Greenback's Recovery has more Room to Run

After a three-week decline, the dollar was over-extended in our view, coming into the past week.  A correction began in recent days, and the greenback rose against the major currencies but the Canadian dollar last week.  Among emerging market currencies, Latam provided the bookends.  Ahead of today's elections (October 27), the Argentine peso fell about 2.8% to finish near two-month lows.  On the other side was the Brazilian real, which was up as much as the peso was down.  Pension reform is projected to save BRL800 bln (~$190 bln) over the next decade.  The Bovespa rallied to new record highs and the credit default swaps, which insure against sovereign default, have fallen for the 13th consecutive session ahead of the weekend to its lowest level in about 6.5 years.  At about 120 bp, it's still relatively elevated, about 30 bp more than Mexico and 50 bp below South Africa, to put it in a context.

Generally speaking, the dollar's upside has more room to run from a technical perspective.  It ended last week on a firm note, and the momentum may be sustained into the run-up to the FOMC meeting at midweek.  However, the likelihood of soft jobs data at the end of next week may inject some caution and cool the dollar buying.

Dollar Index:  The Dollar Index rose four of last week's five sessions and snapped a three-week decline.  It closed firmly at the week's highs to secure a 0.6% advance and successfully resurfaced above the 200-day moving average (~97.40).  The technical indicators suggest the recovery will likely continue.  A move now through 98.10 would see 98.40.

Euro:  The euro began the month at new two-year lows near $1.0880 and reached almost $1.1180 at the start of last week.  Our technical analysis had anticipated a pullback, and the euro finished the week on its lows near $1.1065 to meet the (38.2%) retracement objective.  Further near-term losses are likely, and the MACDs and Slow Stochastics only recently turned down.  The next target is near $1.1030 and then around $1.10.  The euro posted an outside down day on October 24, and the high from then (~$1.1065) ought to offer a near-term cap.

Yen:  The Japanese yen often seems to march to a different beat these days than the other major currencies.  It has fallen for three consecutive weeks.  That said, it has hardly moved.  Last week, the dollar was confined to a little less than half a yen range.  It has not closed outside of a roughly JPY108.40 to JPY108.85 range for two weeks.  The MACD and Slow Stochastics are flatlining at elevated levels.  The JPY109 area remains important.  One strategy for short-term players is to sell dollars on a break above JPY109.  As stops are triggered, it could rise toward JPY109.30.  We had thought the market would have given up on the move higher, but the pullback to JPY108.25was bought.  It may take a break of the JPY108 area, which also houses the 20-day moving average to boost confidence that a high is in place.

Sterling:  Ideas that the Brexit drama was ending lifted sterling from around $1.22 on October 10 to a little above $1.30 at the start of last week.  The momentum faded as Prime Minister Johnson's plans were thwarted and sterling was testing $1.28 ahead of the weekend, when it posted its lowest close since October 15.  The Slow Stochastics have crossed lower, and the MACDs are set to do so in the coming days.  We see scope for sterling to push back toward $1.26 with intermittent support near $1.27.  The decline in implied volatility also is consistent sterling returning to old familiar territory.  The implied one-month volatility has fallen around 14.4% on November 16 to around 9.4% before the weekend, the lowest level since mid-September.  The $1.2880 area may be expected to cap bounces.

Canadian Dollar:  The US dollar has trended lower against the Canadian dollar.  It rose in only one week in September, and it rose the first week in October but has fallen for the past three weeks. The greenback fell almost CAD1.3050 on October 24, finding no succor in Trudeau's Liberals becoming a minority government.  Important support is seen near CAD1.3000, and the Slow Stochastics are set to turn up, though the MACDs are lagging a bit. We look for a corrective bounce that would carry the US dollar toward CAD1.3125-CAD1.3150.

Australian Dollar:  The Aussie put in a one-month high on October 22 near $0.6885 before turning lower.  It found support ahead of $0.6800, which is about the midpoint of the rally of the leg up that began on October 16, near $0.6725.  A break of the $0.6785-$0.6800 area would re-target that low. A trendline drawn off the October 2 low (a 10-year low of around $0.6670) is found near $0.6780 at the end of next week. Initial resistance is seen near $0.6860.

Mexican Peso:  In quiet markets, and encouraged by a stronger than expected retail sales report (0.3% vs., expectations of a 0.1% decline), the Mexican peso climbed to its best level since the end of July.  The dollar fell to almost MXN19.00.  It is the fourth week in a row that the dollar fell, and technical indicators are stretched.  The Slow Stochastics did not confirm the new low ahead of the weekend, and the MACDs look poised to turn up soon.  We continue to caution against new dollar shorts without a bounce, which we suspect can extend into the MXN19.00-MXN19.25 area.

Chinese Yuan:  The US dollar slipped against the yuan for the third consecutive week.  It is the longest losing streak since the start of the year.  During this run, it has fallen from about CNY7.1480 to around CNY7.0550. The settlements last week were between roughly CNY7.065-CNY7.0750.  However, we think the talk among some economists that the currency ha been re-pegged is a dangerous exaggeration.  A peg implies a commitment.  None exists.  A peg would fly in the face of official efforts to encourage market participants to learn to hedge in a two-way market.  The extreme stability comes while the PBOC is injecting liquidity into the banking system ahead of tax payments and month-end.  The dollar has dropped four consecutive weeks against the offshore yuan (CNH).  The technical indicators show the dollar is stretched against CNH.  The lower Bollinger Band is near CNH7.0350, while it closed around CNH7.052.

Oil:  Light sweet crude for December delivery jumped nearly 5.2% last week to reach its best level in a little more than a month (~$56.75).  It closed on its highs and has a four-day rally in tow coming into next week.  US oil inventories fell for the first time in six weeks, and a critical North Sea pipeline was briefly closed on October 24.  Some observers also cited the prospect of a US-China trade deal as a factor.  At the end of last week, Baker Hughes reported that the number of oil rigs fell by 17 to bring the rigs in operation to their lowest level since April 2017.  The December futures contract has approached the (50%) retracement of the slide since the spike in the immediate aftermath of the attack on Saudi facilities last month.  The 200-day moving average is near $57.35, and the next retracement objective is around $58.20.  The technical indicators are supportive, but two consecutive closes above the upper Bollinger Band (~$56.25) should inject a note of caution.  Also, soft US and Europe Q3 GDP reports may continue to raise questions about demand going forward.

US Rates: While the on-the-run 10-year Treasury yield eased half a basis point last week, the generic yield rose four basis points for the third consecutive weekly increase.  On October 4, the generic yield was a little below 1.60%.  Since the middle of the month, it has been knocking on 1.80%.  The September high was near 1.90%.  The December futures note fell to its lowest level since September 19 ahead of the weekend (~129-11).   There appears to be mild chart support there, but on a break, there is little to stand in the way of a push toward the mid-September low near 128-16.  The US generic two-year yield rose four basis points last week.  While the Federal Reserve's repo operations have succeeded in bringing down the effective fed funds rate, it has done little for the overall financial conditions.  On October 11, the Federal Reserve announced its intention to buy $60 bln of T-bills a month.  Net-net the generic three-month bill yield is flat since the announcement around 1.66%. 

S&P 500: Before the weekend, the S&P 500 came within a hair's breadth (3027.39) of the record high set in July (3027.98).  For the week, the benchmark closed 1.2% higher, which is the biggest gain since the first week in September.  The rally extended the advance for the third consecutive week. Intel's upbeat outlook and Apple's new record high reflected the optimism and even Amazon, which under-performed expectations recoup most of the losses that were initially inflicted.  The daily technical indicators appear constructive. Although the S&P 500 would be in uncharted territory, our next target above 3030 is around 3065. Still, there may be some caution around the FOMC meeting, where some expected a hawkish cut, (whereby the Fed signals the end of the mid-course correction and a pause policy).  Volatility is not separate from the stock market's direction.  As the S&P 500 has climbed, the VIX has fallen.  It closed last week at about 12.65%, the lowest level since late July. It has slipped below 12% a few times this year but has not closed below.    

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