What the Charts Say: Lower Yields and Softer Equities?

Disappointing flash PMI figures helped push the euro to new lows for the year last week to almost $1.09.  The dollar rose against most of the major currencies.  The dollar bloc fared the best, while no-deal Brexit fears and dovish comments by a traditional hawk at Bank of England took the wind from sterling's sails and sent it roughly two-cents lower (~1.5%).  The dollar was also firmer against nearly all the emerging market currencies.  The Turkish lira bucked the pressure, though and was the strongest with about a 1.2% gain.  Foreigners were strong buyers of Indian equities, and the demand helped the rupee gains about 0.5% against the dollar.  The Philippines central bank delivered a 25 bp rate cut and the peso firmed as it was sold on the speculation of a cut and bought back on the fact.

Many important issues are unresolved for investors.  While an impeachment investigation in the US would seem to weaken Trump, the fact that Warren is emerging as the front-runner alienates a group of swing voters. US rhetoric about China seems almost whimsical, but the actions are consistent. Some Chinese companies were sanctioned for helping Iran sell oil and the Trump Administration discussed ways to limit US portfolio flows into China.  In the UK, Prime Minister Johnson's effort to circumvent Parliament was ruled illegal by the UK Supreme Court. He still says he will refuse to request a three-month Brexit extension as instructed by Parliament.

Dollar Index:  The Dollar Index rose 0.6% last week and approached the nearly 2 1/2-year high set in early September a little above 99.35.  It finished August a little below 99.00.  The trend has been slow but clear.  The Dollar Index has fallen in only two months this year (January and June).  However, there is one session left in September, and a close below 98.90 would weaken the technical tone.  That said, the MACD and Slow Stochastics are trending higher, illustrating the strong momentum.  The Dollar Index closed just inside the upper Bollinger Band (~99.15).  The next technical target is near 100.00. The cyclical high was set in early 2017 near 103.80.

Euro:  Unable to sustain the rally in the first half of September, the euro trended lower in the second half and finished last week after seeing its lowest level since May 2016, a little above $1.09.  The MACDs and Slow Stochastics are headed down but are not close to their lows.  The euro needs to re-establish a foothold above $1.1000-$1.1020 or face more downside pressure.  The next downside target is ear $1.08.  The lower Bollinger Band begins the new week a little above $1.0925.

Japanese Yen:  The dollar ended a four-day downdraft with a three-advance in the second half of last week.  The dollar began the week near JPY107.00 and set new highs for the week ahead weekend a little above JPY108. The momentum could carry the dollar to the high set in the middle of September near JPY108.50.  The 200-day moving average and the early August highs are in the JPY109.10-JPY109.20 area.  The technical indicators are mixed with the MACDs turning up from high levels, and the Slow Stochastics still headed lower.

Sterling:  Recognizing the reversal of sterling on September 20 after it overshot our target to test the $1.2580 area, we anticipated last week's pullback.  It has now fallen in five of the past six sessions.  It has retraced half of the rally in the first half of the month that began near $1.1960.  The next retracement objective is close to $1.22.  The technical indicators are headed lower, and the five-day moving average is poised to move the 20-day moving average for the first time since September 4.  The lower Bollinger Band is a little above $1.21. Initial resistance is near $1.24.

Canadian Dollar:  The US dollar edged lower for the second consecutive week against the Canadian dollar.   The Canadian dollar is the strongest of the major currencies in September with one session left with a little more than a 0.25% gain.  The minor increase may be more impressive than it may appear given the decline in oil prices and risk-appetites (S&P 500 proxy). The US dollar began last week testing the 200-day moving average near CAD1.33 and finished the week with an approach to a two-week low of CAD1.32.  Support is seen in a band around CAD1.3150.  The technical indicators are mixed.

Australian Dollar:  Offers around $0.6800 checked the Aussie's gains early last week, but shelf may have been created in the second half of the week around $0.6740.  The technical indicators not generating a compelling signal.  We suspect unless the Australian dollar can resurface above $0.6810, it remains vulnerable.  Some short-term participants may prefer to wait until after the central bank meeting on October 1.  A rate cut is mostly discounted, so there is risk of "sell the rumor buy the fact" type of activity.

