The Dollar Remains on the Defensive

June WTI is firm and holding above $65. The supply disruption is key, but iron ore prices soared 10% on strong Chinese demand. More broadly, the CRB Index settled last week at six-year highs. Led by South Korea, Asia Pacific equities markets moved higher, and Australia’s ASX rose to a new record high. Europe’s Dow Jones Stoxx 600 is up fractionally but sufficient to also set a new record high.

US futures are narrowly mixed, with the NASDAQ trailing. The US 10-year yield recovered smartly after the sharp and quick drop on the back of the weak jobs data. It is steady today near 1.58%. European yields are narrowly mixed. The UK Gilt yield is up a couple of basis points, while Australia and New Zealand saw their 10-year yield rose three basis points.

The dollar is mostly softer. Sterling and the dollar bloc are leading the majors, while the yen is softer. The South Korean won is leading emerging market currencies higher. The eastern and central European currencies are laggards, though the Hungarian forint is more resilient. The JP Morgan Emerging Market Currency Index is advancing for the fourth consecutive session. Last week’s 1.7% gain was the most since last November. Gold is firm but below the pre-weekend high (~$1843.50). The yellow metal may be pausing ahead other $1850 area, which is where the 200-day moving average is found.

Asia Pacific

The yen rose to two-week highs at the end of last week but has come back offered today. The exchange rate remains hyper-sensitive to US rates. Meanwhile, the formal state of emergency for Tokyo and three other prefectures was extended at the end of last week through the end of the month. The emergency declaration was broadened to the industrial regions in Aichi and the prefecture of Fukuoka. It now covers around 40% of the economy and most major urban centers.

The latest poll (JNN) found support for Prime Minister Suga fell to its lowest level of his eight-month tenure. His support was at 40%, down from 44.4% last month. Nearly 2/3 of the respondents (63%) said there disapproved of the government’s handling of the pandemic, a 13 percentage point rise. A separate poll (Yomiuri) found 60% want the Olympic games canceled. Suga will face a leadership contest within the LDP in September ahead of the national election, which must be held by the end of October.

The PBOC set the dollar’s reference rate weaker than expected, and the gap between the fix and the market expectations (e.g., median projection in Bloomberg’s survey of bank models) was particularly wide. Bloomberg calculates it was the widest since January (CNY6.4425 vs. forecast for CNY6.4370). As we detected in the pre-weekend fix as well, Chinese officials appear to be trying to slow the yuan’s rise. The yuan is at a three-year high today, with the greenback approaching CNY6.4100.

Tomorrow Australia’s government will announce its budget. In many respects, it will look like the Us approach with strong infrastructure measures, social spending, and extended tax income-tax breaks for low and middle-income households. The faster-than-expected growth and the surge in iron ore prices boost the government’s revenues, allowing it to record a smaller than expected budget deficit. Meanwhile, Australia’s vaccine rollout out so far has been slow, and before the weekend, the Trade Minister warned international visitors may remain restricted well into H2.

The dollar is within the pre-weekend range against the Japanese yen (~JPY108.35-JPY109.30). The stabilization of the US 10-year yield appears to have helped. The JPY109 area is the halfway point of last week’s range, and the greenback stalled a little above there. The next retracement target (61.8%) is near JPY109.20. The dollar looks poised to snap a three-day slide today.

It finished last week near JPY108.60. The Australian dollar is extending its gains for the fourth consecutive session. Around $0.7870, it is at its best level since the end of February. There is an option for roughly A$640 mln at $0.7900 that expires today. The multi-year high was set on February 25, a little above $0.8005. Since April 9, the Chinese yuan has only fallen in two sessions.

However, the pace of its ascent has quickened. Since returning from the May Day holidays last Thursday, the dollar has fallen by nearly 1%. It took almost two and half weeks to fall by the last 1%. The offshore yuan is a bit stronger than the onshore yuan. Official protests may escalate, and among the measures it has adopted before, it can make it easier to invest abroad.

Europe

The UK government did well in last week’s local elections, and it is set to ease social restrictions further in about a week’s time. Last week, the Bank of England announced it will slow its weekly bond purchases and looks to complete them by the end of the year. The opposition Labour is in a bit of disarray after losing some traditional strongholds, and party leader Starmer’s initial reaction to downgrade his deputy did not boost confidence and was ridiculed by other Labour leaders. The SNP did not secure an outright majority in Scotland, but with the Greens, a clear majority favor independence. Still, the public health crisis is the first order of business, and the SNP does not envision a referendum until toward the middle of the five-year term.

Support for Germany’s CDU/CSU slipped to 23% from 24% in the latest polls. Support for the Greens eased a percentage point as well to 26%. The SPD lag behind in third place. It formally endorsed Scholz, the current Finance Minister as its candidate over the weekend. However, he tacked left with a call for more progressive taxes to pay for expanded social programs in his acceptance speech. The SPD challenge is to distinguish itself after being the junior coalition partner to the CDU/CSU since 2013.

The euro rose by nearly 0.85% ahead of the weekend to reach about $1.2170, its highest level since the end of February. It was the largest gain of the year. It made a marginal new high today but is really consolidating after a strong advance. Recall that in the middle of last week, it briefly traded at two-and-a-half week lows near $1.1985. Resistance is seen near $1.22 now, and the late February high was near $1.2245. Initial support is pegged near $1.2130 and then $1.2100.

Sterling rose to almost $1.41 today after testing $1.38 at the start of last week. It peaked a little above $1.4235 on February 24. The $1.4100 area offers nearby resistance, and the intraday technical readings are stretched. Support is seen by $1.4050. The euro stalled near GBP0.8700 last week, the upper end of its recent range, and appears poised to test support in the GBP0.8590-GBP0.8600 area.

America

The disappointing April employment data spurred a debate about the nature of the problem. Tomorrow’s Job Opening and Labor Turnover Survey (JOLTS) will be looked up to shed some fresh light on the issue, but the issue has been terribly partisan. Some, including the Chamber of Commerce, see the main culprit being the government’s income support and the federal unemployment insurance supplement. Others, including the Biden administration, argue that the main challenge is the partial re-opening of the economy and that many have not been able to return to work because they are taking care of family members (children and seniors).

There is a secondary argument the suggests if the modest bump in unemployment insurance coverage is sufficient to deter the return of employees, it says something about the low pay, below what is called a “living wage.” In the public health crisis, poverty itself was seen as a comorbidity. Initial industry-level analysis suggests that there does not seem to be an obvious relationship between the slow job gain and the relative wage.

Hiring in some high and mid-wage sectors slowed while others quickened. Leisure and hospitality reported a 331k increase in employment, mostly associated with lower-wage positions. Personal and laundry services grew 14k positions. On the other hand, employment by couriers and messengers fell by 77k.

The knee-jerk reaction to the jobs report saw the 10-year yield dropped 10 basis points to 1.46%, but it snapped back completely in less time it took to make a cup of coffee. Net-net, the 10-year yield closed higher (albeit slightly) ahead of the weekend. The market concluded after the employment data that the Fed was less likely to raise rates next year and that inflation is likely to result. As a result, the 10-year break-even rate rose to a fresh eight-year high, a little above 2.50%.

With this backdrop, the US Treasury will sell $126 bln at its quarterly refunding this week, and projections suggest as $40-$45 bln of US investment-grade corporate bonds. At the same time, the US is expected to report a surge in April CPI as the base effect peaks. Recall that in April 2020, headline CPI fell by 0.7%. It is expected to be replaced with a 0.2% gain last month.

In May last year, CPI slipped by 0.1%. Core CPI fell by 0.4% in April 2020. It is expected to have risen by 0.3% last month. It took fell by 0.1% last May. The bottom line is that the year-over-year headline rate will soar well above 3% to reach its highest level in a decade, while the core rate will likely approach pre-pandemic levels (2.4% in February 2020).

The busy week begins off slowly with light economic calendars today in North America. The Canadian dollar has appreciated for the last five consecutive weeks against the US dollar. It has extended its gains today. The greenback slipped below CAD1.2100 today for the first time since September 2017 but has stabilized in the European morning. There is a $320 mln option struck there that expires today. There is little chart support until closer to CAD1.20. The CAD1.2150-level, which holds an expiring option for $425 mln, may offer initial resistance.

The US dollar slumped by 1% against the Mexican peso before the weekend, its largest drop in over a month. It had begun the week around MXN20.24 and ended it below MXN19.92. So far today, the dollar is consolidating in a narrow range above the pre-weekend low (~MXN19.86). Last month’s low was set close to MXN19.7850, while the year’s low was set in late January by MXN19.55. The highlight for the week is Thursday’s central bank meeting. With inflation above 6%, Banxico cannot afford to resume the easing cycle that looks to have ended in February before price pressures accelerated.

This article was written by Marc Chandler, MarctoMarket.

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

The Dollar Consolidates Pre-Weekend Advance

The UK holds local elections, and the US and Canada report employment data at the end of the week. In addition, the earnings season continues, while the US will also announce details of its quarterly refunding plans. Several markets are closed for holidays, including China and Japan (through Wednesday). UK markets are closed for a bank holiday.

After falling 1.15% last week, the MSCI Asia Pacific Index traded heavily today, with only Australia and New Zealand bucking move. Europe’s Dow Jones Stoxx 600 fell for the second consecutive week to the end of April and is struggling to sustain early upticks today. US S&P and Dow futures are trading higher, but the NASDAQ was nearly flat after a mixed performance last week. European benchmark 10-year yields are 1-2 bp firmer.

The US 10-year yield begins the new week around 1.63%. The dollar, which rose sharply ahead of the weekend is narrowly mixed today. Sterling and the Swedish krona are leading European currencies higher, while the yen, and to a lesser extent, the Canadian dollar, are nursing losses. Similarly, among emerging market currencies, eastern and central European currencies are mostly firmer, while Asian currencies are mostly lower, led by a 1% loss of the South Korean won.

The JP Morgan Emerging Market Currency Index is little changed after losing 1% in the last two sessions. Gold is consolidating in last Thursday’s range (~$1756-$1790) and is slightly firmer. Oil prices have slipped lower. Last week, June, WTI tested $65.50 and found support in the $62.90-$63.00 area.

Asia Pacific

Australia reported a small upward revision in April’s manufacturing PMI and a further gain in house prices. The PMI edged up to 59.7 from the preliminary estimate of 59.6 and 56.8 in March. The average in Q1 was 57.0. The rise in house prices is becoming a greater concern to policymakers (in New Zealand and Canada). Prices rose by 1.8% in April after a 2.8% rise in March. Prices have risen steadily since the middle of last year. The average monthly gain over the past six months is 1.5%, while over the past three months, the average has accelerated to 2.2% a month. Tomorrow it reports March trade figures ahead of the central bank meeting.

South Korea is integrated into global supply chains, making its trade figures reported ahead of most other countries a lead indicator. Its April trade figures were released over the weekend, and the 41.1% jump in exports from a year ago exaggerates the strong recovery that is, in fact, taking place. There were two additional working days, which, if adjusted for, still lifted South Korean exports by almost 29.5%.

The second distortion comes from the base effect. The 25.6% year-over-year decline in April 2020 made for a low base. Nevertheless, the takeaway is that the South Korean economy, which returned to its pre-pandemic peak in Q1, is continuing to expand. Exports are averaging about $2.2 bln a day this year. Shipments of semiconductor chips rose by a little more than 30%, and auto exports rose by almost 73.5% from year-ago levels.

Rising South Korean exports to its major trading partners, including China, the US, EU, ASEAN, and Japan, underscore that the global recovery is accelerating. South Korean imports also surged. The nearly 34% year-over-year increase is exaggerated for the same reason imports were flattered. Three forces appear evident. First, South Korea is embarking on a capex cycle for semiconductor chips. Fabrication equipment imports soared by nearly 135%.

Second, importing intermediate goods and components, like display panels, will be used as inputs for exports. Third, the 25% increase in consumer goods imports speaks to the strength of the domestic economy.

The dollar is rising against the yen for the fifth session in the past six again. It reached JPY109.70, its highest levels since April 13, and has met the (61.8%) retracement objective of the decline since peaking near JPY111.00 at the end of March. The JPY110.00-JPY110.10 is the next hurdle. Support is building near JPY109.20.

