Can Bonds and the Dollar Recover Together?

The US dollar appreciated against all the major currencies last week, but the gains were not sufficient to turn the tide of sentiment.  The bearish dollar narrative has shifted away from European and Japan exiting from their super-accommodative monetary stance to the return of America's  twin deficit problem. 

The US will sell at least twice the debt it sold last year, but with the ECB and BOJ buying up all their new net issuance, supply and demand may not be disjointed to the point of requiring a sharp rise in yields, even with the Fed reducing its reinvestment.  The technical indicators for the US 10-year Treasuries are more constructive than sentiment would suggest, and the same is true about the dollar.  

If one thinks that inflation will rise only gradually, then high real yielding (sovereign) bonds may be attractive because as they offer prospects of nominal yield declines, i.e., higher prices.   Positive real rates, calculated by the looking at the yields of the inflation-linked securities or by subtracting current headline CPI from the nominal yield, are not to be found in Germany, France, Japan, or the UK.  They are in the US.  

A bullish divergence is evident in the RSI for the US 10-year Treasury note futures contract.  The lows in price were not confirmed by the RSI.  The MACDs appear set to turn higher, and the Slow Stochastics are not far behind.  A shelf has been etched out near 120-00.   On the upside, the 121-00 area, where the 20-day moving average is found may offer the immediate resistance.  It has not closed above this average since mid-December.  The yield peaked a little more than 2.95% in the middle of the week, and it finished the week at 2.88%. The 20-day moving average is near 2.82%.  

The technical considerations for the Dollar Index are also favorable.  The RSI and MACDs show a similar bullish divergence as the US 10-year futures note. The Slow Stochastics are turning up as well.  Also, the five-day moving average has crossed above the 20-day average.  Admittedly, it has been stuck in a roughly 88.25-90.60 trading range over the past month, and the moving averages can whipsaw.    The lower end of the range may have formed a double bottom (88.43 on January 25 and 88.25 on February 16). The neckline is the top of the range, and a break would signal potential toward 93.00.  The 200-day moving average can now be found near 93.45.  The high for the year has so far been set on January 9 near 92.65.  

As we noted a week ago, the euro posted a key reversal on February 16.  There has been follow-through selling over the past week, with lower highs were recorded every day.  The euro closed January near $1.2415.  Without a recovery, for which the technical indicators suggest is unlikely, the euro will snap a three-month advance.  Given the carry, it becomes expensive to hold the euro without momentum.  The eurozone reports its preliminary estimate of February CPI in the middle of next week, but with the political risk ahead of the Italian vote and the SPD on another grand coalition in Germany, participants may be more inclined to peel back long positions.   

  

The yen fell about 0.6% against the dollar last week. It ends a two-week advance of about 3.6%. The MACDs are about to turn higher, while Slow Stochastics already have.   Still, it means little until the dollar can get back above JPY108. After falling through that level on February 13, it tried to resurface it on  February 21 but was repulsed.  Provided the dollar can hold the JPY106.45 area, it, the market may try again.  The yen's outperformance of the euro has translated into the euro testing the 200-day moving average against the yen near JPY131.20, which also corresponds with the Q4 17 low set in late November.  There is heavy congestion around JPY130. 

Sterling's technical tone remains fragile. The RSI and MACDs are not inspiring, and the Slow Stochastics seem to be cresting in a mini-cycle.  Its firmer tone against the euro may have helped it weather the firmer dollar.  The euro had been flirting with the upper end of its recent range around GBP0.90 a week ago and is now struggling to hold above GBP0.88.  Re-establishing a foothold above $1.40 would offer a launchpad for $1.4145, but with the EU already seeming to reject a UK proposal on Brexit that May is expected to deliver in a speech at the end of next week; the market maybe cautious. 

On the back of a disappointing retail sales report, the Canadian dollar recorded new lows for the year on February 22 at the equivalent of CAD1.2755.  A firm inflation report ahead of the weekend saw the US dollar slump to CAD1.2620 and end a five-day advancing streak.  The technical indicators are out of sync with each other.  Support for the greenback is pegged near CAD1.2570 now. The Bank of Canada hiked rates three times since the middle of last year, the Fed only once.  This year, Canada will be unable to keep up with the US.  The two-year rate differential is already back to where it was before the first hike was delivered by the Bank of Canada last July.  While the short-term outlook may not be clear, the medium-term outlook seems to support the US dollar.  

The Australian dollar lost 0.9% last week to bring this month's loss against the US dollar to 2.7%.  Less than hawkish comments from the central bank and a disappearing yield premium over the US has weighed on the Aussie. The downside momentum seen in the first part of the week after reversing lower on February 16 seemed to stall in the second part of the week.   It approached important psychological support near $0.7800, but the key chart support is seen near $0.7745.   On the upside, a convincing move above $0.7850 would begin healing the technical damage.  

Light sweet crude oil for April delivery has risen in six of the past seven sessions.  The technical indicators point to the likelihood of further gains, and the five-day moving average is poised to cross above the 20-day average. The contract closed above the 20-day average for the second consecutive session ahead of the weekend, which had not been done since the start of the month.  The weekly close above the $63.15 area seems to signal a retest of the recent highs near $66.40.  That said, the week technical studies are not nearly as constructive.  The US exported more than 2 mln barrels in the week ending February 16.  This might explain a key force behind the unexpected decline in US oil reserves.

The S&P 500 turned in a consolidative holiday-shortened week,  trading between 2701 and 2748.  The most important technical development may have been the fact that there was no follow-through selling after the reversal in the middle of the week.  The S&P 500 finished the week with strong momentum and above the 2743 area, which corresponds to the 61.8% retracement of the recent swoon.  It has closed above its 20-day moving average (~2725) for the first since February 1. The next immediate target is 2755, and although there is more technical work needed, a move above there would strengthen our conviction that the S&P 500 can make new record highs in the coming weeks.   The S&P rose almost 0.6% last week.  Russell 1000 Value Index slipped 0.1% while the Russell 1000 Growth Index rose 1.1%.   

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