Mexican Peso: Latin American currencies accounted for three of the four weakest emerging markets currencies last week, and the Argentine peso was not one of them.  The Chilean peso was off about 1.5%.  The South African rand, Colombian peso, and Mexican peso were all around 1.25% lower.  The US dollar appears to have carved a rounded bottom against the Mexican peso.  The measuring objective suggests the greenback can retrace (61.8%) of the decline that began in late August in the MXN19.90 area.  The upper Bollinger Band is now a little below MXN20.00.  The five-day moving average will move above the 20-day moving average for the first time since early September reflecting the US dollar's recent strength.  The technical indicators also favor the dollar. 

Chinese Yuan:  After falling in the first two weeks in September, the dollar has risen for the last two weeks against the yuan.   The mainland market is open on Monday but closed the rest of next week.  The dollar closed August at CNY7.1560 and finished last week at about CNY7.1230.  The yuan's 0.4% loss nearly matches the decline in the JP Morgan Emerging Market Currency Index.  Reports that the US may consider limits on American portfolio investment in China may weigh on the offshore yuan (CNH), which did appear to weaken when the news initially broke.  It recouped about half of those losses before the end of the session.   Chinese companies that trade as American Depository Receipts also sold off.  We suspect outside of some token gestures, like the limits on government pension funds, forcing a de-listing of Chinese companies from US exchange of limiting benchmark index weightings, would be strongly resisted. It seems to be like the threat to intervene in the foreign exchange market.  Yes, the Trump Administration can review its options, but such encroachment into the private sector risks alienating what is left of the free-trade faction in its coalition.  It could, if implemented, undermine the US role as the premier financial center. We expect that like the intervention threat, it can be filed under "thunder but no rain."  

Oil:  Light sweet crude oil for November delivery fell 3.75% last week and is taking a four-day losing streak into next week.  The loss before the weekend saw the price of November crude briefly trade back into the range seen before the attack on Saudi facilities.  It closed a little below $56 a barrel, which is about a dollar higher over the course of the month.  The fall saw the  November contract complete the (61.8%) retracement (~$55.60) of the rally from the 7-month low set in early August near $50.50.  The escalation of US-China tensions and continued concerns about the global growth outlook (September PMIs will be reported in the coming days) may weigh on oil prices.  The technical indicators leave more downside potential.  The 5, 20, 100, and 200-day moving averages converge between about $56.75 and $57.20. Last September WTI was a little above $70, before tumbling about 32% in Q4 18.   

US Rates:  The US 10-year yield fell four basis points last week as the surge in the first half of September continued to be unwound despite mostly favorable economic data.  Over the past two weeks, the generic yield has fallen 21 bp after having risen by 40 bp in the previous two weeks.  A similar pattern is evident in the two-year note. After rising about 28 bp in the first half of September, the two-year yield fell 16 bp in the second half.  Despite news that the core PCE deflator rose to a marginal new high for the year did not prevent slippage in yields ahead of the weekend.  The technical indicators for the 10-year December futures note suggest the path of least resistance is higher prices and lower yields.  A move above last week's highs (130-30) could spur a test of the high set in early September near 132-13, suggesting yields can retest the recent lows.  Looking at the fed funds futures strip and the overnight index swaps, the market is pricing in another cut this year and is narrowly divided between October and December, with a slight bias toward December.  

S&P 500:  The S&P 500 fell in all but one-day last week and is off in five of the past six sessions.  The five-day moving average fell below the 20-day moving average for the first time since late August.  After posting an outside down day on September 24, the S&P 500 has been unable to rise above 2990.  Ahead of the weekend, the index fell to the lowest level since September 5, when it had gapped higher.  The gap (~2938.8 to 2945.5) was entered but not filled.  The technical indicators warn of further downside potential.  Several chart points, old gaps, and retracement objectives converge in the 2900-2930 band.  

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