The Australian dollar retreated from $0.7800 and dipped below $0.7700 at the end of last week. It consolidating in quiet turnover at the lower end of the pre-weekend range. The nearby cap is seen around $0.7740. With Chinese markets closed, the offshore yuan (CNH) weakened for the second consecutive session. It is the first back-to-back decline in three weeks and appears to simply reflect the better tone of the US dollar. The dollar closed at about CNY6.4750 and is trading around CNH6.4760.

Europe

While the final manufacturing PMI was a bit disappointing, the real takeaway is that the eurozone economy is recovering from the Q1 contraction. Moreover, claims about a double-dip recession that the Financial Times called out in a headline are misleading. It is hard to say that it truly recovered from the “first” one. And recall, there is no fixed definition of a recession. Europe’s seven-day vaccination average has surpassed the US and is still accelerating. In the US, nearly all adults who want a vaccine have gotten at least one jab.

EMU’s April manufacturing PMI stands at 62.9 rather than 63.3 of the preliminary estimate and 62.5 in March. It was at 55.2 at the end of last year—slower supply deliveries, which are how the supply chain bottlenecks are expressed with rising prices. German and French flash readings were shaved, and although Italy and Spain showed improvement, it was not quite as much as economists anticipated.

Although last week’s release of Q1 GDP figures takes away some of the interest in the high-frequency data from March, German retail sales were stellar. March retail sales soared by 7.7%, more than twice the median forecast in the Bloomberg survey. Moreover, the February series was revised to show a 2.7% gain instead of 1.2%.

European negotiators appear more restrained than Iranians about the prospect of a deal on the nuclear accord. Separately, Iran’s state television claimed a deal was struck–prisoner swap with the US and UK and as much as $7 bln in funds, which the US quickly denied. Getting the US and Iran back into compliance with the 2015 agreement has ramifications not just for Iran, which apparently has been hit hard by the pandemic, but also for the oil market.

Already, last month, Iranian output is believed to have risen by 200k barrels per day to around 2.5 mln, which would be the largest increase in OPEC. Iran and several small producers were exempt from the OPEC+ output cuts, which are now being slowly reversed. Iran’s capacity is estimated to be a bit higher than 3.5 mln barrels per day, but it needs around 1.2-1.5 mln bpd for its domestic consumption. Estimates suggest Iran has around 70 mln barrels in floating storage. A deal is thought necessary before the end of this month, ahead of the June 18 Iranian elections.

Russia may be withdrawing its forces that had massed on the Ukraine border, but relations with Central and Eastern Europe are the most strained since the annexation of Crimea in 2014. Whatever goodwill Putin sought through is vaccine diplomacy has been undermined its aggressive behavior. Bulgaria and the Czech Republic believe Moscow was behind explosions in arms depots and the 2016 poisoning of an arms dealer.

They expelled some Russian diplomats, and Moscow retaliated in kind, and Prague kicked out more. Of particular note, Lithuania and Slovakia moved in sympathy and also expelled Russian diplomats. There arguably is a lost opportunity for the UK. Eastern and Central European were natural allies for the British on various issues, including a harder line toward Russia. Meanwhile, the Greens, whose fortunes in Germany are rising as the center (CDU/CSU and the SPD) continues to lose support, seems to also take a harder line against Russia (and China).

The euro initially extended its pre-weekend drop but has subsequently rebounded from a little below $1.2015 to about $1.2055 in the European morning. The intraday technicals are stretched, and the $1.2065-$1.2080 area offers a nearby cap. Similarly, sterling successfully tested $1.3800, where a large option (~GBP845 mln) expires tomorrow. It has recovered to around $1.3860, which stretched the intraday momentum indicators.

Resistance is seen in the $1.3860-$1.3880 area. Separately, we note despite a slightly smaller increase than expected in Turkey’s April CPI (17.14% year-over-year from 16.19% in March, and 17.3% median forecast in Bloomberg’s survey), there is little chance that the central bank will cut rates this week. Last week, it raised this year’s inflation forecast. Yet, the drop in the manufacturing PMI (50.4 from 52.6) illustrates how the high rates and pandemic are weighing on the economy. The dollar has traded on both sides of its pre-weekend range against the lira and is firm in the European morning around TRY8.30.

America

The US has a packed economic diary this week, with the April employment report at the end of the week, the highlight. Another gain of around a million jobs is expected. Today features the final April manufacturing PMI report and the initial ISM manufacturing index, and the economists in Bloomberg’s survey look for a 60k jump in manufacturing jobs last month.

The preliminary look at Q1 GDP last week gives good reason to expect a sharp recovery in construction spending in March after a 0.8%, weather-induced decline in February. April auto sales will trickle in over the course of the North American session. Recall that in March, they jumped to a 17.75 mln seasonally adjusted annual rate. It was the most since December 2017. It may be difficult to have sustained that level in April.

Canada sees its manufacturing PMI today, but the Canadian dollar does not seem particularly sensitive to this report. The March merchandise trade balance is out tomorrow, but the week’s highlight is the employment report at the end of the week. In March, Canada grew a dramatic 303k jobs. The risk is of a weaker report. Note that the better part of three rate hikes has been discounted over the next two years.

Mexico reports its PMIs today, but the focus may be on March worker remittances after President AMLO tipped a record of $4.128 bln. Last year, worker remittances were a greater source of capital inflows than Mexico’s trade surplus ($40.6 bln vs. $34.5 bln). The highlight of the week, though, maybe the CPI report and another gain will solidify ideas that its rate cycle is over. Brazil has a full economic diary, including what is expected to be a record trade surplus. Still, little will distract the market from Wednesday’s central bank meeting, which is expected to signal another 75 bp rate hike.

The US dollar has carved out a small shelf against the Canadian dollar in the CAD1.2265-CAD1.2275 range. Initial resistance near CAD1.2320 has already been tested. A break of it could see the greenback firm to around CAD1.2400. Meanwhile, the dollar is extended last week’s 2.1% gain against the Mexican peso that halted a four-week slide. Today’s high near MXN21.3150 is the best level of the US dollar since early April. The next technical target is a little above MXN21.37. At the end of last week, the dollar jumped 1.8% against the Brazilian real to around BRL5.4450. A move above there will target the BRL5.49 area.

This article was written by Marc Chandler, MarctoMarket.

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

The Dollar can Build on the Pre-Weekend Gains

The Japanese yen was a notable exception. The rise in US yields helped lift the greenback nearly a percent against the yen. The Fed’s standpat stance in light of the surging economy and signals the Norwegian central bank and the Bank of Canada seemed dovish. The contrast carried the Norwegian krone and Canadian dollar to new three-year highs last week. Even if the greenback’s pre-weekend advance was exaggerated, it looks to be turning after trending lower in April.

The Federal Reserve’s broad trade-weighted nominal dollar index fell by about 7.5% in the last three quarters of 2020 after rising by 4.6% in Q1 as the pandemic struck and the dollar was bought partly as a safe haven. In addition, it was partly a function of unwinding structured positions that used the greenback as a funding currency. It gained 1.3% in Q1 21 but traded with a heavier bias in April and surrendered most of the Q1 gains, falling over 1%. Moreover, the technical indicators for the dollar have been stretched by its persistent decline in recent weeks. Frequently, it seems that the short-term trends in the dollar are reversed or consolidated around the US employment data. The April report is released on May 7, and another strong report is anticipated.

Our broad macro view is that given the large US fiscal and trade deficit (the March goods balance reported last week widened to a new record high deficit of a little more than $90 bln) requires higher yields or a weaker dollar, or some combination thereof. The fact that the US 10-year yield rose nearly 83 bp in Q1 and the dollar strengthened, and the yield fell in April, and so did the dollar is not coincidentally. We do not want to overstate the link between exchange rate and yields. The long-term relationship does not appear linear but cyclical. However, when trying to discern the recent broad trend, the foreign exchange market seems particularly sensitive to US rates.

Dollar Index

The Dollar Index fell by about 2.5% in April, essentially unwinding the March gain. The pre-weekend advance, helped apparently by month-end position adjustments, was the most since early March. Tentative support was found near 90.40. The MACD looks poised to turn higher, but the Slow Stochastic has flatlined in the overextended territory. The close above 91.15 may help stabilize the tone. To signal a correction to April, the 91.55 area may be overcome. Above there, 92.00 comes back into view.

