp for two weeks. It can steepen toward 125 bp in the period ahead.

S&P 500

The benchmark gained almost 2.5% last week and filled the old breakaway gap from February (~3328.5). The S&P 500 gapped higher to start the week, and the gap takes on additional technical significance because it appears on the weekly and monthly charts as well. That gap, for reference, is roughly between 3272.20 and 3284.5. It then gapped higher on Wednesday, and that gap is unfilled as well (~3306.8-3317.4).

This area may offer initial support. The MACDs are not yielding any useful signal, while the Slow Stochastic turned up in the past week after barely correcting the over-extended reading. The S&P closed firmly, setting new highs were set for the week in the run-up to the close. There seem to be little in the way of a test on the record high set in February around 3393.5.

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

This article was written by Marc Chandler, MarctoMarket.