Within the context of our medium-term dollar bearish outlook, we had been anticipating a countertrend dollar bounce. It was to be fueled by short-covering as the adverse developments had been discounted, rate differentials were moving in the US favor, and the technical indicators were stretched. When the dollar traded higher after the disappointing ADP estimate and the events in Washington, and again on the headline miss with the December non-farm payrolls, that lent credence to our call. However, it looked dicey last week as sterling, and the Canadian dollar made new highs since the Q2 18. Yet, the greenback ended the week on a firm note, and those corrective pressures are likely to continue into next week.
Dollar Index: Advances bookended last week. After rallying Monday, the Dollar Index chopped around before moving higher ahead of the weekend. We are working off the assumption that the leg lower than began with the election is over and is being corrected. The first target is 91.15 (38.2%) and then 91.75 (50%). The other (61.8%) retracement comes in closer to 92.35. The momentum indicators are moving higher. The note of caution is the proximity of the upper Bollinger Band, which will begin next week a little below 90.80. The 20-day moving average (~90.10) should now offer support.
Euro: The euro's technical tone has deteriorated. It peaked on January 6 near $1.2350 and, at the end of last week, fell to almost $1.2080, the lowest level since December 10. Last month's low was around $1.2040. The five-day moving average crossed below the 20-day moving average last week for the first time since a couple of days after the US election. The $1.2065 area corresponds to a (38.2%) retracement of the gains since then, and the $1.1975 area is the halfway point. The (61.8%) retracement is about $1.19. The MACD and Slow Stochastic are falling hard and approaching overextended territory. The euro finished just inside the lower Bollinger Band (~$1.2100). We suspect the euro will bottom around the ECB meeting and when the market turns its attention to the FOMC meeting the following week.
Japanese Yen: The dollar peaked against the Japanese yen on Monday near JPY104.40, its best level since December 10. It worked its way lower and found support ahead of JPY103.50. That area also corresponds to the 20-day moving average and is roughly the 50% retracement of the dollar's rally off the JPY102.60 low seen on January 6. The momentum indicators have not turned down, but they appear poised to do on any future weakness. The BOJ meets next week. Although it is most unlikely to take fresh initiatives, its economic assessment may still be worrisome as the emergency decree now covers areas that account for more than half of the country's output.
British Pound: Sterling pushed above $1.37 twice last week, and once to a new high since April 2018, failed to close above there. Profit-taking ahead of the weekend knocked it back to almost $1.3570, a three-day low and the 20-day moving average. It had recorded a low at the start of the week, near $1.3450. The momentum indicators are not particularly helpful now. Unlike the euro, sterling's five and 20-day moving averages have not crossed. The trendline connecting the early November low with the two spike lows in December comes in near $1.3400 in the middle of next week. The euro's six-day slide against the sterling ended ahead of the weekend with a small gain that lifted to about GBP0.8900. It appears to have found better bids in the GBP0.8860-GBP0.8870 area, the lowest since late-November.
Canadian Dollar: The US dollar was practically flat against the Canadian dollar last week, but only because it snapped back around 0.5% ahead of the weekend. The greenback had set a marginal new low(~CAD1.2625) the day before. It held the downtrend from the mid-November and late-December highs (~CAD1.2840) at the start of the week, giving it a running start of the previous week's low (~CAD1.2630). However, the greenback rebounded ahead of the weekend (~CAD1.2765). The trendline starts next week near CAD1.2800. A move above CAD1.2830 could signal a move toward CAD1.2900 and the last month's high around CAD1.2965. The momentum indicators did not confirm the new lows lends credence to some sort of irregular correction.
Australian Dollar: While the Australian dollar approached its previous high, unlike the Canadian dollar and sterling, the Aussie stalled a little shy of $0.7820 before returning toward the week's lows, set on Monday (~$0.7665). Ahead of the weekend, it held above the 20-day moving average ($0.7680), which it has not closed below since November 2. The MACD and Slow Stochastic are falling gently. We suspect there is scope for another cent decline in the days ahead, but the more important technical target may be nearer $0.7500. The Aussie's roughly 0.5% loss last week is only the second weekly loss since the US election. The day before it, it had briefly traded a little below $0.7000.
Mexican Peso: The US dollar fell by about 13.2% against the Mexican peso from late September through early December. It has been moving broadly sideways in its trough since then, which has not prevented marginal new lows. We had thought the upper end of the trough's range might be MXN20.50, but the dollar topped out near MXN20.2650 before falling back to the lower end of the trough in the MXN19.60-MXN19.65 band, which also houses the 200-week moving average. The momentum indicators are not generating a strong signal. A move outside of the MXN19.65-MXN20.15 range now may be newsworthy.
Chinese Yuan: Since the high made last May around CNY7.20, the US dollar has trended lower. It reached almost CNY6.43 on January 5. It has entered a consolidative phase. The PBOC seemed to give two conflicting signals last week. The first was through the fix. It was understood that officials did not want to see further strengthening of the yuan. On the other hand, the central bank seemed to snug market liquidity. It withdrew cash from the financial system for the first time in six-month. The dollar settled a little above CNY6.48 ahead of the weekend. We see scope for additional dollar gains and initially target the 20-day moving average near CNY6.5050 and then CNY6.53-CNY6.54. There is no reason to have a sharp yuan sell-off share headlines with Yellen's confirmation hearings of Biden's inauguration.
Disclaimer
Reviewed by Marc Chandler
on
January 17, 2021
Rating:
