Technicals: The Underlying Signal

The heightened geopolitical risks and then the unwind drove the price action in the capital markets last week, the first full week of the new year.  These are the kind of markets that whipsaw even the most experienced and nimble among us.  We review the recent price action and technical condition of some of the major currencies and other instruments that are frequently driven by the same macro forces, or influence the foreign exchange market with the hope of being able to identify the underlying signal.  One takeaway is that there has been a move to unwind the price action recorded at the end of last year.  That phase is over.

Dollar Index:  The Dollar Index rose from 96.35 on New Year's Eve to hit a high near 97.60 shortly before the US employment data disappointed.  It reversed lower, leaving a bearish shooting star candlestick pattern in its wake.  Although the MACD and Slow Stochastic are still moving higher, respecting the price action now may mean looking for a pullback. If the recent leg up is being retraced, the 96.80-97.00 offer a proximate target.   From mid-October through mid-December, the Dollar Index was mostly confined to a 97.00-98.50 trading range.  It appears to found a new range over the past month, 96.50-97.80.

Euro: After falling to 2.5-week lows ahead of the weekend (~$1.1080), the euro reversed higher, with the help of the disappointing US employment data and stronger than expected European industrial production figures.  The five, 20, and 200-day moving averages converge near $1.1140, which also roughly corresponds to the (38.2%) retracement objective of the decline since New Year's Eve.  The technical indicators are not supportive, but follow-through buying after the key reversal ahead of the weekend could push the euro toward $1.1180.

Yen:   The dollar posted its key reversal against the yen in the middle of last week when the collective wisdom of the markets was that the US and Iran conflict would remain chronic rather than acute.  The greenback shot-up from nearly a three-month low (~JPY107.65) to the upper-end of a seven-month trading range (~JPY109.70), where the 200-day moving average is found.  Momentum would seem to favor an upside break, but the US jobs report, lower rates, and a heavier tone reinforced the significance of the resistance.  That said, the technical indicators favor the upside. A break above it would likely trigger stops and bring in new buying that could lift the greenback toward JPY110.70 initially.

Sterling: The pound, which has been streaky lately, is taking a four-day slide into the new week.  It has fallen in seven of the past eight sessions after rallying the previous six, which ends a five-day slide.  The market also seems to be in the process of re-evaluating the outlook for UK monetary policy.  The implied yield of the June short-sterling futures contract has fallen by eight basis points in the past two weeks.  Sterling seems to be caught between the bid from the under-weight asset managers and some speculators seeing the Brexit uncertainty lifted on the one hand, and the under-appreciated risks of a rate cut and a no-deal Brexit still on the other. It stalled near $1.33 at the start of the month, and last week, found support in front of $1.30.  The technical indicators are trying to rollover from the middle of the range.  In a softer US dollar environment, sterling may lag.  The broader near-term range is likely $1.29-$1.32.

Canadian Dollar:  Bids for the US dollar near CAD1.2950 appear to have marked the end of the greenback's slide that began in early December from a little above CAD1.33.  With the geopolitical reactions and soft Canadian data, the greenback briefly poked above CAD1.3100, completing a (38.2%) retracement of the recent drop.  The diverging employment data optics stop the greenback's climb, but its setback found support near an important technical area that extends from CAD1.3000 to CAD1.3030.   The technical indicators favor additional US dollar gains.  The next retracement target is near CAD1.3140 and then CAD1.3180.

Australian Dollar:  After peaking near $0.7030 on New Year's Eve, the Australian dollar hammered out a base around $0.6850.  With the help of heavier greenback tone, the Aussie traded to $0.6910 ahead of the weekend, just shy of the (38.2%) retracement of this year's decline.  It closed firmly, and follow-through buying next week could see the $0.6935-$0.6955 area before meaningful resistance may be encountered.  The technical indicators, though, still seem to favor the bears.

Mexican Peso:  The peso continues to perform stronger than expected.  The high real and nominal yield continue to drive the peso higher.  The dollar slipped through last year's lows near MXN18.75 and may be headed toward the lows from the H2 18 in the MXN18.40-MXN18.50 area.  The five-week decline in the past six have left the technical indicators stretched by not poised to turn higher.  It has not closed above MXN19.00 in a month.  Doing so would likely signal that a near-term low is in place.

Chinese Yuan:  The dollar fell below its 200-day moving average against the yuan (~CNY6.9525) last week for the first time in eight months.  The greenback has not traded above CNY7.0 since Christmas Eve.  Believing that the currency is closely managed (without direct intervention) and accepting that the PBOC is easing policy implies that officials may not want a much stronger appreciation of the yuan. The CNY6.90 offers past congestion and psychological support.  The strength may be tolerated ahead of the Lunar New Year(Jan 25, the Year of the Rat).

Gold:  The fear of a broader conflict between the US and Iran sent the shiny metal above $1600, but quickly the market spasm ended, and gold unwound its gain, falling to $1540.3 before stabilizing. Even though there may be some follow-through buying early next week, resistance in the $1575-$1585 area may hold. The Slow Stochastic shows a bearish divergence and has rolled over.  The MACD looks as it tor turn lower in the coming sessions. We suspect consolidation is in order.

Oil: The price of crude oil has been trending higher since early October when it had approached $50 a barrel.  That move was completed in an explosive move following the US strike when the February WTI spiked up to about $65.65 and then reversed powerfully lower.  The key reversal in the middle of the saw follow-through selling that extended the losses to around $58.65 just ahead of the lower Bollinger Band (~$58.55).  It snapped a five-week advance with a little more than a 6% drop.  The MACD and Slow Stochastic are falling, and the price action gives no reason to think a low is in place.  There is some chart support around  $58, and the 200-day moving average is closer to $57.25. 

US Rates: The volatility sparked by the geopolitical developments and the disappointing employment report did not push the US 10-year yield out of the roughly 1.70%-1.95% range that has confined the benchmark for the past 2 1/2 months.  When everything was said and done,  the yield rose about three basis points last week after falling 13 bp in the previous two weeks.  The March futures contracted posted a large outside down day in the middle of last week, but follow-through selling through selling was limited, and the employment report seemed to help put a floor under prices.  The contract settled the volatile week in the middle of the 128-130 range that has dominated since early November.  The technical indicators are not generating particularly robust signals.  As we suspected, investors looked through the employment report as Fed officials are unexpected to be persuaded that it is a significant departure from trend.  The December 2020 fed funds futures contract was virtually unchanged after the jobs data at 1.36%.  The 2-10 yr yield curve flattened to about 25 bp last week from 35 bp at the end of 2019.  It looks poised to flattened further, though next week's CPI may challenge it.  

S&P 500:  After the employment data, the S&P 500 opened at new record highs (~2982) rose a touch more before reversing and falling through the previous day's low.  However, the close was back into the Thursday's range, negating a key reversal.  The Dow Industrials did close below the Thursday's low, putting in a potential key reversal. Still, the takeaway from the price action around the heightened geopolitical tension is that investors are still strongly inclined to buy pullbacks.  This also means that many will also sell the VIX on bounces.  The VIX has not closed above 16 in nearly three months.  The technical indicators are stretched and have not confirmed the new highs.  The underlying fundamentals are also increasingly worrisome outside of liquidity and interest rates.  Consider the Wall Street Journal report recently by James MacKintosh that recently found that almost 40% of the companies that trade on US exchanges have lost money in the past year, the highest since the dotcom bubble.  It may take, though a convincing break of the 3200 area to dent the bullish fever.  

 





Disclaimer