The US dollar fell against all the major currencies last
week. The
downside reversal after the employment data on October 6 set the stage for the pullback. From a fundamental perspective,
we cautioned the good news for the dollar
had been discounted. With two
months before the December FOMC meeting, the market had priced in a high degree
of confidence (over 80% chance at its peak) of a hike and the 10-year yield reached the top end of its six-month
trading range near 2.40%.
The ECB meeting on October
26 is the next key policy focus. The ECB is expected to reduce the amount of asset is buys
starting next year. While officials may try to facilitate a dovish
interpretation of its tapering, it is not clear that they will
succeed. The speculative participants, judging from the positioning in the futures market, remains favorably disposed to the single currency. The net long speculative position was the largest in six years as of October 10.
There also appears to be
growing skepticism over the prospect of tax reform in the US. One of the controversial measures that
the White House proposed was to eliminate the deduction (from Federal
tax obligations) taxes paid to state and local government, is reportedly being reconsidered. As was the case with
health care, the debate within the Republican Party is key as it seeks to take
full advantage of its majority position and sideline the Democrat
minority. The IMF's latest World Economic Outlook dropped its
assumption that the US will deliver fiscal stimulus next year.
The Dollar Index snapped a
four-day drop on October 12 and managed to close higher on October 13, despite
the fact that the core CPI did not rise as economists forecast. The last leg up in the Dollar Index
began on September 20 near 91.50 and peaked after the employment report close
to 94.25. The low before the weekend frayed the 50% retracement
(~92.90). The 61.8% retracement is closer to 92.25. The MACDs and
Slow Stochastics on the daily bar charts are moving lower, and the five-day moving average
appears poised to fall below the 20-day average in the coming days. That
said, we remain impressed by the fact that the technical indicators on the
weekly charts, especially the MACDs and Slow Stochastics, remain quite
constructive for the Dollar Index.
The euro recorded a bullish hammer candlestick bottom pattern after the
employment data, and a week later, it appears to have formed a shooting
star candlestick pattern top. The euro tried three times to push above the $1.1880
area which corresponds to a 50% retracement objective the drop that began on
September 8. We would be inclined to be short until that area is penetrated. A move above $1.1880
now could signal a move to $1.1930. When the euro has poked through
$1.20, it does appear that some official (unnamed sources) seem to talk it
down. On the downside, the $1.1750-$1.1775 area offers support.
The US 10-year yield
continues to appears to be a powerful contemporaneous indicator of the
dollar-yen exchange rate.
The correlation between the two, on a percentage change basis appears to be near a
record high. The US 10-year yield fell 13 bp since the post-US jobs data high
near 2.40%. It has fallen through its 20-day moving average for the first
time in over a month. The dollar recorded its lows against the yen for
the year on September 8, the same day the
10-year yield bottomed just above 2.0%.
If this marks the end of
this leg up in the dollar, then we should look at some retracement objectives. The first is near JPY111.10, and a break would bring the next
retracement into view. JPY110.40 finds it
The daily technical indicators are consistent with additional dollar losses,
and the five-day moving average is set to cross below the 20-day average for
the first time in a month. However, here too we remain impressed that the
technical indicators on the weekly charts remain dollar-friendly.
EU's chief negotiator for
Brexit, Barnier, injected volatility into sterling. When he first formally acknowledged
that the talks reached an impasse, sterling sold off on ideas that the UK could
leave the EU without a deal. Later, when he suggested a willingness to consider a two-year transition
phase, sterling recouped its losses and more. There was some follow-through
buying ahead of the weekend that lifted sterling to $1.3340. This is an important area from a technical perspective.
It corresponds to a 50% retracement of the leg down in sterling that began on
September 20 from nearly $1.3660. It is also where the 20-day moving
average is found. The daily
technical indicators are supportive, and the next the 61.8% retracement is
found near $1.3415.
The
prospects of a UK rate
hike as early as next month has protected sterling's downside. Next week, the UK reports on
inflation, labor, and retail sales.
We anticipate that the investors will be particularly sensitive to the
data. The market, according to Bloomberg calculations of the Fed funds
futures strip and sterling Overnight Index Swaps, investors a little more
confident that the BOE hikes rates in November than the Fed hiking in
December. Data that makes the market
question this would spur sterling sales.
The Canadian dollar was
among the worst performers against the US dollar over the past week, gaining
about 0.3%. The
greenback's softer tone appears to reflect consolidation rather than an
outright correction The pullback has stopped shy of testing the minimum
retracement objectives (~CAD1.2395). Official comments have encouraged
investors not to be so aggressive about the trajectory
of monetary policy. The technical indicators are mixed.
The market has taken the
guidance to heart. A
month ago the market was pricing in about nearly an 80% chance of another hike
this year. Now, according to Bloomberg, about 53% change has been
discounted. Canada reports retail sales and CPI on October 20. Both
reports are expected to be firm.
Between a jump in China's
imports and lower US rates, the Australian dollar jumped before the weekend. The 0.8% gain was the largest in
two months and extends the advance for
the fourth consecutive session. It finished with its 20-day moving average (~$0.7870) for the first time
September 20. The advance has also completed the 38.2% retracement of its
decline since September 8 (~$0.7885). The next retracement is near
$0.7930. The daily technical indicators warn of the likelihood of
additional gains in the days ahead. The weekly technical indicators are not nearly as favorable.
Light sweet crude oil for
November delivery rallied nearly 4.5% last week. A third of these gains were recorded before the weekend amid reports that
China increased its imports in September (by almost 9% on the month).
Since the start of the year, China's oil imports have risen by a little more
than 12%. US inventories and the oil rig count fell. There is more
talk of OPEC and participating non-OPEC countries extending their production
restraint after March 2018. The technical indicators are mildly positive,
and there appears to be scope to return to the $53 a barrel level.
Initial support is seen near
$50.
The December 10-year US note
futures contract finished the week on firm footing. It closed above the five and 20-day
moving averages for the first time since September 11, when it gapped
lower after peaking on September 8. The technical indicators are
consistent with further price gains in the period ahead. It seems as if
that the rise in US yields from September 8 through October 6 is over.
The first target is in the 125-28 to 126-10 range. Retracement
targets, past congestion, and the 50- and 100-day averages converge that
range.
The S&P 500 made another
record high before the weekend. It marked the fifth consecutive weekly gain. It has only recorded four weekly losses since the end of June. However, momentum has faded recently. Even though
it made a higher high every day last week, it was often by pennies. Daily
technical indicators are looking a bit toppish,
signaling the risk of a near-term pullback. We expect initial support to be seen in the 2540 area. The driver
remains growth. The Russell 1000 Growth Index rose (~0.6%) for a third
consecutive weekly advance. It brings the year-to-date advance to nearly
22%. The Russell 1000 Value Index snapped a four-week advance by posting a 0.3% loss. Year-to-date it is
up a more modest 6.7%.
Disclaimer
Will the Bullish Outlook for Treasuries Weigh on the Dollar?
Reviewed by Marc Chandler
on
October 14, 2017
Rating: