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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
This article was written by Marc Chandler, MarctoMarket.