Welcome to the High Vol World: What the Charts Say

The dollar soared last week as a collapse of equity markets and disruption even to sovereign bond markets unveiled a large shortage of dollars.  This shortage was seen in the spread of onshore and offshore dollar rates and in the cross-currency basis swaps. The strain seems less evident in the use of the swap lines that the Federal Reserve has in place with several major central banks. The usage was an inconsequential $58 mln, The shortage of funding was also not obvious in the response to the Fed's repo operations. Banks took less than $125 bln of $1.5 trillion in term repos that were offered in the past two sessions.

Volatility, which we were previously told was depressed by large central bank balance sheets, has exploded. The increase in ECB's balance sheet and the buying of bonds by the Fed (instead of only bills) did not prevent the equity market meltdown on March 12 or the DAX, unwinding nearly 9% gains plus some ahead on March 13 before settling up around 0.75%. Currency volatility remains elevated. Three-month euro vol rose to three-year highs near 9.5%. A week ago, it was closer to 7.5%. Implied yen vol peaked near 20% its highest level since 2009 before pulling back as the dollar rebounded and closed the week near 13.5 up from a little more than 10% at the end of last week. Sterling, which collapsed to five-month lows last week, saw volatility jump to five-month highs (10.7% vs.7.6%) a week ago. Higher volatility may offer opportunities for investors (e.g., the sale of covered calls) and for some kinds of corporate exposures.

Dollar Index: After starting last week by selling off to levels not seen since September 2018 (~94.65), it surged back to around 98.80 before the weekend. It will take a four-day rally into next week and has moved within striking distance of the three-year high reached in late February near 99.90. It posted a weekly key reversal trading on both sides of the previous week's range and closed above its high. The momentum indicators have just crossed higher. The higher volatility requires given stops wider berth. Initial support is seen near 97.20.

Euro: The euro nearly reached $1.15 in early Asia to start the week and spent the rest of the week selling off. It reached $1.1050 in the second half of the week, which corresponds to the 20-day moving average and the (61.8%) retracement of the rally from the February 20 low below $1.0800. It settled a little above $1.1105.The price action has led the technical indicators, which have only begun to fall. The technical condition is poor, and follow-through selling could see a retest on the $1.08 area. Resistance is seen near $1.1150, while a move above $1.12 would improve the technical tone.

Japanese Yen: The more than the seven-yen range of the dollar last week (~JPY101.20-JPY108.50) was larger than the ranges seen in each of the past three quarters. The 2.85% rally before the weekend was the largest single-day advance in nearly seven years. The shortage of dollars may be most acute for non-bank financial institutions, but it is difficult to know for sure now. The rebound through JPY108 met the (61.8%) retracement objective of the precipitous drop February 22 test on JPY112.20 to last week's low.The 200-day moving average is near JPY108.25, and the March high is around JPY108.60. The technical indicators have turned up from over-extended territory, has the greenback snapped back after tumbling about 5.65% in the previous two weeks. Technically, there is little to stand in the way of a test on the JPY110.00 area. Given the wide swings, it is understandable why the closest support may be in the distance (~JPY105.70-JPY106.00).

British Pound: Not to put too fine a point on it, but sterling fell out of bed last week. The 5.9% drop was bigger than the week of June 2016 referendum (~-4.7%) and the flash crash that October (~-4.1%). It was the biggest since the 6.3% drop in a week in January 2009 during the heart of the financial crisis. It began the week by extending its advancing streak for the fifth consecutive session, during which time it gained about 2.8% against the dollar. In the proceeding four sessions, it collapsed by roughly 6.4%. The MACD had not advanced with sterling previously and has turned lower from over-extended condition to begin with. The Slow Stochastic has turned down from the middle of its range. Sterling posted a big outside down week. Nearby support is near $1.22, and a violation could open the door to $1.20. Below there is the flash crash low for which there is some dispute over. Bloomberg has it near $1.1840, and some other platforms put it closer to $1.1770, for example. Sterling's sharp losses against the euro suggest a UK-specific story on top of the broader dollar rebound. The euro surged 4.4% against sterling, its fourth consecutive weekly gain. The almost 9% rally over this streak saw the euro retrace (more than 61.8%) of the sell-off from last August's high (~GBP0.9375) to last December low that was retested last month (~GBP0.8275).

Canadian Dollar: After seeming to lag behind the other major central banks, the Bank of Canada has turned more aggressive, delivering a 50 bp emergency rate cut ahead of the weekend after cutting rates the same amount at the policymaking meeting on March 4. The Canadian dollar 's recovery after the rate cut coincided with a strong recovery in equities and a bounce in oil prices. The US dollar reversed lower after testing the CAD1.40 level, a four-year high and resistance area we had noted. The measuring objective of the flag or pennant formation is in the CAD1.4100-CAD1.4150 area.  After closing the first four sessions of last week above the upper Bollinger Band, the US dollar closed back under it (~CAD1.3865) on Friday. The technical indicators look poised to turn down. The first downside target is near CAD1.3575 and then CAD1.3655.  

