France's Giscard d'Estaing passed away in early December. He who accused the US of enjoying an exorbitant privilege of providing the chief reserve asset lived long enough to see European rates, including the long-end in Spain and Portugal, drop below zero. At the same time, the US dollar fell to two-and-a-half-year lows against many currencies, including the euro.
There had been a flurry of official comments when the euro initially probed $1.20 in early September, and Japanese officials fretted when the dollar fell below JPY104 in November. However, the continued weakness of the dollar has been greeted with a near-non-chalance attitude subsequently. At last week's ECB meeting, President Lagarde barely addressed it and did not go beyond the boilerplate: yes, the euro appreciation is weighing on prices, and yes, it is being monitored closely, but no, the ECB does not target it. Similarly, with the Canadian dollar at its best level since Q2 '18, Bank of Canada officials were also largely mum, except to say that the exchange rate impacts the economic outlook.
While the G7 has been noticeably quiet during the dollar's latest lurch lower, the verbal and material intervention appears to be on the rise in East Asia. Reserve growth has accelerated in several countries. Some observers suggest maintaining the currency allocation of reserves (strategic) that following a period of dollar-buying, the intervening central banks will likely sell some dollars and buy euros (as the single biggest reserve currency after the US dollar). There is merit in this, but consider the central bank that did not intervene. Due to its appreciation, the dollar value of the euro's share of reserves has risen beyond the tolerance band around the allocation. The central bank might find itself in a position to sell euros to rebalance.
After trading in ranges for a few months, the dollar broke down and continued to push lower. The momentum indicators warn that a consolidative phase may have begun. Below we highlight near-term consolidation and initial targets if it morphs into a correction. Politics (as in Brexit and US stimulus, and last-minute actions by President Trump) and positioning ahead of the holidays provide the backdrop for the FOMC and BOJ meetings and the preliminary December PMI reports.
Dollar Index: The low since April 2018 was recorded on December 4, a little below 90.50, and before the weekend, it made a marginal new low for the week near 90.60. The Slow Stochastic has barely turned up from the oversold territory, and the MACD is about poised to cross higher. A move above the 91.35-area would suggest the consolidation is becoming an outright correction. It could trigger short-covering by trend followers and spur a gain toward 92.00.
Euro: The euro appears to be consolidating in a $1.2060-$1.2175 range after breaking out of its $1.16-$1.20 four-month trading band. The Slow Stochastic is arching lower, and the MACD has flatlined near its best level in nearly four months. The broad sideways movement has brought it back within the upper Bollinger® Band that was exceeded last week. A band of support may be seen between $1.2020 and $1.2050. A break below $1.20 would disappoint the bulls.
Japanese Yen: The dollar was confined to about three-quarters of a yen range last week. The dollar set the week's lows before the weekend near JPY103.80. On the upside, the dollar traded briefly above JPY104.50, but it has not closed above for nearly three weeks. The momentum indicators are not generating a robust signal, but the poor close, near the week's lows, casts a pall over the price action. From a slightly broader view, note that the dollar remains in the range set on November 9 when Pfizer (NYSE:PFE) made its vaccine announcement: JPY103.20-JPY105.65.
British Pound: Sterling had fared fine through the first half of last week, but the dinner between Johnson and von der Leyen appeared to fail to generate fresh impetus, and market participants began liquidating sterling. On December 4, sterling poked above $1.35 for the first time since Q2 18, but last week's rally stalled near $1.3480 before the more pessimistic mood took hold. It fell to $1.3135 before the weekend. A last-minute agreement could see sterling recover fully or nearly so, while confirmation of failure to reach an accord would initially send it into the $1.2900-$1.3000 area. The momentum indicators ahead headed lower quickly. The lower Bollinger Band (~$1.3185) was violated for the first time in three months. The Bollinger Band is set at two standard deviations for the 20-day moving average. A three-standard deviation move is near $1.3115. The euro enjoys strong upward momentum against sterling, and it reached GBP0.9230 before the weekend, a new three-month high. The MACD is rising quickly, but the Slow Stochastic has drifted a bit lower and has not confirmed the news highs. This, and the push well above the upper Bollinger Band (~GBP0.9145), is flashing some caution. Nevertheless, on confirmation of no-deal, the highs for the past four years have mostly been around GBP0.9300-GBP0.9320. The main exception was this past March when in the chaos, the euro rose to GBP0.9500.
