The U.S. dollar traded heavily last week, falling against all the major currencies but the Canadian dollar. The Bank of Canada softened its neutral stance a few hours before the Federal Reserve signaled a pause after delivering its third rate cut to complete its midcourse correction.
The Federal Reserve's real broad trade-weighted dollar index, which arguably is the single best measure when considering the economic impact of changes in foreign exchange prices, eased in October by a little more than 0.5%. With two months left in the year, it is up by a little less than a quarter of one percent here in 2019. This index has risen in only three months this year thus far after falling in three months all of last year.
The move against the U.S. dollar was led by those currencies that one often associates with robust risk appetites, namely the Antipodean and Scandinavian currencies. They all appreciated by more than 1%. The dollar fell against most emerging market currencies, though the South African rand (-2.3%), the Chilean peso (-1.7%), and the Mexican peso (-0.3) were notable exceptions. The dollar fell 0.4% against the Chinese yuan. It was the fourth consecutive weekly decline. Ahead of the weekend, the PBOC leaned against further yuan appreciation.
Dollar Index: The Dollar Index was turned back from 98.00 after the FOMC meeting and spent the last two sessions below the 200-day moving average, a little under 97.50. It entered a band of support seen 97.00-97.15. Below there, another range houses several technical levels between 96.50 and 96.80. Given the MACDs and Slow Stochastics, we see scope for another modest leg lower before corrective pressures likely emerge.
Euro: The stronger than expected Q3 U.S. GDP, the Fed's confirmation that it is on hold, and a better than expected U.S. employment report failed to mark the end of the euro's recovery. The euro rose every session last week for the first time in two years but was unable to overcome the October 21 high near $1.1180. The 200-day moving average is a little below $1.1200. The (61.8%) retracement of the decline since the late June high a little above $1.1400 is found a little above near $1.1210. The MACD is extended, but the Slow Stochastic gives room for another push higher. We expect the next leg up will complete a phase before a downside correction of a move that began in early October around $1.0880. A break of $1.1130 would suggest a near-term high is in place.
Yen: The dollar reversed lower versus the yen after the FOMC meeting near three-month highs near JPY109.30 and proceeded to drop to a bit through JPY108.00 to three-week lows before the weekend. It found support near the trendline drawn off the August and October lows and the (50%) retracement of the October rally. The MACDs and Slow Stochastics suggest the dollar's downside correction may have just begun. A break of JPY107.50 could signal another big figure decline. The JPY108.40-JPY108.60 may offer initial resistance.
Sterling: With the government finally able to push through a snap election, sterling found support near $1.28 and recovered to the $1.2970 area. It was stopped shy of the $1.30 level and the nearly $1.3015 high on October 21. The momentum is sufficient to carry it to new highs, which we think will complete the advance before a correction ensues. As part of a larger dollar decline, there may be potential toward $1.3100-$1.3140.
Canadian Dollar: The U.S. dollar posted a key upside reversal last week against the Canadian dollar by trading on both sides of the previous week's range and closing above last week's high. The surprising shift in the Bank of Canada's stance, opening the door to a possible rate cut in the coming months, spurred the Canadian dollar sales as important technical resistance had been approached. Canada's two-year yield tumbled nearly 16 basis points to 1.55%. The greenback's downside momentum has been waning near CAD1.3050, and we had cautioned that the risk-reward did not seem to justify chasing it lower, and the U.S. dollar posted a key reversal on the daily bar charts the day before the Bank of Canada met. The surge carried it a little above CAD1.3200 and the (50%) retracement of the decline since early October push toward CAD1.3350 that came in near CAD1.3195. The MACDs and Slow Stochastics warn that the U.S. dollar's correction may have just begun. The next retracement objective is near CAD1.3230, and the 200-day moving average is near CAD1.3275. However, of the November 8 employment data, the U.S. dollar could drift back toward CAD1.3100 as the market has not been convinced that a rate cut will be delivered before late Q1 20.
Australian Dollar: The Australian dollar rose in October to post its first back-to-back monthly gain since December 2017 and January 2018. It showed resilience in the face of disappointing Chinese developments but responded positively to the better than expected Caixin Manufacturing PMI. The Reserve Bank of Australia meets next week but is expected to keep the cash rate at the record low of 75 bp. Governor Lowe may caution that continued currency strength could undermine the success of the monetary policy. The Aussie has risen in four of the past five weeks and in five of the previous six sessions. It finished the week above $0.6900 for the first time in more than three months. The technical indicators suggest the move is getting stretched, but new highs are possible. As the Bloomberg chart above illustrates, the 200-day moving average (yellow line) has kept rallies in check since the end of last year. It is found near $0.6955 at the start of the new week. A break of the $0.6865 area would be an early sign that the move is over.
Mexican Peso: The U.S. dollar ended a four-week slide against the Mexican peso by eking out about a third of a percentage point gain. For the last three sessions, it is chopped back and forth in a roughly MXN19.08-MXN19.24 range. The upper end is marked by the 200-day moving average (~MXN19.26) and the lower end by the technical and psychological support around MXN19.00. The technical indicators favor an eventual resolution to the dollar's topside. We are more inclined to buy dollar weakness for a move to MXN19.35-MXN19.45.
Chinese Yuan: The dollar fell for the fourth consecutive week against the Chinese yuan, and the PBOC signaled its concern at the end of last week, setting the dollar's reference rate weaker but not as week as the bank models suggested. Progress on a U.S.-China trade agreement, the broad weakness in the U.S. dollar, and the uptick in Caixin Manufacturing PMI helped send the greenback to levels not seen since mid-August (~CNY7.03). Many are talking about whether Chinese officials will allow the dollar to trade back below CNY7.0. The technical indicators on the more freely traded offshore yuan (CNH) are stretched, suggested limited scope additional near-term dollar losses.
Oil: The December light sweet crude oil futures contract lost about 0.8% lat week, but this obscures the fact that the four-day slide ended with a bang before the weekend when prices jumped 3.7%, the largest one-day move since the middle of September's attack on Saudi facilities. The Chinese Caixin survey, the U.S. employment report, and the jump in U.S. new export orders in the ISM eased concern about demand and world growth. The Slow Stochastics have turned down, and the MACDs have flatlined, but we suspect the pre-weekend momentum can spill over into next week. The next objective is the recent high near $56.90 and the 200-day moving average by $57.35.
U.S. Rates: When everything was said and done last week, the generic 10-year U.S. yield fell eight basis points to about 1.71%. The two-year yield fell about 6 bp to roughly 1.55%. Given the clear signals from the FOMC and subsequent official-speak that policy is on hold, and the stronger than expected jobs data (and back month upward revisions), the U.S. coupon curve reaction was muted. The price action in the 10-year note futures suggests the yields can rise more in the near-term. The December futures contract stopped near 130-17, which houses the (50%) retracement objective of the October decline. The futures contract may find support ahead of 129-16 after closing last week near 130-00. The derivatives market has discounted another rate cut by around the middle of next year.
S&P 500: Lifted by the Chinese and U.S. economic news, the S&P 500 gapped higher on November 1. This gap (~3046.9 and 3050.7) has added significance because it appears on the monthly bar charts. A quick scan suggests that if gaps did appear on the monthly charts in the last 40 years, they were closed. The S&P 500 gained 2% in October. It's the best month since June. Global markets rallied, and the MSCI Asia Pacific (4.3%) and the MSCI Emerging Markets Index (4.1%) were up double the S&P gain, while Europe's Dow Jones STOXX 600 trailed with a less than 1% gain. The strong momentum carried the S&P 500 above our 3065 objective. It makes little sense to talk about resistance at record highs, but we suspect the momentum can carry it up another 1%.