The U.S. dollar's rally before the weekend ensured a positive week. It gained against all the major currencies, but the yen, the Swedish krona and New Zealand dollar. Its losses against those currencies were minor, less than 0.15%. The rally was spurred by the divergence between the flash PMIs and signals from the Trump Administration of two possible concessions to China.
The 15% tariffs on roughly $160 bln of China's exports to the U.S. (threatened for December 15) could be suspended as October's were while talks are proceeding even if no deal is struck by then. In addition, the bills that passed nearly unanimously by Congress might not be signed by the President for fear of disrupting the negotiations. Even the President vetoes it, Congress would likely override the veto. If he does not veto it or sign it by November 27, it becomes law.
Despite gains before the weekend, the S&P 500 and the Dow Jones STOXX 600 snapped six-week rallies. The pullback seemed to have brought in new buyers, and the momentum will likely carry into the new week. Bonds also rallied last week. The benchmark 10-year yield was little changed in China even though the central bank nudged a key market rate five basis points lower. South Korea, New Zealand, and Australia saw their 10-year yields fall 5-10 basis points. European benchmarks were mostly 2-4 basis points lower. The U.S. 10-year yield fell to near 1.70% on November 21, a nearly 30 bp decline in two-weeks, before recovering to 1.77% before the weekend.
For the past six sessions, the price of January WTI moved more than 1% a day. In fact, the average move over this run was more than 2%. Although it slipped before the weekend, it still closed near two-month highs. Gold's sell-off in the past three sessions wiped out the gains scored earlier in the week, leaving it off a little less than 0.5% on the week. It will begin the last week of trading off about 3.5% so far in November, completely unwinding the 2.75% gain in October.
Dollar Index: The Dollar Index will begin next week with a three-day advancing streak in tow. The roughly 0.3% gain before the weekend was the largest since November 5. It looks poised to test the month's high (~98.45) in the coming days. We anticipate a move toward 98.70-99.00. The technical indicators suggest that the upside correction to last month's losses has more room to run.
Euro: The single currency extended its gains to almost $1.1100, which corresponds to a (61.8%) retracement objective of the decline in the first half of November. It reversed lower on November 21 and continued to sell-off ahead of the weekend. It has fallen for three consecutive sessions. The month's low was set near 1.0990, and break now seems likely. Although the next target would be $1.0950, last month's low was set by $1.0880. The technical indicators do not preclude a test on the October low, but it would stretch them. As it is approached, it may offer a lower-risk entry opportunity.
Yen: The dollar rose against the yen for the last three sessions, but it was not enough to make up for the losses earlier last week. It was the second weekly loss and the third in the past four. Since October 14, the dollar has barely strayed off the JPY108-handle. Bearish divergences remain in the MACDs and Slow Stochastics by not confirming the near high around November 7, and both indicators are still trending lower. Still, there is no momentum to speak of, and near-term conviction is low.
Sterling: The pound has been streaky. It ended a four-day advance with a four-day decline, and over the eight-session period, it is nearly flat. A triple top, which is a close relation to a head and shoulders pattern, appears in place near $1.30. The neckline is found in the $1.2770-$1.2800 area. The importance of such patterns lies in the measuring objective. Assuming the neckline is violated, it projects a pullback into the $1.2540-$1.2600 area. Alternatively, if the rally from $1.22 on October 10 to $1.30 on October 17 is being corrected, the retracements are roughly $1.27, $1.26 and $1.25. The 200-day moving average is a little above $1.27. The MACDs have been trending lower for three weeks, and the Slow Stochastic appears to be rolling over. The weekly charts underscore the bearish outlook. Sterling made a four-week high and then reversed lower to leave a bearish shooting star pattern in its wake.
Canadian Dollar: The U.S. dollar looks poised to extend its gains against the Canadian dollar. It has already rallied from around CAD1.3040 in late October to almost CAD1.3330 in the middle of last week. The Bank of Canada has signaled that the bar to a rate cut is high, and the market sees its likely in late Q1 20 or early Q2. The rail strike will disrupt economic activity and exports. The Toronto stock exchange had rallied for 11 consecutive sessions to new record highs before last week. It fell every session last week. The technical indicators are rolling over. The greenback looks poised to take out last month's high near CAD1.3340. The next target is the CAD1.3400-CAD1.3420 area, but the note of caution that comes from the technical indicators and proximity of the Bollinger® Band, which warn that the market is getting stretched.
Australian Dollar: The Australian dollar has fallen for the past three weeks and in nine of the previous 11 sessions. The MACDs are trending lower, but the Slow Stochastics are flatlining. In recent sessions, the Aussie is trailing the Lower Bollinger Band, which is falling (and shows why a strategy that puts a stop below the Bollinger Ban does not necessarily limit losses). A break of $0.6770 signals a new leg down, and the topping pattern warns of the risk of another cent decline, A move above $0.6830 would negate the bearish technical outlook.
Mexican Peso: The dollar rose a little more than 1% against the peso last week. The JP Morgan Emerging Market Currency Index fell almost 0.6% to post its fourth consecutive weekly decline. Most Latam currencies fell last week, led by the 2.7% decline in Chilean peso. The dollar made a marginal new high for the month against Mexican peso (~MXN19.5525) but pulled back to about MXN19.3460 ahead of the weekend. The technical indicators do not appear to be generating robust signals, though it has been fraying the upper Bollinger Band (now ~MXN19.46) for two weeks. Support is seen in the MXN19.1750-MXN19.20 area.
Chinese Yuan: The dollar rose in four the last week's five sessions against the Chinese yuan. It is the best performance in nearly three months. It rose by almost 0.45% last week, which is the most since the last week of September. The dollar rose to almost CNH7.05 against the offshore yuan, a little more than 0.5% for the week. The technical indicators are constructive, and there appears to be near-term potential in the CNH7.06-CNH7.08 area. The dollar moved above its 20-day moving average for the first time since mid-October. It may offer support now (~CNH7.0260).
Oil: The price of WTI for January delivery had been in a $56-$58 range in the first half of the month, but last week first broke down to $54.85 before breaking higher to almost $58.75 ahead of the weekend. Net-net, it lost about a nickel last week. The MACD and Slow Stochastics are flashing a possible bearish divergence by not confirming last week's high. The upper Bollinger Band is near 58.65, and the lower band is around $54.70. Oil is in a deep backwardation, which means that the front-month contracts are more expensive than the deferred months. Consider that the January contract settled near $57.75. The June 2020 contract is around $56.10, and next December's contract is just above $54.00. At the end of last year, the June contract was around a 50-cent premium to January, and the December contract was almost at a $1 premium.
U.S. Rates: The U.S. 10-year yields fell six basis points last week. At its low point, the day before the stronger than expected flash PMI report, the yield approached 1.70%. Recall that it peaked on November 7, around 1.97%. A move back above 1.80% now would likely signal another run at 2.0%. That said, the technical indicators of the December note futures contract still are aligned with higher prices (lower yields). The U.S. yield curve (2/10-year) has been flattening. The slope has been halved since peaking a little above 27 bp on November 12. It moved below 14 bp before the weekend and the five-day moving average cross below the 20-day for the first time since the beginning of October. It is below the 200-day moving average (~16 bp) for the first time in over a month. The June 2020 fed funds futures imply a 1.41% yield. The current average effective fed funds rate is at 1.55%, which is only five bp above the corridor floor (1.50%-.175%). Even with the unusually low Fed funds rate, the market is pricing in about a 50% chance of a cut in H1 20.
S&P 500: The benchmark snapped a five-day and a six-week rally last week. Good buying emerged on the pullback. The gap (~3098.2-3104.6) created by the sharply higher opening on November 15 was our immediate technical concern at the start of the week. It was filled and a little bit more in the middle of the week. Support was found ahead of 3091, and the S&P 500 finished the week at a three-day high (~3110). Filling the gap was a constructive technical sign, but we remain concerned that the market is extended, and both the MACD and Slow Stochastics have crossed lower. The 20-day moving average begins the new week near 3084.50. The S&P has not traded below this moving average since October 10. It gapped above it on October 11. A break of it may be necessary to signal the near-term move is over.