The US dollar has recorded its best two-week performance since
Reagan was President. There has been a sea change.
Although the low in global yields took place before the US election, and
deflation forces looked to have been largely defeated (with a few exceptions,
including Japan), more market participants recognize
the likelihood that the three-decade decline in bond yields may be over.
At the
very least, the promise of fiscal stimulus for a U.S. economy that is already
growing near-trend, while core PCE deflator and wage growth gradually
increasing, may be confirming the biggest change in the investment climate
since the financial crisis. The dramatic adjustment seen in interest
rate markets and the dollar reflects the repricing of assets under a new
paradigm. Of course, two weeks
after the election, details do not exist yet, and the Republican
President-elect has bolder ideas that part of the Republican Party that may
lead the legislative branch. However, the direction is clear.
The US Dollar
Index has risen for ten consecutive sessions. In this two-week period, it has
gained about 4.25% to reach its best level since 2003. It has only fallen
in two of the first seven weeks here in Q4. On October 20, when the
50-day moving average moved above the 200-day moving average (Golden Cross),
Dollar Index closed near 98.30. It pushed a little past 101.30 last week.
The technicals are stretched. The
RSI is at its highest in more than 18 months, but there no bearish divergences.
The price
action gives no reason to think that this surge in dollar demand has been satiated. In the last seven sessions, the
Dollar Index recorded higher highs and higher lows. The next important
chart point is seen near 101.80.
That is the 61.8% retracement of the Dollar Index's decline from what I
have dubbed the Clinton Dollar Rally of the second half of the 1990s, ending
with G7 intervention to arrest the euro's slide. A convincing break of
that area will make my longer-term call of a move to that Clinton Dollar Rally
high (~121) look less extreme.
Even after
being down nine consecutive sessions, the euro still could not sustain the
smallest of upticks, and so its streak was extended ahead of the weekend.
It is not the US
side of the equation. Europe is looking more and more out of step.
The US, Japan, Canada, and the UK (expected to be signaled by UK
Chancellor of the Exchequer in the Autumn Statement in the week ahead) are or
will adopt the more stimulative fiscal
policy. The EC continues to insist
on austerity, and Germany is not inclined to use the fiscal space that the IMF
and ECB claim to exist.
Just as
importantly, if not more so, the populist-right appeal that has arguably been expressed in the UK and the US heads
toward Europe. Europe is more vulnerable to a rise
in nationalism and anti-integration sentiment. Italy's referendum and
Austria's presidential election are the first. The most likely scenario
following the probable defeat of the referendum is another caretaker government
whose mandate to resolve the conflicting electoral law and prepare for 2018
election. Austrian's presidency is mostly ceremonial office, but the
victory of the populist right candidate
would be seen as another sign of the
power of that tendency.
The euro's
50-day moving average fell below the 200-day moving average on October 24 when it finished the North American session
a little above $1.0880. To reach that level required the
euro to violate the uptrend drawn off the January, June and July lows. The 2015 low was in the $1.0460 area in the spring and $1.0525 at the end
of the year. These represent the next near-term targets. Given the
speed and duration of the euro's slide, some technical bounce would not be surprising. We note that the euro has not
closed above its five-day average since 4 November. It comes in now near
$1.0675. An intraday move, or close above there would be a preliminary
indication of the end of the strong downside momentum.
The dollar has
risen 7% against the yen over the past two weeks. It is rose neared JPY111
for the first time in six months. Like the dollar's gains against the
euro, the rise in the dollar vs. the yen fueled by the sharp higher US interest
rates, the greater US premiums, and the general reflation
meme. At JPY110.35 the dollar recouped half of this year's losses.
The 50% retracement from the dollar's peak from mid-2015 near JPY125.85
is a little below JPY112.50. The technical readings are stretched. The MACDs and Slow Stochastics
appear to be peaking, while the RSI is at its highest level since the middle of
2015. The dollar has been climbing the five-day average. It is now
near JPY109.45. Its violation would warn
that the leg up is over.
Sterling
snapped a two-week advance against the US dollar. It lost a little more than 2% against the dollar last
week. It held up a little better than the euro (~ -2.4%). This also underscored the sense of it being a
dollar move. The US premium over the UK on two-year money (~86 bp)
appears to be the largest in the quarter of a century that Bloomberg has data.
Sterling finished last week below its 20-day moving average (~$1.2365)
for the first time since November 1. It is poised to test the congestion
band seen between $1.2160 and $1.2260.
