The Dollar May be at an Inflection Point

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

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

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

Dollar Index

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

Euro

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

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

Japanese Yen

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

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

British Pound

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

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

Canadian Dollar

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

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

Australian Dollar

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

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

Mexican Peso

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

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

Chinese Yuan

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

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

This article was written by Marc Chandler, MarctoMarket.

Big Week Begins Quietly

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

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

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

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

America

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

FX Price Action: Beginning or End of the Punch?

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

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

Dollar Index:

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

Euro:

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

Japanese Yen:

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

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

British Pound:

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

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

Canadian Dollar:

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

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

Australian Dollar:

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

Mexican Peso:

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

Chinese Yuan:

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Risk Extends Gains Ahead of the ECB

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

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

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

America

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

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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Gold Finds the Ultimate Support

 

Gold meets the ultimate horizontal support and bounces from it with a confidence.

Silver comes back above the uptrend line.

Nasdaq denies the head and shoulders pattern.

DAX trades confident around the all-time highs.

The EURUSD meets a very promising resistance but the bullish momentum looks strong.

The AUDUSD aims higher after the inverse head and shoulders pattern.

The USDCHF drops after the price creates a head and shoulders pattern on the 38,2% Fibonacci.

The CHFJPY enjoys the ride north after the false bearish breakout.

The USDMXN tests very promising support but so far, there is no sign of any bigger demand.

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

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

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

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

Asia Pacific

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

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

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

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

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

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

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

Europe

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

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

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

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

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

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

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

America

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

Markets Chill

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

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

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

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

Asia Pacific

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

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

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

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

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

Europe

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

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

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

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

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

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

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

America

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

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

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

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

America

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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

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

Asia Pacific

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

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

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

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

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

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

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

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

Europe

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

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

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

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

America

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

China’s Expansion Does not Prevent Deflation

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

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

America

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

Limited Follow-Through Dollar Selling to Start the Week

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

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

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

America

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

Bullish Looking Crude Oil May Push USDMXN Even Lower

As you may already know, in risk-on sentiment investors are confident, so stocks are bullish. Risk-on mode is in play since March lows and seems like it may continue into January of 2021.

The main reason for a bullish continuation in the stock market in risk-on mode is also bullish looking Crude oil, which has an unfinished five-wave cycle, So more upside is in view for wave »v« towards 50 level, ideally once a correction in wave »iv« fully unfolds with ideal support in the 46-44 zone.

crude oil

Bullish continuation on Crude oil may cause more weakness for the USDMXN pair since we know they are in negative correlation. So, USDMXN could easily continue lower, at least for one more push to the downside, especially because of recent short-term A-B-C corrective recovery.

usdmxn

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

Speculators Bet on a Continued Commodity Rally in 2021

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, December 8. A week where vaccine and stimulus optimism continue to propel stock markets higher and the dollar lower while bonds held steady. Commodities traded mixed with continued profit taking across agriculture commodities and a big setback for natural gas more than offsetting gains in oil, fuel products and metals, both precious and industrials.

Commodities

The Bloomberg Commodity Index traded lower by 1.2%, hurt by continued profit taking in agriculture commodities led by soybeans, wheat, cocoa and cattle together with a 16.7% drop in the price of natural gas. Overall these developments helped drive a 3% reduction in the total net long held by speculators across 24 major commodities to 2.3 million lots, but not far from the February 2017 record of 2.4 million lots. A clear sign that speculators expect more to come from the commodities in 2021 as the reflation trade gathers momentum and the dollar potentially continues to weaken.

It is also worth noting that speculative positions, compared with recent peaks in 2017 and 2018, are much more spread out across all sectors, with net long positions held in all but one (CBOT Wheat) commodity. In February 2017 when the net-long hit the mentioned record, the energy sector accounted for 56% of the total length while today that share is down to 42%.

graph 1

Energy

The combined net long in Brent (+27k lots) and WTI (-1.6k lots) reached 602k lots, the highest since January. This after Brent began toying with $50/b as the market, despite current Covid-19 lockdowns and loss of mobility, continued to price in a vaccine-led recovery next year. The natural gas long was cut by 26% by in response to a dramatic 16.7% sell-off on demand concerns driven by unseasonal warm weather across the U.S.

Metals

Gold was bought for a second week in response to the rally that followed the failed break below $1800/oz. The bulk of the 19k lots of buying was driven by fresh longs, something that also helps to explain the increased volatility seen last week when the move above and subsequent failure to hold $1850/oz triggered a 45 dollar correction last Wednesday. Net platinum buying extended into a fifth week and during this time, the white metal has outperformed its yellow big brother by 17%.

Speculators in silver meanwhile maintained a net long close to 43k lots for a fourth consecutive week. Thereby extending the lack of price response in a week where the metal rallied by close to 3%. During a week of sideways trading before popping to a fresh seven-year high, the net long in HG copper rose by 5% to 90.4k lots, not far from the 91.6k lots record high recorded two months ago.

Agriculture

For a second week, a broad but relatively small amount of selling was seen across the sector with the soybeans complex and sugar accounting for the bulk of the 58k lots reduction to 1 million lots. Only short position was held in CBOT wheat before a post-WASDE and Russia export tax and quota threats gave the crop a strong end of week boost.

graph 2

Forex

Dollar bears continued to be awarded in the week to December 8 as the Greenback spiraled lower to reach the lowest against both the euro and the Bloomberg Dollar Index since April 2018. The tumble being part of a broader vaccine optimism led move across financial markets pricing in a recovery in global growth for 2021 and the potential for better investment opportunities outside the U.S.

These developments helped drive a 14% increase in the combined dollar short against ten IMM currency futures and the Dollar Index to $30.7 billion, a ten-week high. The bulk of the $3.7 billion of net dollar selling occurred against the euro which saw a 12% rise in the euro net-long to 156,429 lots (€19.6 billion). The other and more surprising contribution came from Sterling which despite trading lower on the week saw 13,609 lots of net buying which swung the net back to a long for the first time in three months.

The Swiss franc together with the Mexican Peso and Russian Ruble saw net selling while the net long in Japanese yen reached a fresh four year high at 48,166 lots.

graph 3

Financials

graph 2

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

COT

This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire

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.

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.