A week ago, the dollar’s technical condition suggested there was potential for one more push higher in the correction that began on September 1. However, instead, the dollar fell against all the major currencies and many emerging market currencies as well. The JP Morgan Emerging Market Currency Index rose by a little more than 0.5%. The dollar’s decline in recent days met initial retracement targets of its recent advance, and the momentum indicators seem to point to additional near-term losses.
Many Asian markets were closed for several days last week, but Europe’s Dow Jones Stoxx 600 finished about 1.5% higher, and the US S&P 500 snapped a four-week decline. Although the news that the US president and First Lady contracted the virus put a dent into risk-taking ahead of the weekend, our technical analysis suggests that the equity market’s downside correction may also have been completed.
Dollar Index: Some position adjustment on news of Trump’s infection helped end the Dollar Index’s four-day downdraft ahead of the weekend. The MACD appears poised to cross lower, while the Slow Stochastic already has turned. Initial support is seen in the 93.45-93.60 area. A break would likely signal a move below 93.00 and boost confidence that a high is in place. However, if the Dollar Index rises above the 94.30 area, the near-term negative view will be neutralized.
Euro: Even with its gains being trimmed before the weekend, the euro rose about 0.5% last week to snap a two-week drop of about 1.8%. It began the week near $1.1615 and traded near its 20-day moving average (~$1.1770) and met the (38.2%) retracement objective of the pullback that began on September 1 from around $1.20. The euro held the upper end of the band of support found between $1.1670 and $1.1690. A break signals a retest on the $1.1600 area. As we saw with the Dollar Index, the Slow Stochastic has turned up, leading the MACD, which looks poised to cross up next week. The euro needs to rise above the September down trendline that begins the next week near $1.1775, and the $1.1810 (50%) retracement hurdle to lift the tone and boost confidence that a low is in place.
Japanese Yen: The knee-jerk reaction to news of Trump’s infection spurred a quick bout of yen buying that drove the dollar below JPY105 for the first time in eight sessions. It quickly snapped back but was barely able to enter the previous range (~JPY105.20-JPY105.80) that had dominated for more than a week. With the pre-weekend low, the greenback has retraced half of the bounce off the JPY104-level (September 21). The next retracement target (61.8%) is near JPY104.70. The downtrend drawn off the early June high (~JPY109.85) and the late August and September highs begins the new week near JPY105.70, and above there, the JPY106.00 looks formidable. If it cannot be taken out, it would look like a new a slightly lower trading range is emerging (JPY104-JPY106 vs. JPY105-JPY107).
British Pound: Leaving aside the Brexit uncertainty and the likelihood that the Bank of England is the next major central bank to ease policy}, from a technical perspective, sterling looks the most bullish. A head and shoulders pattern appears to have been carved out with the potential neckline near $1.30. The measuring objective is about $1.3325. The $1.30 area also corresponds to a (38.2%) retracement September’s declined. The next retracement (50%) is around $1.3070 and then (61.8%) $1.3175. Both the MACD and Slow Stochastic have turned up from overextended territory. Ahead of the weekend, the five-day moving average crossed above the 20-day for the first time in nearly a month.
Canadian Dollar: The US dollar tried in vain to establish a foothold above CAD1.3420 and posted a key reversal in the middle of the week by making a (marginal) new high for the move and then selling off to close below the previous day’s low. Follow-through selling the following day took it a little below CAD1.3270, almost meeting the (38.2%) retracement objective of the September rally and near the 20-day moving average. Upticks should be limited to the CAD1.3365 area if the greenback’s downtrend is resuming. September’s uptrend begins next week near CAD1.3260 and rises toward CAD1.3300 by the end of the week. A break targets CAD1.3150 initially. The Slow Stochastic has turned down, but the MACD is lagging.
Australian Dollar: The Aussie moved higher for the first four sessions last week and met the (38.2%) retracement target of last month’s decline at $0.7210, and the area also houses the 20-day moving average. It stalled there before pulling back ahead of the weekend amid the broader risk-off mood. Support is seen in the $0.7080-$0.7100 area. The Slow Stochastic has turned higher, while the MACD is trying to do the same.
Mexican Peso: The peso was impressive. Even in the face of the weakness in equities ahead of the weekend, the peso extended its rally, rising for the third session to reach its best level in eight sessions (~MXN21.60). The dollar closed below its 200-day moving average (~MXN21.77) and on its week’s lows. A break of MXN21.50 would likely signal a return to last month’s low near MXN20.85. The momentum indicators are consistent with additional near-term dollar losses. The MXN22.15 area should offer initial resistance.
Chinese Yuan: The Golden Week holidays keep Chinese mainland markets closed through Thursday, October 8. When the markets closed on September 30, the dollar was a little above CNY6.79, and against the offshore yuan, the dollar finished near CNH6.7840. While the mainland markets were closed, the dollar slipped against the offshore yuan to end the week around CNH6.7535. The greenback fell about 1.1% against the offshore yuan last week, which is the largest decline since early 2019. In Q3, the dollar fell by nearly 3.9% against the yuan. Its largest move in a dozen years. While many critics embrace the direction, many want China to go further and faster.
Gold: The price of gold rose by about $40 an ounce last week or a little bit more than 1%. It posted a key upside reversal on Monday and set the high for the week ahead of the weekend near $1917, near the 20-day moving average. The low at the start of the week (~$1848) held above the (38,2%) retracement objective of this year’s rally (~$1837). The momentum indicators are moving higher. Support near $1880 should hold if the bullish advance is resuming.
Oil: Light sweet crude for November delivery tumbled by a little more than 7% last week. At the pre-weekend low around $36.60, the price of WTI has fallen by 17% since the end of August. Demand stories seem to draw more attention than supply. The demand concerns reflect industry forecasts and mounting evidence that the pace of recovery appears to be broadly slowing. Supply factors, as more Russian output, more OPEC output, and Libyan production returning, were blunted by reports suggesting the UAE will make cuts to offset excess output previously, and US inventories, which unexpectedly fell by almost 2 mln barrels for the third consecutive weekly draw. The November WTI contract settled a little above the early September lows (~$36.60). A break signals a move toward $34.25, and possibly to around $32.
US Rates: For nearly a month, the US 10-year yield has been confined to a range of about 0.64% to 0.72%. It moved to the upper end of the range ahead of the weekend. We suspect that it was more due to the possibility that a fiscal package is agreed upon shortly rather than the employment data. While the unemployment rate fell below 8%, the participation rate also unexpectedly fell, and the headline jobs number missed (due to government curbs being cut). The momentum indicators on the December 10-year note futures are mixed. The MACD is nearly flat-lining, while the Slow Stochastic is moving lower. For a month, the two-year yield has stayed within two basis points of 0.13%. The five-year yield has been confined to a range between 24 bp and 29 bp. One of the reasons the Fed has not formally implemented yield-curve control is that investors may be acting like it already has.
S&P 500: The benchmark gapped higher Monday and rose to 2.5-week highs near 3400 before the pre-weekend uncertainty over the implications of Trump’s contraction of the virus weighed on prices. The high was also corresponds to the (50%) retracement of last month’s decline. Although Trump may have some pre-existing conditions that make him vulnerable, it is reportedly a mild case, and his access to care must be assumed to among the best in the world. The gap appears on the weekly bar charts and was entered ahead of the weekend, but was not closed. It extends to a little below 3307. The S&P 500 gapped lower on Friday but rallied to close the opening gap and settle near its highs. The momentum indicators are moving higher as the S&P 500 snapped a four-week losing streak. The next target is around 3345, and a convincing move above there leaves little in the way of another run to 3600.