Sterling may be
more interesting against the euro than against the dollar. The euro recorded an outside day against sterling,
though failed to generate a stronger reversal signal by closing above the
previous day's high. Still, the lows had been seen the euro nearly
complete a 50% retracement (~GBP0.8510) of its post-referendum gains. The technical indicators confirm a
low may have been approached. The
RSI is curling higher, while the MACDs and Slow Stochastics look about to turn.
While eurozone politics are an important
factor, May is expected to mount a rigorous defense of her royal prerogative,
perhaps on the same logic that did not require Brown from submitting the Lisbon
Treaty to Parliament. Initially,
resistance is seen near GBP0.8645 and then maybe GBP0.8720.
The Canadian
dollar was the only major currency to gain against the US dollar last week (~0.3%). The Toronto stock exchange was the second-best performing major stock market last
week (~2%) behind Japanese shares (Topix +3.6%). Oil prices snapped a
three-week decline. But, it is not unusual for the Canadian dollar to
outperform European currencies and the yen in a strong US dollar environment.
What is impressive of the even the minor Canadian dollar gains is that it
come as US two-year interest rate premiums over Canada rose to its highest level in 10-months. At 38 bp it has risen 12 bp over the past two weeks.
The greenback's
highs were made at the start of last week (~CAD1.3590) and the
attempted retest before the weekend was rebuffed,
after a seemingly bullish outside advancing session was recorded the previous day. The CAD1.3575 area houses the upper
Bollinger Band and the 50% retracement of the US dollar's decline from the
late-January high, a little below CAD1.37 to May low near CAD1.2460. To be anything significant from a technical
perspective, the US dollar pullback needs
to extend through CAD1.3400.
After the
Japanese yen, the Australian dollar has fallen the most of the major currencies
since the US election. It has lost a touch more than 5%, while the yen has depreciated by 5.7%.
In the second half of last week
(three sessions), the Aussie dropped nearly 3% (2.9%). Softer metal
prices provided a ready excuse, but the new higher interest rate environment
steals some of the thunder of the traditional high yielders, like the
Australian dollar. Like the yen, but unlike the euro and sterling,
speculators in the futures market were leaning the wrong way. They had
net long Australian dollar futures positions.
Before the
weekend, the Australian dollar met, almost to the tick, the 50% retracement
objective of this year's gain. The next retracement objective is
near $0.7200. However, the near-term yellow flag is that the Aussie
closed below the lower Bollinger Band (~$0.7400) for three consecutive
sessions. While a corrective bounce may lift the Aussie back toward the
Bollinger Band, the Bollinger Band itself may drift lower toward prices.
The Mexican
peso fell almost 1.5% last week to bring its month-to-date decline to 8.3%. The central bank hiked rates by 50 bp, but after
strengthening into the meetings, the peso sold off afterward and the technicals do not preclude another test on the
record lows. The US dollar peaked on November near MXN21.39. It
fell to nearly MXN20.30 before Mexico's rate hike. A move now above
MXN20.80-MXN21.00 would increase the likelihood that the greenback makes
another run at highs.
The price of
the January 2017 light sweet crude oil futures has risen only in one of the
last seven sessions.
It was a roughly 5.6% gain Tuesday on ideas that maybe Russia will participate
in OPEC's attempt to reduce supply. It more than offset the string of losses and was sufficient to snap a
three-week air pocket, as the
market grew suspicious of a meaningful accord. The point is that the
downside momentum has eased and the technical tone has improved. A move
above $47 would be constructive and set up another test on the $50
threshold.
US 10-year
Treasury yields continued their upward climb tacking on another 23 bp on top of
the previous week's 38 bp rises. New highs in the 10-year yield were
seen ahead of the weekend at 2.35%. The next obvious technical target is
last year's high near 2.50%. In the big picture, yields have been
falling for 30 years. The 10-year fell to almost 1.30% this year,
essentially test the cyclical low seen in 2012. This may mark the historic low, and
such low yields will look as quaint as the double yielding Treasuries,
the last of which recently matured. We suspect that the two-year yield, which has risen 25 bp since the
election to 1.05%, is going find the 1.10%-1.20% area provides a formidable cap.
Disclaimer
Dollar Technicals are Stretched, but Fundamental Shift Underway
Reviewed by Marc Chandler
on
November 19, 2016
Rating:
Reviewed by Marc Chandler
on
November 19, 2016
Rating:
