What was a good week for risk assets, albeit in thin holiday markets soured ahead of the weekend as geopolitical fears escalated between the U.S. and Iran. Also, North Korea's Kim Jong Un was particularly provocative, and Turkish troops will enter Libya, clearly as U.S. President Trump said, "complicating the situation." The markets frequently over-react to geopolitical developments, but it appears to have begun a new technical phase in the capital markets.
Corrective pressures appear to be building. This would seem to favor the dollar, though a poor jobs report at the end of next week could cut it short. Gold and oil seem stretched on a near-term basis. Although the S&P closed in the middle of its range ahead of the weekend, a corrective phase may have begun. Below, the technical conditions at the start of 2020 as liquidity returns are sketched out.
Dollar Index: The Dollar Index fell to five-month lows on New Year's Eve near 96.35. It had finished November a little above 98.25. The pre-weekend bounce on the back of the heightened geopolitical tensions spurred a rebound, but it ran out of steam near the week's high of 97.10, just above the (50%) retracement of the decline since the December 23 high (~97.80). The next retracement objective and the 20-day moving average are found in the 98.20-98.25 area. As we anticipated last week, the 50-day moving average has moved below the 200-day moving average (known as the deadman's cross or the golden cross). The MACD is trying to turn higher, but the Slow Stochastic appears a bit further from turning.
Euro: The euro peaked on New Year's Eve a hundredth of a penny shy of $1.1240 and proceeded to sell-off to $1.1125 ahead of the weekend. That the euro was sold on the geopolitical developments may not be surprising, but what stands out is the not the sell-off but the recovery to session highs of $1.1180 into the end of the European session. It finished the week near $1.1160. Perhaps the contrast between the firm inflation readings from Germany and France and the disappointing U.S. manufacturing ISM (headline and new orders fell to the lowest level in a decade, and employment hit a three-year low). The euro held a trendline drawn off the end of November and late December lows. It begins the new week near $1.1120 and rises to about $1.1140 at the end of the week. Neither the MACD nor the Slow Stochastic have turned lower, but they appear poised to do so in the coming days. This would seem to suggest short-term participants should sell into strength, though we are concerned about the possibility of a soft U.S. employment report at the end of next week.
Yen: The dollar lost nearly 1.25% against the yen last week, which is its biggest weekly decline in four months. Only around a third of this was recorded at the end of the week in response to the geopolitical developments. The absence of the domestic market may have exacerbated the move (who can forget last year's flash crash during this period). In the previous two weeks, the dollar has fallen in eight sessions, according to Bloomberg. In December, the market repeatedly tried taking the greenback above JPY109.70 in vain. It fell to about JPY107.85 on the geopolitics and subsequent decline in equities and interest rates. The MACD and Slow Stochastic are pointing lower, but a note of caution in injected by the lower Bollinger® Band (~108.20), which was violated on a closing basis. A convincing break of JPY107.70, the (38.2%) retracement of the gains in the August 26th low (~JPY104.45) could signal another leg down into the next band of support in the JPY106.50-JPY107.00 area.
Sterling: Recall that sterling rallied a touch through $1.35 as the election results became clear and proceeded to sell-off over the following week to almost $1.29. From there, it recovered back to nearly $1.3285 on New Year's Eve. However, it lost roughly 1.3% in the last two sessions. Ironically, the bigger loss occurred before the geopolitics and poor UK data (disappointing construction PMI and the weakest net consumer credit growth in six years). This gives a sense of the corrective nature of sterling's losses. Sterling's losses ahead of the weekend brought it to the (61.8%) retracement of the last leg up (from December 23 low ~$1.29) that is found near $1.3050. The Slow Stochastic is still moving higher, but the MACD may be turning lower.
Canadian Dollar: The U.S. dollar has fallen for the past six weeks against the Canadian dollar. It is the longest streak since February and March 2016. The MACD and Slow Stochastic are stretched but are still moving lower. However, the price action suggests the greenback is trying to base. The New Year's Eve low was near CAD1.2950, and the pre-weekend low was about CAD1.2960, before closing at CAD1.30. It needs to move above CAD1.3040 to be technically important.
Australian Dollar: A four-week advancing streak ended with a nearly 0.45% loss, the largest in six-weeks. The Aussie fell victim to both profit-taking and risk-off at the end of the week. It peaked on New Year's Eve around $0.7030 and was above the upper Bollinger Band. The Aussie seemed ripe for profit-taking. It reached about $0.6980 on Thursday before the pre-weekend sell-off knocked another half-cent off. The December uptrend line comes in near $0.6920 and roughly corresponds to the (38.2%) retracement of last month's rally. The MACD and Slow Stochastic have just turned down from over-extended levels warning that the trendline and retracement objectives are unlikely to hold. The next retracement objectives are found near $0.6895 and $0.6860.
Mexican Peso: The dollar traded as high as MXN19.63 in late November versus the Mexican peso, before selling off to MXN18.80 be the end of December. We had thought the market looked vulnerable to a short-squeeze, but it was not until the geopolitical developments at the end of last week for the dollar to rise from its base. The dollar spiked to almost MXN19.0275 before North American markets even opened and closed just below MXN18.91. While the Slow Stochastic has turned higher, the MACD has yet to do so. It is not clear that the correction we anticipate has really begun. It may take a close above the 20-day moving average (~18.98), which it has not done in a month, to boost confidence that a low is in place.
Chinese Yuan: The PBOC announcement of a cut in reserve requirements, which also has some signaling value about the direction of the Loan Prime Rate benchmark, did not stop the yuan from rising. It rose against the dollar for a second week and third in the past four. The nearly 0.45% gain put the yuan in third place among emerging market currencies, behind the Colombian peso (~1.15%) and Malaysian ringgit (~0.60%). The dollar has approached its 200-day moving average (~CNY6.9465). It has not traded below this long-term average since last May. The offshore yuan (CNH) has been in a strong uptrend. It rose against the dollar every week since the end of September but two, which is to say the offshore yuan was strengthening even before the trade agreement was announced. The technical indicators reflect the downside momentum, but we suspect the downside is limited in the near-term from here.
Gold: The yellow metal forged a shelf in late October and throughout November near $1450. It climbed steadily through December to poke above $1525 on New Year's Eve. The geopolitical news gave it a fresh impetus, and it closed the week above $1550. The 2019 high (set in September) was near $1557. Since June last year, we have suggested potential toward $1700, and that still seems reasonable. However, in the near-term caution is advised. First, gold finished the week above its upper Bollinger Band. Second, the Slow Stochastic is flatlining jU.S.t below 100. Support is pegged near $1520.
Oil: February WTI gained a little more than 3% ahead of the weekend. The previous week it gained 0.2%. It had punched through $64 a barrel briefly to take out last year's high before settling slightly above $63. The MACD is still heading higher but is stretched. The Slow Stochastic has turned down and is not confirming the new highs for a possible bearish divergence. The contract also closed above its upper Bollinger® Band (~$62.85). Initial support is pegged near $62, with stronger support nearer $60.
U.S. Rates: That sharp backing up of long-term rates and the steepening of the yield curve in December—never mind. The 10-year yield fell almost nine basis points last week, and four basis points the week before, leaving it less than two basis points above where it finished November (~1.775%). The 2-year:10-year yield curve flattened nearly nine basis points in the last two sessions, almost evenly divided between the pre- and post-strike sessions. The March 10-year note futures contract built support in November and December near 128-00. The MACD and Slow Stochastic have turned higher, and there is potential toward the top of the range near 130-00. The implied yield of the December fed funds futures contract fell to 1.33% at the end of last week. This is the lowest in three weeks and implies around an 80% chance of a cut is being discounted, even though 14 of 17 Fed officials think no change will be necessary this year.
S&P 500: The S&P 500 gapped higher on the first day of trading in the New Year to new record highs. The risk-off ahead of the weekend spurred a gap lower opening the filled the previoU.S. session's gap. The S&P 500 quickly recovered and spent the rest of the session in Thursday's range and closed near the middle of the day's range. The MACD and Slow Stochastic are crossing down and did not confirm the new record high. Our initial near-term target is the 3200-3205 area.