Look for Near-Term Dollar Recovery

The dollar extended the down move that began at the start of the month last week.  It fell against nearly all the currencies in the world but the yen and Turkish lira. However, the near-term decline may be exhausted, and a recovery is likely in the days ahead.  With interest rates low and much of the perceived event risk being alleviated, this is the kind of environment investors ought to like.  Holiday-thin markets and year-end vagaries can be particularly treacherous.

Dollar Index:   The Dollar Index has moved higher in only two of the last 11 sessions.  During this run, it sold-off by 2%, before consolidating ahead of the weekend, to reach five-month lows near 96.70.  The technical indicators are consistent with a low being in place or approached. The Slow Stochastics are poised to turn higher.  The MACD is almost there.  The Dollar Index spent part of the past three sessions below the lower Bollinger Band, and closed back inside it (~97.05) ahead of the weekend).  A move above 97.35 would confirm a break in the downside momentum, and above the 97.55-97.65 band would lift the tone  It may require a foothold above the 97.80 area, which houses the 20-day moving average and the (61.8%) retracement of the decline that began at the end of November.

Euro:  The euro failed spectacularly at $1.12 ahead of the weekend and closed on its lows of the session just above $1.11.  It left a bearish shooting star candlestick.  The immediate risk extends toward $1.1065, which corresponds to the (61.8%) retracement objective and the 20-day moving average.  The Slow Stochastics have flatlined at elevated levels, set to turn lower, while the MACDis still gradually rising.  If the $1.1175-$1.1180 area, seen last month, and almost $1.12 seen last week marks the top end of the euro's range, the bottom end is closer to $1.10.

Yen:  The dollar rose against the yen last week by 0.7%, and it can be fully accounted for by the risk-on response of traders to news of a US-China trade deal.  The greenback reached about JPY109.70, where it was also stopped in the previous week.  The intermittent low near JPY10.8.40 proved rock-solid, enduring repeated tests over the past couple of weeks.  The technical indicators are constructive and favor te dollar's upside, though the upper Bollinger Band is about JPY109.60. A year-old trendline on the weekly charts comes in near JPY109.90, and above the psychological important JPY110.00 level, there is scope toward JPY110.50-JPY110.60.

Sterling:  When everything was said and done, sterling gained 1.5% last week.  It was the third consecutive weekly advance.  It has risen about 3.6% over this stretch.  There was a three-week run in October when it rallied 5.5%.  Much good news has been priced in during this eight-of-11 week adjustment.  The price action was in line with our expectation, a push higher when the results became clear to $1.35 and then "buy the rumor, sell the fact" activity.  Since the high was recorded (~$1.3515), sterling has found support near $1.33, the upper Bollinger Band is just below there.  As we have noted with the euro and yen, the Slow Stochastics are leading the MACD.  The former is toppy, while the latter still has scope to rise. A break of the $1.3280 area could spur another cent decline.

Canadian Dollar:  The US dollar has found a good bid near CAD1.3150. Recall that it corresponds to a (61.8%) retracement of the US dollar rally from the end of October.  The lower Bollinger Band is near there as well.  It has been tested a few times in the first half of December.    A move above CAD1.3220 would likely signal a run initially to  CAD1.3250-CAD1.3275, on the way probably back to the recent highs in the CAD1.3330 area.  The MACD and Slow Stochastics have not turned, but the momentum is stalling.

Australian Dollar:  The Australian dollar, like the euro, staged a sharp reversal ahead of the weekend.  The Aussie, which had been testing support near $0.6800 at the start of last week, rallied to almost $0.6940 at the end of the week.  It was the best level since late July before reversing lower and briefly trading below the previous session's low (~$0.6870).   The price action suggests a phase is over even if it is not quite a key reversal or a pretty shooting star candlestick.  The 200-day moving average ($0.6910), which stopped around other counter-trend rallies this year, was penetrated on an intraday basis, but it held at the close.  There is a band of support in the $0.6825-$0.6850 area that will likely be tested.

Mexican Peso:  For the second consecutive week, the dollar lost more than one percent against the Mexican peso. It was the first time it has strung together such a performance in eight months.  The risk-on mood briefly drove the dollar below MXN19.00 (~MXN18.98), which it has not seen since July.  It finished just below the lower Bollinger Band (~MXN19.05).  The Slow Stochastic is over-extended but shows no signs that it will turn shortly.  The MACD is trending lower but is not stretched.  Even if Mexico's central bank cuts interest rates again on December 19 as widely expected (to 7.25%), the wide differentials may attract savings, especially in a risk-friendly environment.

Chinese Yuan:  The dollar initially was sold on news that an agreement was struck.  Then there was some confusion as Beijing was quiet and then the confirmation shortly after the US equity market opened on December 13.  The volatility was more evident in the offshore yuan (CNH) than the onshore yuan (CNY).  The dollar fell nearly 1.2% against CNH on December 12 on the US announcement but rallied almost 1% the following day.  Against CNY, the dollar fell by a little more than 0,75% on December 12 and closed marginally lower ahead of the weekend.  The dollar firmed broadly after the onshore market closed. Despite the relative volatility, the dollar finished the week little changed against CNH (~-0.15%) and considerably more against CNY (~-0.85%).  The fix on Monday (PBOC setting of the reference rate for CNY) will be important.  The models will be looking for a considerably stronger US dollar.

Gold:  Despite the risk-on mood, gold advanced four sessions last week and posted its highest weekly close since early November ($1476.3).  The 1.1% gain on the week was the most since late September.  The technicals indicators do not appear to be generating a robust signal.  The Bollinger Bands begin the new week at around $1452 and $1481.

Oil:  January WTI closed above $60 a barrel for the first time since the attack on Saudi facilities in the middle of September when it reached about $61.50.  It gained nearly 1.5% last week, all of it in the last session, as Beijing confirmed not just a tariff truce but commitments to gradually unwind existing tariffs.  China agreed to buy a relatively large amount ($40 bln) of US agriculture products in exchange.  The technical indicators are stretched, and the MACD and Slow Stochastic appear poised to turn down.  The upper Bollinger Band is found near $60.55.

US Rates:  The enthusiasm about the developments (USMCA, US-China Agreement, UK election) lifted the US 10- year yield to almost 1.95% ahead of the weekend and just short last month's high print of 1.97%. A disappointing retail sales report helped reverse the move, and the yield ended the week a little above 1.82%.  Net-net, the yield fell about 1.5 bp on the week.  The March futures note contract staged a reversal ahead of the weekend, and the technical indicators look constructive.  It could imply a further pullback in the US 10-year yield toward 1.75%.  The 2-10-yr yield curve was practically unchanged a little above 21 bp last week.  Recall it finished last year just a little flatter at 19 bp.   The implied yield of the December 2020 fed funds futures contract (1.32%) means that a rate cut has mostly been discounted next year.

S&P 500:  A new record-high and record-high close were set before the weekend, encouraged by the investor-friendly developments.  However, the market had largely been priced for perfection, and it was fortunate that that is what was delivered.  Some profit-taking was seen, but the low of the session was seen before midday.  The momentum indicators are still strongly positioned and provided the 3150 area holds, the index can move toward 3200, though the proximity of the upper Bollinger Band (~3169.4) may encourage some caution.   Of the G7 major benchmarks, only Italy has outperformed the S&P 500 year-to-date (27.3% vs. 26.4%).  The FTSE Milan Index has a dividend yield of 4.14%, while the S&P 500 dividend yield is 1.84%.  On the other hand, the euro is off 3% against the dollar this year.   The S&P 500 trades at a little more than 21-times earnings, while Italy is a third lower, with a 14-multiplier.  

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