Canadian Dollar: The sell-off in the greenback extended for the fourth consecutive week, and it visited levels not seen since April 2018. Support around CAD1.30 frayed in November and convincingly gave way at the start of the month. It consolidated in a CAD1.2775-CAD1.2835 range before breaking down to almost CAD1.2700 on December 10. That may have completed a move, and the Slow Stochastic is poised to turn higher, and the MACD is not long behind. A move above CAD1.2860 may signal an upside correction rather than a sideways consolidation. The first target may be around CAD1.2960.
Australian Dollar: Its 1.5% gain had the Aussie neck-to-neck with the Chilean peso as the strongest currencies in the world last week. In part, they both are expressions of the same thing: namely, a judgment about Asian demand and the global recovery in general. Copper prices eked out a small gain last week, despite losses ahead of the weekend, to extend its streak to the sixth consecutive weekly dance. During the run, copper prices have risen by more than 15%. Iron ore prices rose for the fifth week in a row and a 20% advance. Still, the Australian dollar looked tired ahead of the weekend, and after spiking a little above $0.7570, retreated to new session lows and just inside the upper Bollinger Band. A break of $0.7500 could open the door to around a 1% decline. The MACD is elevated but rising. The Slow Stochastic is more concerning. There is a possible bearish divergence as the new highs in price were not confirmed by the indicator.
Mexican Peso: The dollar snapped a five-week decline against the Mexican peso. It is only the fourth weekly rise in the greenback since the end of July. The dollar bottomed on December 8 near MXN19.70. The move above MXN20.00 on December 10 spurred further short-covering ahead of the weekend and lifted the greenback to almost MXN20.20. Above there, near-term potential extends toward MXN20.30-MXN20.32. The MACD and Slow Stochastic did not confirm the dollar's recent low and have both turned higher. We expect the relatively high yield (~4.25% on three-month bills) to continue to cushion the peso's downside.
Chinese Yuan: Although the dollar made a marginal new 2.5-year low against the yuan last week near CNY6.52, the general tone remains consolidative nature. The dollar quickly bounces back from new lows, and the price action has the feel more of the end of a boxer's punch than the beginning. In fact, the dollar has edged higher for the past four sessions, the longest advance in seven months. The upper end of the range seems more defined than the lower-end. Initially, it may be near CNY6.57 and CNY6.60.
Gold: The precious metal posted a big outside up day to start the week and follow-through buying the next day saw it complete the leg higher near $1875. This was a little more than the halfway point of the sell-off since the $1965.6 high before Pfizer's announcement of November 9. The sell-off in the middle of the week to a little below $1826 was marginally extended ahead of the weekend, but it quickly recovered to set new session highs in late dealings. The $1850 area offers initial resistance and then a return to $1875 on the way to $1888-$1890.
Oil: The anticipation of stronger demand helped lift January WTI to almost $48 a barrel last week despite a 15 mln barrel surge in US oil inventories, the most in eight months. Since November 1 low near $34, the January contract rallied 40% through last week's high. It was the sixth consecutive weekly rally. The momentum indicators appear to be as stretched as they can be, but neither has turned down nor confirmed the new highs. Holding above $46 is impressive, but as long as it holds above $44, the technical tone will remain constructive.
US Rates: The US 10-year yield fell almost nine basis points last week, the most here in H2 amid a virus that still seems to be out of control, a rise in weekly initial and continuing jobless claims, and stalemated stimulus talks. The 10-year yield fell closed below the 20-day moving average (0.889%) for the first time this month. The March note futures contract is bumping against the 138-08 cap. The momentum indicators are constructive, and a break higher initially targets 139-00, the highest level since mid-October. It suggests the generic yield can slip closer to 0.80%. The US 10-year breakeven fell four basis points last week to 1.86%. It is 16 bp higher than at the end of October. In comparison, the 10-year breakeven in Germany is about 0.87% after falling seven basis points last week. It is about 17 bp higher than at the end of October. The reflation trade appears to be the driving consideration more than country-specific developments.
S&P 500: The S&P 500 fell ahead of the weekend. It was the third consecutive losing session, the longest streak since last October. A key reversal was posted in the middle of the week when a new record high was set (~3712.40), and then sellers took the benchmark below the previous day's low on a closing basis. New lows for the month were recorded at the end of the week near 3644.50. The gap created with the higher opening on December 1 extends to about 3634.20. A break of that signal a test on the 3590-3600 area. The momentum indicators are rolling over, warning that the Santa Claus rally might be a stay-at-home affair this year. If a correction has begun, investors should be prepared for a 200-400-point decline. The Russell 2000 fared better. It has declined in two of the past three sessions but still managed to extend its rally for the sixth consecutive week, during which time it has appreciated nearly a quarter.