Dollar Falls out of Favor Again

The US dollar moved higher in September and October after falling broadly since late April when it became clear that populist-nationalist forces would not sweep across Europe, as many had feared in the aftermath of the Brexit referendum and Trump's unexpected victory in the US.   It has fallen out fallen out of favor again.  This month, the yen and euro are leading the broad move against the greenback.  

Heading into the last week of the month, only the Australian dollar, among the major currencies, is weaker than it had started the month.  It has a central bank that is steadfastly neutral and a government that may be hamstrung by the loss of a majority over dual-citizenship problems among its members of parliament.  The fact that Australian dollar is on the verge of completely losing its interest rate premium over the US also weighed on sentiment. 

The highest US two-year yield since Q4 2008 and the largest premium over Germany since the late 1990s has been insufficient to give the greenback a strong bid against the euro.   The euro will begin the new week with a four-session advance and a three-week rally in tow.  It has traded above the mid-October high and key retracement objective found in the $1.1880-$1.1885 area.  Technically, it suggests a return to the early September high near $1.2090.  Above there, the 50% retracement of the euro's decline since the mid-2014 peak is found near $1.2165-$1.2170.  This area also appears to correspond to a measuring objective of a possible head and shoulders bottom pattern in the euro.   A note of caution comes from the fact that the sharpness of the euro's advance as left it above the upper Bollinger Band.  

The dollar's recovery against the yen since hitting JPY107.30 in early September coincided with the recovery in the US 10-year premium over Japan from 203 bp to almost 240 bp by late October.  This month the premium has stopped trending higher and moved sideways between 227 bp and 235 bp.  This has coincided with a pullback in the greenback against the yen.  The dollar peaked near JPY114.75 in the first week of November and slumped to nearly JPY111.00 last week.  The lows corresponded with a 50% retracement of that dollar's recovery.  A break would open the door to the next retracement objective near JPY110.15.  A move back above previous support in the JPY111.65-JPY111.80 would help stabilize the technical tone.  

Despite an uninspiring UK budget that recognized increased costs of Brexit,  and cuts in growth forecasts, which recognized that the UK economy slipped behind France in size, sterling rallied nearly 1% against the dollar.  It finished the week at its best level in nearly two months.  It was the third consecutive weekly gain.  The euro edged higher against sterling last week.  It was the first back-to-back weekly gain since August, but the broad trading range remains intact (~GBP0.8800-GBP0.9000).

The Canadian dollar shrugged off disappointing retail sales, a further discount to the US on two-year money, and rose against the greenback for a third stronger weekly close in the past four weeks.  The Canadian economy is cooling dramatically after a string of four-quarter advance through the middle of this year that it saw an average annual pace of 3.75%.   It appears to grown less than half that pace in Q3, a quarter in which the central bank raised rates twice.  The two-year discount to the US widened to 30 bp, the most since June.  It was near 20 bp at the end of October.   The daily technical indicators seem supportive of the Canadian dollar.  Initial support for the US dollar is seen near CAD1.2660 and a break, which looks likely, could signal a move toward CAD1.2500.   

The Australian dollar posted a key reversal on the daily bar charts on November 21 by making a new low for the move (~$0.7530) and reversing to close above the previous session's high.  Follow through buying was slow to materialize, but it did, and the Aussie closed above $0.7600 the following day.  It has run into offers near the 20-day moving average (~$0.7635), which it has not closed above in over a month.  It also corresponds to a 50% retracement of this month's decline.  The daily technical indicators appear supportive for additional gains.  Assuming nearby resistance is overcome, the Aussie may work its way back toward $0.7700 over the coming sessions. It will be disappointing it the Aussie closes below $0.7575.  

Oil prices continued their meteoric rise.  Brent is up nearly 45% since late June, and WTI for January 2018 delivery is up 37%, including last week's 3.5% increase.  Reports that Saudi Arabia and Russia seem to agree on extending the output cuts another nine months through the end of next year was seen as supportive, though many seemed to have expected it.  The shutdown of the Keystone pipelines and additional declines in US oil stocks may have been among the factors that drove the bulls in recent days.  The continuation futures contract finished at its best level in nearly two and a half years.  While some technical readings are stretched, there seems to be potential to test the $60 a barrel level.    

The US 10-year yield was stuck mostly in a five basis point range last week between 2.32% and 2.37%.   The volatility continues to compress and near 47 bp now (according to the MOVE index, which is like the VIX for Treasuries) it is below the year's average of 58 bp, and near the record low around 43 bp seen earlier this month.   The technical indicators are not generating strong signals, and we suspect short-term participants will go whichever way the narrow 124-28 to 125-04 range breaks.  Ahead of the core PCE deflator on November 30, we would be more inclined to sell rallies in anticipation of acceleration of the targeted measure of inflation.  

The S&P 500 gapped higher on November 21 and did not look back.  The gap between 2584.64 and 2589.17 remains unfilled, and the index set new record highs ahead of the weekend.  It snapped its first two-week drop in three months.  The NASDAQ also set new records at the end of last week.  The Dow Industrials set their record on November 21 and consolidated during the last two sessions.  The daily technical indicators suggest the upside momentum can continue in the coming weeks.   If the tax bill fails in the Senate,  equities may be vulnerable initially, but could recover on ideas that the continuation of the status quo is not so bad as corporates are reporting record earnings and interest rates remain low.  

The Russell 1000 Growth Index jumped 1.40%, last week, its ninth consecutive weekly advance.  It was the largest gain since the first week in October.  The Russell 1000 Value Index managed to snap a four-week downdraft and closed 0.5% higher on the week.  It is still off about 1% from last month's record high.  

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