Euro

The dovish Fed lifted the euro to $1.2150, its highest level since the end of February. Sellers greeted it and pushed it back to around $1.2015 ahead of the weekend. The move seemed exaggerated by month-end adjustments. Follow-through selling will likely test support is likely in the $1.1980-$1.2000 area. The momentum indicators are stalling. In the near term, we are more inclined to sell into strength than buy dips. Three-month euro volatility (implied) slipped below 5.5% before the weekend, its lowest level since March 2020, but closed near session highs.

Japanese Yen

The dollar bounced smartly against the yen last week. It had finished the previous week below JPY108, but the rise in US yields seemed to fuel the greenback’s recovery. After falling in nine of the past ten sessions, the dollar rose at the beginning of last week and recorded higher highs until consolidating ahead of the weekend and month-end. The MACD and Slow Stochastics have turned up, suggesting the dollar’s recovery will continue.

The dollar rose above JPY109.30 before the weekend to push and closed above the (50%) retracement of April’s decline. The next retracement target (61.8%) is near JPY109.65, and then the JPY110 level beckons. Implied vol trended lower in April alongside the dollar. The dollar’s recovery is likely to see higher implied vol, which at a little below 6%, is also near its 20-day moving average.

British Pound

A five-day advance rally was halted before the weekend as it pulled back and slipped below the 20-day moving average (~$1.3850). Once again, the market was reluctant to push it above $1.40. Sterling has not closed above that threshold since the end of February, though it has flirted with it several times. The pre-weekend drop succeeded in turning sterling lower for the week after threatening to extend its weekly advance to three. The momentum indicators stalled. Many observers see the local elections, and the election in Scotland, in particular, as a risk to sterling.

On the other hand, the Bank of England is expected to be upbeat as the fiscal stimulus and vaccine will spur a recovery sooner and stronger than previously projected. If $1.40 is the upper end of the range, then the $1.3670 area has been the lower end of the range. Initial support is seen around $1.3800. Three-month sterling vol fell below 7% last week to make a marginal new low since last March.

Canadian Dollar

The Canadian dollar was easily the strongest currency last week, gaining 1.5% against its US counterpart. It the fourth consecutive weekly advance, and it was the biggest of the year. The central bank has begun tapering, rising commodity prices is seen as constructive, and its 1.6% expansion in Q1 matches the US. However, a note of caution is generated as the US dollar closed below the lower Bollinger Band every day last week and finished the week on its lows. Another note of caution comes from the market that may be getting ahead of itself as it prices in three rate hikes by the end of 2023.

The momentum indicators are still falling, and the Slow Stochastic is stretched, and the US dollar still made new three-year lows ahead of the weekend. Initial resistance is seen near CAD1.2335 and then CAD1.2400. The low from 2018 is about CAD1.2250, and below there, chart support is sparse until the 2017 low of almost CAD1.2060. Implied volatility has begun rising. It had briefly fallen below 6% near-mid April, its lowest level since last July, but finished above 6.5%.

Australian Dollar

Rising commodity prices, including industrial metals, and a dovish Federal Reserve failed to sustain an Aussie rally above $0.7800. While it flirts and penetrates it on an intraday basis, it has failed to close above it since the end of February. Indeed, it finished the week close at its lowest level in about two and a half weeks, a tad above $0.7700, briefly dipping below it in a thin NY Friday afternoon. The momentum indicators a mixed. The Aussie spent April mostly in the $0.7600-$0.7800 range and largely above $0.7700 since mid-monthly. A break warns of a return to the lower end of the range.

The RBA meets on May 5 in Sydney. It may be a bit early for it to signal that it too wants to pull back from its extraordinary monetary support, but it seems like a good candidate for later Q3. The central bank will publish new economic projections at the end of the week, ahead of the government’s budget announcement the following week. Three-month vol is trading in its trough below 9.0%. It reached 8.75% last week, its lowest level since last March.

Mexican Peso

The peso had its worst week in a couple of months, falling in four of the five sessions. It snapped a four-week advance with a 2,1% decline, making it the second-worst performing emerging market currency after the Colombian peso (~-2.4%). Higher global interest, including a modest rise in US yields and the prospect of another 75 bp hike in Brazil in the week ahead, encouraged some profit-taking.

News of a large and unexpected trade deficit ($3 bln in March) was not helpful, but the surprising expansion in Q1 (0.4% quarter-over-quarter GDP) did not prevent the peso from extending its losses. The US dollar finished the week around MXN20.2460, its best level since April 16. The MACD and Slow Stochastic have turned up. It met the (38.2%) retracement objective of the decline since late March high near MXN20.2350. The halfway mark is about MXN20.3730.

Chinese Yuan

The broad dollar gains ahead of the weekend halted the yuan’s four-day advance. It was only the second session that the greenback gained over the redback in three weeks. Still, the dollar fell for the fourth consecutive week, which followed a six-week advance. Over the four-week streak, the yuan rose by 1.6%, making it the second strongest currency in the region after the Taiwanese dollar (~2.1%).

If the dollar strengthens in the near term, as it looks likely against a range of currencies, it can return to the CNY6.50 area. The yuan and the euro remain highly correlated. On a purely directional basis, the correlation over the past 30 and 60 days is slightly more than 0.85. The onshore market will be closed the first part of next week to celebrate the May Day holiday.

This article was written by Marc Chandler, MarctoMarket.

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

The Dollar is Heavy ahead of What is Expected to be a Dovish Fed

Despite unmistakable signs that the US economy is accelerating, and by more than expected, the US 10-year yield is around 25 bp off the end of March high. This seems to dampen the enthusiasm for holding the greenback.

The Federal Reserve meets next week and there is no compelling reason to expect a change in tone from either the statement or Chair Powell’s remarks. The Fed has anticipated that the pace of activity and prices would pick up and they have. We think as the economy continues to open up, and growth broadens and deepens, it will be increasingly difficult to justify the $120 bln a month in bond purchases. Although it is not fully discounted, the market leans strongly toward a rate hike by the end of next year.

Tactically, we had thought that there was still some life in the divergence meme that saw the dollar recover in Q1 after its losses accelerated in the last two months of 2020. Strategically, we remain bears. We continue to believe that the third large dollar rally since the end of Bretton Woods is over. Also, the divergence meme that had helped the greenback offers only a temporary respite, as the slow vaccine rollout in the EU and Japan delays but does not negate their recoveries. The combination of a large budget and trade deficit seems to require higher interest rate differentials to support the dollar. Over the past month, the 10-year differentials have narrowed rather than widened.

Dollar Index

The third consecutive weekly decline has brought the Dollar Index to the 90.80 area, which corresponds to a (61.8%) retracement of the rally from the early January lows (~89.20). A break of the 90.80 area signals a test on the 90.00-90.20 area before a return to the lows. The MACD is still headed lower while the Slow Stochastic is trying to turn higher. A close above 91.40 would help stabilize the technical tone.

Euro

The euro settled last week at its highest closing level since early March, and made a new high ahead of the weekend at $1.2100. The retreat after the ECB meeting that pushed the euro to $1.1995 was snapped up. The trendline connecting the January and February highs comes near $1.2110 at the end of April, which also is around the (61.8%) retracement objective of this year’s decline. Above it, there is little chart resistance until $1.22. The MACD is still picking up this month’s uptrend, while the Slow Stochastic is detecting a loss of momentum and appears to be poised to roll over. A break of the $1.1990 area may be suggestive, it probably requires a break of the $1.1930-$1.1935 area to be of technical significance.

Japanese Yen

The dollar dipped below JPY107.50 for the first time since early March ahead of the weekend and extended its loss for a fifth consecutive session, for the longest losing streak since last November. It was similar to the previous week when falling US rates dragged the dollar lower until it found a bid before the weekend. Still, it managed to close just above JPY017.75, the (38.2%) retracement target of this year’s advance. If it does not hold, the next technical target is near JPY106.80.

It has been two full weeks since the dollar managed to rise above the previous session’s high. The dollar has not closed above the previous session’s high this month. The MACD’s decline has begun slowing and the Slow Stochastic has flatlined in overextended territory. A move above JPY108.20-JPY108.40 would lift the tone.

