Capital Markets Stabilize before Economies

While the world's largest economies are contracting like never before, central banks have acted quickly and boldly to stabilize the global capital markets.  The stabilization has a clear directional bias:  good for stocks, bad for the dollar. The major equity benchmarks rose for the second consecutive week for the first time in two months.  The dollar's extreme was recorded a month ago.  

Central banks can often act faster than governments, and the impact does not necessarily require material changes.  The Fed aptly demonstrated this with its offer to buy high-yield ETFs, which immediately triggered "buy what the Fed buys" strategies.  The price of the ETFs rose to levels beyond the Fed's thresholds, without a single red cent spent.  The signaling power of policy is often an under-appreciated force multiplier.  And to make a virtue out of necessity, the fact the channels of capital have remained open, well lubricated by central bank efforts, will facilitate a quicker economic recovery if they had shut.  Besides, at the extremes, monetary policy can look a lot like fiscal policy. In any event, some of the measures reinforce fiscal policy efforts to cushion the blow, like when the Fed buys SBA loans.

Here is a review of the price action and what it may portend going forward: 

Dollar Index:  It was a week of two halves.  In the first part of the last week, the Dollar Index slipped from around 99.40 to near 98.80.  In the second part of the week, it traded mostly between 99.60 and 100.30.  The MACD and Slow Stochastic look to be turning higher.  The high from earlier this month was set near 101.00.  If this can be convincingly overcome, the technical implications can be significant, and potentially sets up a test on the March high by 103.00.

Euro:  Last week's low was set ahead of the weekend near just above $1.0810.  Its recovery earlier in the week had stalled near $1.10. That is likely to be, more or less, the near-term range.  The MACD and Slow Stochastic are grinding around the middle of their ranges, not generating strong signals.  In the options' market, the discount for euro calls over euro puts (three-month risk-reversals) nearly doubled last week to over 1.0%, reaching a two-week extreme.  This suggests the market is more fearful of a weaker rather than a stronger euro. 

Japanese Yen:   Stronger equities did not lead to a weaker year.  In fact, the dollar slipped against the yen (~-0.8%) for the second consecutive week.  The euro fell nearly 1.4% against the yen, giving back all of the previous week's gains and more.  Rangebound activity looks like the most likely near-term scenario. The lower end may be a little under the lows.  The JPY106.45 area corresponds to the middle of the wide crisis-provoked range of JPY101.20 to JPY111.70.  On the top side, the JPY109.20 area has provided the cap.

British Pound:  Sterling's rally extended to almost $1.2650, its highest level since mid-March.  Although it stalled there, near the 200-day moving average, it may not have given up the fight.  It has found support near $1.24, the halfway point of the last leg up (from ~$1.2165 to the high).  However, the potential move higher may not be worth playing for as both the MACD and Slow Stochastic are rolling over as if sterling is completed or nearly completed a move that began near 30-year lows a little above $1.14 on March 20.  A break of $1.2350 area may be the confirmed of a top is in place, in which case, a move toward $1.2050 is reasonable.

Canadian Dollar: The US dollar has fallen in eight of the past 10 sessions against the Canadian dollar.  Last week, the US dollar ground lower in the first two and last two sessions, but in the middle of the week, it soared by nearly 1.7%, which corresponded to the largest loss in the S&P 500 since April 1 (2.2%).  The MACD has been falling for almost three weeks and has leveled off, while the Slow Stochastic is turning up.  Initial support is seen in the CAD1.3980-CAD1.4000.  A move through the CAD1.4165 area is constructive, but the greenback needs to rise through the CAD1.4250 area to be anything important.  

Australian Dollar:  Like the Canadian dollar, the Aussie's uptrend was challenged by the midweek set back in risk-appetites.  However, the day (when it lost almost 2%), was the only session in the past two weeks that the Australian dollar fell. The Aussie peaked within a few hundredths of a cent of the (61.8%) retracement of this year's sell-off that began near $0.7030 and concluded with a spike to about $0.5510.  A move above it would target the $0.6600-$0.6700 area.  However, as we saw with sterling, the MACD and Slow Stochastic are rolling over.  The takeaway is that while new highs are possible, they may not be sustained.  

Mexican Peso:  The US dollar rose a little less than 2% against the peso after falling about 6.8% the previous week.  Since mid-March, the US dollar has been mostly chopping in an MXN23.00-MXN25.50 range.   Most recently, a narrower range has emerged between roughly MXN23.25 and MXN24.50.  The broad sideways movement has seen the technical indicators trend lower. The Slow Stochastic appears poised to turn higher, and he MACD may not be far behind.  

Chinese Yuan:  After breaking out of the CNY7.05-CNY7.1250 trading range to the downside in early April, the greenback moved back toward the middle of the range last week.  The stability was demonstrated after China reported that Q1 GDP had contracted by nearly 10%, and the yuan gained against the dollar.  There appears more scope for the yuan to decline than rise in the near-term. 

Gold:  A new eight-year high was recorded near $1747, but profit-taking ahead of the weekend finished the week with a 0.7% decline, the most in four weeks.  The momentum indicators are rolling over after a nearly $300 rally.  Follow-through selling early next week could be important from a technical perspective.  A $100-$150 pullback from the high is possible. 

Oil: The May WTI futures contract fell nearly $4.5 a barrel to finish the week at $18.30.  However, this reflects the spot pressures, and the June contract now has greater open interest and volume.  It closed near $25.25 a barrel for loss of almost $3.60 a barrel.  The June contract closed below a trendline off last month's low (~$21.65), and initial support is seen around $23.50.  A move above $30 may be needed to improve the technical tone.  

US Rates:  The US two-year made a marginal new record low last week (~18 bp).  It fell less than two basis points on the week, but it was the ninth consecutive week of declines. The 10-year yields eased almost eight basis points last week (to ~64 bp).  The June 10-year note futures contract settled last week just below 139, and the record high was 140-24 (March 9).  The momentum indicators are mildly constructive.  Dollar Libor continued to ease.  The three-month benchmark fell to about 1.10%, the lowest since March 17. after peaking near 1.45% at the end of last month. 

S&P 500:  The S&P 500 has opened outside the previous day's range more frequently now, which seems to reflect news outside of the trading hours.  However, the gaps are regarded as normal because they are closed in a day or two since the three-day island bottom was marked with the April 6 gap higher.   The index gapped higher ahead of the weekend and closed on its highs.  The S&P 500 closed higher for the second consecutive week for the first time in two months and finished above the (50%) retracement of the sharp drop from the record high in February.  There are two technical targets to note.  The first is a gap from last month that extends from about 2882.6 to 2901.5.  The other is the (61.8%) retracement objective near 2934.50.  The MACD is trending higher still, but the Slow Stochastic has been flattened out in over-extended territory despite the strong close ahead of the weekend.  

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