The US dollar had a good week, appreciating against all the major currencies but the Swiss franc, and most emerging market currencies, with a couple of notable exceptions, including the Turkish lira and the South African rand. However, the dollar's gains seemed to be more a function of negative developments abroad rather than positive developments in the US. The market continued to pull back expectations for the trajectory of Fed tightening. The implied yield of the December 2019 fed funds futures fell 3.5 more basis points after a 14.5 bp decline the previous week. Ahead of the weekend, the yield touched its lowest level since early September. The benchmark 10-year yield slipped a couple of basis points over the course of the week, bringing the three-week decline to 17 bp and pushing the yield to spitting distance of the psychologically important 3.0% level.
Although global stocks continued to move lower, and yields eased, the most dramatic move happened with oil. It is was the seventh consecutive weekly decline. The WTI for January delivery reached a four-year high in early October a little over $76.55 a barrel. It reached a low at the end of last week just above $50, shedding 11% over past four sessions. Those losses pushed the price beyond the 50% retracement (~$51.50) of the two-year recovery. The 61.8% retracement is near $45.50. Technically, the market is over-extended. The latest developments, including the US unwillingness to isolate Saudi Arabia, despite the large steps toward energy independence and the continued build of US inventories, fueled the continued sell-off. The market is still reeling from the unexpected exemptions granted to Iran's largest oil customers from the US embargo. Reports indicate more US capacity will come online next year. A move above $55-$56 would begin to stabilize the technical tone.
Dollar Index: The Dollar Index closed at the week's high near 97.00. There is a band of resistance that extends to 97.20. The 61.8% retracement of the recent drop is seen a little above 97.05. The downside correction ended on November 20 and was marked by an outside up day, where it traded on both sides of the previous day's range and closed above the previous high. The price action also reinforces the significance of support in the 96.00 area.
Euro: The euro reversed lower last week after reaching a two-week high on November 20 (~$1.1470). It closed the week on its lows near $1.1320, It has nearly retraced 61.8% of its bounce from the year's low near $1.1215 earlier this month. In Q3, the euro was mostly confined to a $1.15-$1.18 trading range. Now in Q4, the range seems to be $1.12-$1.15. Most of the euro's losses were recorded at the end of the week, following the disappointing flash PMI. The implied yield on the December 2019 Euribor has fallen 15 bp since the middle of October to stand at its lowest in two years. This seems to reflect expectations that the poor economic data and the drop in oil prices will push the ECB's first rate hike further out.
Yen: The dollar has been in range against the yen. Except for a bit of a fluke in August, the dollar has not been below JPY110 here in H2. On the upside, the air has gotten thin above JPY114 in the few attempts. The 100-day moving average has been a fair guide since April, catching the lows on a closing basis in May, August, September, and October. It begins the last week of November near JPY112.15. The technical indicators are not particularly supportive. The dollar was resilient despite the equity market losses and softer yields. Immediate resistance is seen near JPY113.20 and a close above there would lift the tone.
Sterling: Sterling edged lower last week, and despite the Brexit drama this month, sterling closed last week (~$1.2815) about half a cent higher than it finished last month. Sterling has been in a three-cent band on either side of $1.30 in H218. Implied volatility remains elevated and the sense that much rests on a binary decision on whether or not a majority in Parliament will approve the divorce agreement negotiated by the UK and EC. Many Brexiters, including the UK's last negotiator, have now put forth that staying the in EU is better than the deal, which many have suspected was one of the objectives of the EC: it had to be demonstrated that being in the club is better than being outside of it. The costs of leaving are too high. The UK had a good deal and it would be hard to strike a better bargain. The UK kept its own currency, for Pete's sake, has its own independent central bank, various opt-out clauses, and a hard-won rebate.
Canadian Dollar: The US dollar has steadily trended higher against the Canadian dollar since the start of October. It has risen from a little below CAD1.28 to a bit over CAD1.33 last week. Since early October, the US dollar has climbed the 20-day moving average, pushing below it intraday but never closing below it. It is now near CAD1.3175. On the upside, the year's high set in June was a little shy of CAD1.34. The Canadian government announced a corporate tax cut in the form of expedited depreciation schedules. It initially seemed to offer support to the Canadian dollar but between the macro concerns, the drop in oil prices, and the weakness in equities, the downtrend remains intact
Australian Dollar: Between February and October, the Australian dollar fell nearly 14% to $0.7000. It bounced toward $0.7340 before dropping nearly 1.4% last week to snap the three-week almost 3.5% rally. We find that the Australian dollar often leads the general direction of the US dollar, The losses of the euro and sterling in the second half of last week were preceded by the Aussie peak on November 16. A break below $0.7200 would sour the tone, but it may take a break of the recent low near $0.7165 to signal anything important. The MACDs and Slow Stochastics have not turned down though they appear poised to do so in the coming days.
US 10-Year: The December note futures contract pushed above 119-00 at the start of last week and consolidated above it. Falling equities and the drop in oil prices helped offset the supply concerns to support prices. There were a of couple attempts on 119-14 last week, which also corresponds to a retracement objective of the August through October sell-off. The Slow Stochastics are trying to turn lower, and the MACDs are leveling off. The technical indicators allow for a short-term push below the 3% threshold, but the break is unlikely to be sustained.
S&P 500: The price action is poor, and additional near-term losses are likely. The holiday-shortened session before the weekend saw a gap lower opening, and failed attempt to close the gap and a close, the lowest in six months, at the session lows. The important chart area is 2595-2600. The gaps offer upside mile markers. Thursday's low, the top of Friday's gap, is found near 2650 and a close above it may be a preliminary sign that a low may be being forged.