British Pound

Sterling did not perform well last week even though it is clear that the recovery in the UK is gaining more traction as the economy gradually re-opens. Retail sales jumped 5.4% in March (median expectation in Bloomberg’s survey was 1.5%) and April’s preliminary composite PMI was above last year’s peak. Sterling’s six-day rally ended after a 1.1% rally to start the week. However, it spent the rest of the week dribbling lower to finish the week higher (~ 0.3%), largely owing to a late rally ahead of the weekend.

It was among the laggards (along with the Australian dollar and Canadian dollar). Sterling has spent March and April between $1.3670 and $1.4000. The upper end of range held last week. Initial support is around $1.3800 and a break may be worth a cent. In the two sessions through last Monday, the euro fell by about 1.5% against sterling but proceed to recover for the last four sessions and rose to almost GBP0.8720 ahead of the weekend and recorded its highest close in two months. The next target looks to be near GBP0.8760 and then GBP0.8850.

Canadian Dollar

The Bank of Canada announced it would reduce the amount of government bonds it was purchasing and brought forward to the second half of next year when it imagines the spare economic capacity would be absorbed. Yet, the Canadian dollar was not really rewarded and finished the week almost 0.3% higher against the US dollar, a function of its pre-weekend advance. The US dollar has been finding steady bids in the CAD1.2460-CAD1.2470 area. The combination of lower implied volatility and a smaller skew in the risk-reversal (favoring the US dollar) is consistent with interest in selling greenback calls. For the past five weeks or so, the US dollar has gone virtually sideways as reflected by the convergence of the five and 20-day moving averages (~CAD1.2530-CAD1.2550).

Australian Dollar

For the past six sessions, the Aussie has been alternating between gains and losses and over this span net-net it is virtually flat. In the first half of April, it traded mostly in a $0.7585-$0.7675 range. Now it is in a $0.7690-$0.7800 range. It did spike to about $0.7825 on April 20, which was the (61.8%) retracement objective of the decline since the peak in late February a little above $0.8000. The momentum indicators are mixed. The MACD is gradually rising while the Slow Stochastic has turned lower.

A break of the $0.7670 area, which houses the 20-day moving average and (50%) retracement objective of this month’s advance would weaken the technical tone. Next week Australia reports Q1 CPI early on April 28 in Canberra, and the underlying measures are expected to be stable, but the import/export prices, the following day, are more noteworthy. Australia has a positive terms-of-trade shock. Consider that its index of import prices fell every quarter last year and is expected to have fallen again in Q1. The index of export prices fell in the middle two quarters of 2020 but rose by 5.5% in Q4 20 and is expected to have risen 9% in Q1 21.

Mexican Peso

The dollar is trading at three-month lows against the peso. It has fallen for the last four weeks and six of the past seven. It is not the strength of the Mexican economy or its success in getting ahead of the Covid-curve that underpins the peso. In fact, there is a good chance that Mexico reports on April 30 that the economy contracted in Q1, and if it did grow, it is likely aided by the booming US economy through the trade and worker remittance channels.

Mexico’s one-month T-bills (cetes) pay a little more than 4%. The 4-week bill in the US has no yield. The momentum indicators are stretched and appear poised to turn higher. A move above MXN20.00 would suggest a near-term low is in place. Yet, if the grind lower continues, there appears little on the charts to deter a test on the year’s low set in late January around MXN19.55.

Chinese Yuan

The greenback ended a nine-day slide against the Chinese yuan, rising a meager 0.1% ahead of the weekend. The yuan’s gain reflects the broad dollar weakness we have been tracking. Over these past two weeks, the yuan has appreciated by 0.8%, which, incidentally, is more than most Asian currencies except the Japanese yen and the Taiwanese and Singaporean dollars.

We suspect that in the near term, the PBOC would prefer the yuan to stabilize after its recent bout of appreciation. That said, China’s premium over the US on 10-year rates widened last week to 161 bp, the most in a little more than a month, though its 60 bp off level prevailing at the end of 2020. China’s April PMI is the main economic feature next week and some stabilization (slight lower readings) seems likely after the March surge. If CNY6.48 is the lower end of the range, then the CNY6.53 may be the upper end of a consolidative range for the dollar.

This article was written by Marc Chandler, MarctoMarket.

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

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.