Australian Dollar: The Australian dollar fell in every session less week that culminated in a 6.5% drop that is the largest since the panic in October 2008. Yet even with the surge in volatility (e.g., three-month vol reached about 18.5% last week, settling near 16.6%, its highest level since 2011. It had been below 6% at the end of last year), the Australian dollar finished the week below its lower Bollinger Band (~$0.6305). The Aussie reached almost $0.6125 ahead of the weekend before recovering to nearly $0.6250 in the late bounce, alongside equities to settle a little above $0.6200. Still, an outside down week was recorded. During the Great Financial Crisis, it bottomed near $0.6000, but according to the OECD's purchasing power parity model, the Aussie is even cheaper now (~9.5% undervalued). The MACD is still trending lower in over-extended territory, while the Slow Stochastic turned down from the middle of its range.   

Mexican Peso: The US dollar slipped ahead of the weekend against the Mexican peso. It snapped an eight-session advance. It was only the third session the dollar fell since February 14. The dollar's roughly 8.3% rally against the peso last week was only bested against the Colombian peso (which lost almost 10%). The dollar reached a record high near MXN22.50. Meaningful technical resistance doesn't exist. Initial support is seen near MXN21.35, which also corresponds to the five-day moving average. The dollar has not closed below this short-term moving average for nearly two weeks. The MACD has accelerated higher, while the Slow Stochastic is moving sideways. It suggests intraday players are shorting the peso, perhaps as a proxy for risk, and repurchasing it before the end of the session.  

Chinese Yuan: All of the emerging market currencies fell against the dollar last week. The yuan's 1.1% decline makes it the sixth-best. The yuan fell in the first four sessions before edging up by 0.3% before the weekend. The nearly 1% decline on March 12 was the largest since the first day Chinese re-opened from the extended Lunar New Year holiday (February 3). The dollar held below CNY7.05, which has been the upper end of the range since early February. The momentum indicators of the offshore yuan (CNH) point higher for the dollar. The yuan's volatility is relatively low (three-month implied is about 4.75% vs. 4.35% at the end of 2019). That, coupled with an attractive 10-year yield, around 2.65% offers some attractions for global investors. Consider too that month-to-date the Shanghai Composite is up 0.25% this month while most other bourses are down double digits.  

Gold: As equities collapsed and volatility jumped, and financial stress soared, the price of gold fell by 8.6% last week, which appears to be the largest fall in at least 30 years. Gold's liquidity and recent strength worked against it as investors appeared to sell their gold to cover losses (margin calls) elsewhere. Gold briefly poked above $1700 on Monday and tested $1500 on Friday, near the 200-day moving average. The Slow Stochastic did not confirm the new high before turning lower, leaving a bearish divergence in its wake. The MACD turned lower. The next area of chart support is around $1450. The 60-day rolling correlation of the percent change in gold and the percent change in the S&P 500 turned positive briefly last week for the first time since December 2018. The $1580-$1600 area offers the first hurdle on the upside. 

Oil: On two sessions, March 6 and March 9, WTI for May delivery fell by more than a third. The compression of demand was met with warnings of a flood of supply. Saudi oil is being sold to some for near $25 a barrel. The price gapped sharply lower at the start of the week, and as it appears on the weekly charts as well, it has added technical significance. The gap is between the mid-week high of $36.70 and the March 6 low of about $41.30. The MACD is headed down, but it is already well below the low seen in the last oil rout in 2014. The Slow Stochastic bottomed in early March and has been flatlining since. A move through last week's high, which recouped nearly half of the losses from the March 6 high, gives the potential to a little more than $39. The crash that began in 2014 bottomed on the futures continuation contract near $26 in early 2016.  

US Interest Rates: The US 10-year yield bottom at the start of the week near 31 bp. The 30-year dipped below 70 bp. These extreme readings, in part, reflected a breakdown in the market. The Federal Reserve responded with liquidity measures and new purchase plans. The 10-year yield snapped back to over 1% ahead of the weekend before settling just below. Given that the expectation for overnight rates reflected in the December 2020 fed funds futures contract has fallen almost 130 bp this year to 11 bp now, the net-net 85 bp decline in the 10-year yield may not be unreasonable. The FOMC meets next week. Nearly everyone expects at least a 75 bp cut. The debate is over the last 25 bp cut. The market sees the Fed bringing the target rate to the zero-bound (0-0.25%) immediately (~66%-75% chance. We understood the decision to buy coupons across the yield curve was a signal that reaching the zero-bound was simply a formality at this juncture.  

S&P 500: The ghastly week ended on a seemingly positive note that saw the major indices post the biggest percentage gains since October 2008. The lifted the benchmark to 2911 that filled the gap left from March 12. Such dramatic bounces in bear markets are not unprecedented, and the key reversal on March 10 proved for naught, producing more technical scar tissue. The (61.8%) of the rally that advance that began in Q1 16 is found near 2415 and maybe the next important technical target. Still, we sense that there is money on the sidelines looking to buy on a six-month view. The VIX jumped to 77.5% last week, its highest since 2008 (~90%). There is a rule of thumb among technicians who think gaps are important signals that one should fade the third gap. It worked in February and was good for more than a 9% bounce. The third gap low was on March 12. On the upside, the next important chart points may be near 2800 and then 2885.  

Disclaimer