Overview: We had anticipated that the dollar's downside correction against the European currencies was over or nearly so and looked for the dollar to find better traction. The Dollar Index held above the previous week's low. The euro's high for the week was recorded on Monday near $1.1815. With the weight of Brexit, sterling was unable to trade above the previous week's high. The dollar set new highs for the year against the Japanese yen. Among the liquid emerging market currencies, which we have dubbed the BRATS (Brazilian real, Russian ruble, Argentine peso, Turkish lira, and the South African rand), only the peso fell against the dollar. As a condition for more IMF assistance sooner, it was forced to let the currency float, i.e., sink. The Turkish lira led the EM currency recovery as overtures toward Germany were seen as a constructive development. In the week through September 21, the Turkish stock market absorbed the flows out of the bond market, which took some pressure off the currency and the external account showed dramatic improvement (August trade deficit was half the size of the July shortfall), and tourism increased after falling sharply in July.
Dollar Index: The Dollar Index rose for the third consecutive session ahead of the weekend and the technical indicators that we had anticipated turning did. The MACD and Slow Stochastics have turned higher from oversold conditions. At 95.40, the Dollar Index has recouped half of the decline since the August 15 peak for the year near 97.00. Support near 94.60 should contain downticks if the new momentum is to be maintained.
Euro: The single currency fell nearly 2.5 cents after the Fed showed that neither trade tensions nor the flattening of yield curve would deter it from raising rates another 100 bp between now and the end of next year and the Italian government made a down payment on its campaign promises and projected a 2.4% deficit for the next three years. This spooked investors who sold Italian assets and yields leaped. It comes as the ECB is set to cut its asset purchases in half starting in October and stopping new purchases at the end of the year. The euro's sell-off in the second half of last week saw it retrace nearly 50% (~$1.1560) of its gains off the year's low on August 15 near $1.1300. The September low was seen near $1.1525, and below there the $1.1500 area is another retracement objective and may offer psychological support. On the upside, the $1.1625-$1.1650 area is the nearby ceiling and reinforced by the 100-day moving average (~$1.1655).
Yen: The dollar rose to new highs for the year against the yen at the end of September (~JPY113.65), to cap a month in which it fell in five of the 20 sessions. Rising US rates and fiscal half year-end adjustments appeared to weigh on the yen. Japanese investors bought JPY3.83 trillion (~$33.6 bln) of foreign bonds in the two weeks through September 21, the most in any two-week period in a couple of years. Foreigners have been active as well, selling nearly JPY4 trillion Japanese stocks and bonds over the past two weeks. Hedging operations are not picked up by the MOF portfolio flow data. The technical indicators are getting stretched, suggesting limited immediate upside potential with the JPY113.75-JPY114.00 offering the near-term hurdle.
Sterling: Ideas that the UK and EU were moving toward a Brexit agreement helped sterling reach a two-month high near $1.33 on September 20. It was sold to around $1.3055 as these ideas were dashed, and although it bounced in the first half of last week, new sellers were lurking near the retracement objective found near $1.3185. Sterling tested the $1.30 area ahead of the weekend, a two-week low. The MACD and Slow Stochastics have turned lower. A break of $1.2980, which corresponds to the 50-day moving average and the 50% retracement of the rally from the mid-August low, would likely embolden the bears. Below there a trendline from the August and September low comes in near $1.2950 at the end of next week.
Canadian dollar: Mexico and the United States failed to deliver a fait accompli to Canada, but despite this and the implicit and explicit threats by the US, the Canadian dollar was the second-best performing major currency last week, slipping 0.1% against the resurging greenback. The better than expected July GDP (0.2%) puts it on a slightly firmer path than the Bank of Canada forecast, and this coupled with firm price pressures leaves little doubt that rates will be increased when it meets next (October 24). The US dollar is approaching the August and September lows (~CAD1.2885), and the 200-day moving average is found a little lower (~CAD1.2870). The technical indicators are stretched, suggesting a break may be short-lived.
Australian dollar: The Australian dollar was holding on to a 0.25% gain for the month entering the last session when it also rose 0.25%. The high for the month was recorded in the middle of last week near $0.7315, and a day later it was testing $0.7200, which is the 50% retracement of the last leg up, which began on September 11 (from ~$0.7085). A move now above $0.7260 would improve the technical tone, though the technical indicators suggest the upside progress will likely be limited.
Oil: The unexpected build in US inventories last week did not offset the growing supply concerns, spurred by the US oil embargo against Iran. Europe is reportedly working on launching a special purpose vehicle that could bypass the US sanctions (which others, including Russia and China, would be able to use, according to reports), but there are no details available. Other countries are implementing early. India was the latest. Light sweet crude for November delivered rose 3.45% last week to bring the monthly gain to 5.6%. The high this year was set in July on the continuation futures contract near $75.30 and above there is $76.50, an important retracement of the decline from 2014. The technical indicators are stretched but have not turned down.
10-year Treasuries: The 10-year yield eased a single basis point last week as the move above the 3% threshold was consolidated. The range was about 3.02% to 3.11%. The year's high was set in May near 3.125%. The yield rose 18 bp in September, the biggest monthly increase since April. The technical readings on the December note futures contract are extended and turning higher. It seems to signal that continued consolidation is the most likely scenario. The December note has scope toward 119-16.
S&P 500: The S&P posted a potential reversal in the middle of last week with an outside down day. However, the trading over the following two sessions remained confined to Wednesday's range. The trendline that is drawn off the end-of-June, August 15, and September lows whipsawed during the week, but the close at month-end was still above it (~2913), albeit barely. The technical tone appears fragile, and there is a potential bearish divergence in the MACDs and Slow Stochastics, which did not confirm the new record highs. It has not closed below its 20-day moving average since August 15, and it is found just above 2900.