The US dollar broke higher
against the yen to start the year. It traded up to JPY116.35, its highest level in five year.
However, within a few days it became clear that it was a false breakout.
The dollar moved back within its old range (~JPY113-JPY115 +/- 0.5 yen).
Indeed, the greenback finished last week near JPY113.65.
Ok, if the dollar is going
to weaken, the euro is a major beneficiary. After trading mostly $1.12-$1.14 since mid-November, the
euro broke higher and set a two-month high on January 14 slightly below
$1.1485. This break also proved to be a head fake.
Frustratingly, correlations
like the yen and US rates, and the Canadian dollar and US stocks have broken
down. That
said, risk-off broadly has lifted the yen to the top of the major currencies
through the first three weeks. It is up about 1.2%. The Canadian
dollar is second best, with an almost 0.8% gain. Currencies which
typically do well when growth and risk appetites are strong, like the Scandis
and Antipodeans, are the weakest since the end of last year.
On the other hand, emerging
market currencies as an asset class have done well. The JP Morgan Emerging Market
Currency Index has risen for three consecutive weeks to start the new
year. This matches the longest advancing streak in 2021.
Latam currencies account for three of the top five performers. The
Chilean peso is the world's best with a 6.7% gain. The South African rand
is second, appreciating by about 5.6%. Peru and Colombia are next (~4.4%
and 3.1% respectively). Geopolitics seems to be trumping oil prices for
the Russian rouble, which is the worst performer, off 3.25%, followed by Argentina
(~-1.55%) and the Turkish lira (~-1%).
Dollar Index: The bounce in the Dollar
Index we anticipated after the key reversal materialized (January 14) but stalled just above
the (50%) retracement objective (~95.75) of the decline from the December 15 high
near 96.90. The trendline from that high and early January highs comes in
around 96.00 and is also the next retracement (61.8%) target. The MACD
and Slow Stochastic have turned up, but the price action is less
encouraging. Still, this flag or pennant pattern is mostly seen as a continuation pattern. A move above 96.00 would target 96.40 initially. Although intraday penetration of the 20-day moving average
(now around 95.75) occurred, DXY failed to close above it. Initial support is seen
in the 95.25-95.40 area. A break of 95.00 warns of a push lower, probably
below the January 14 low (~94.65).
Euro: After approaching $1.1485 on January
14, it was sold back to $1.1300 ahead of the weekend, the middle of the old
$1.12-$1.14 trading range. The trendline off last year's low
(~$1.1185 on November 24) and the mid-December lows will begin the new week
slightly below $1.13, which is also the (61.8%) retracement objective of the
gains since the low. . The MACD and Slow Stochastic have rolled over, but
if the $1.13 area holds, a bounce back above $1.14 cannot be ruled out. On the other hand, a break of $1.1280 would be a blow to the late longs. In the futures market, speculators added to their gross long position for the fifth consecutive week in the reporting period ending January 18. At almost 212k contracts, (each contract is notional value is 100k euros), it is the largest gross long position since last August. The bearish speculators have reduced their gross short position for last four weeks and at about 187.3k contracts, it is the smallest since late September.
Japanese Yen: After falling from JPY116.35
on January 4 to JPY113.50 on January 14, the dollar bounced last week and
flirted with JPY115 on January 18. This roughly corresponds to the top of
the previous JPY113-JPY115 range (+/- 0.5 yen) and the (50%) retracement of the
slide from the early January high. The greenback slipped lower in
the second half of the week, returning back to JPY113.60 ahead of the weekend,
which is where the lower Bollinger Band can be found. The MACD is falling
but the Slow Stochastic is moving sideways near its recent trough. A
break could spur a test on the early December lows near JPY112.50.
British Pound: Sterling looks particularly
vulnerable. It finished last week on its lows and below the 20-day moving
average for the first time since December 21. Recall that after rallying more
than a nickel from mid-December to mid-January, it stalled near the 200-day
moving average (~$1.3735). Since posting the three-month high on January
13, sterling fell in five of the next six sessions. The retreat brought it to spitting distance of the (38.2%) retracement objective found near
$1.3530. A break would bring the next retracement (50%) into view around
$1.3460. The MACD and Slow Stochastic have turned lower and the
five-day moving average looks poised to cross below the 20-day moving average
for the first time in a month. The market has priced in a slightly
greater chance of a BOE rate hike on February 3, now a little above 90%. Next
week's report from the Gray’s inquiry into the parties at 10 Downing Street may
keep the pressure on Johnson, while England's remaining Covid restrictions will be lifted.
Canadian Dollar: The US dollar's high for 2021 was
recorded on December 20 near CAD1.2965. It subsequently sold off to about
CAD1.2450 on January 13. It has chopped in recent days between roughly
CAD1.2450 and CAD1.2550 before rising to CAD1.2580 before the weekend. The MACD and Slow Stochastic are turning up from
oversold territory. The market is more confident after the December CPI
report that the Bank of Canada will hikes the target rate 25 bp on January 26.
Over the past week, the market increased the amount discounted to almost
three-quarters from slightly more than half on January 14. The near-term
risk is on the US dollar's upside, and we suggest two targets. The first
is the CAD1.26 area, which is the neckline of the head and shoulders topping
pattern (which projects to around CAD1.2250). The second is the
CAD1.2640-CAD1.2650 area, which corresponds to a (38.2%) retracement of the
sell-off since December 22 and the 20-day moving average. The US dollar
has not closed above the 20-day moving average since December 28.
Australian Dollar: The Aussie climbed three cents
from early December through January 13. Subsequently, it met the (38.2%)
retracement objective near $0.7190 and is nearing the (50%) retracement by
$0.7155, where the lower Bollinger Band can be found. The stronger moves have
been on the downside, while upticks have been more of a grind. The MACD
is flat but appears to be rolling over. The Slow Stochastic did not
confirm the mid-January high, leaving a bearish divergence, and is moving
lower. A break of the $0.7150 area could signal another half to
three-quarters of a cent decline. Our leaning is that Aussie's gain
through mid-January were corrective in nature and look for a retest on the
$0.7000 in the coming weeks. The Australian dollar, however, has been
particularly strong against the New Zealand dollar, rising to levels not seen
in around six-month. The cross is closed above the upper Bollinger Band
for the past two sessions. Initial support is seen around
NZD1.0650. More important support is near NZD1.06, which is also
the neckline of a “W" pattern on the weekly charts.
If valid, the measuring objective is close to NZD1.09.
Mexican Peso: Of the half dozen most active Latin
American currencies, the Mexican peso is the worst performer so far this year
after the Argentine peso. The Mexican peso dropped by 0.75% last week to
snap what was a seven-week rally, leaving it up about 0.25% for the year.
The Brazilian real is next with a 2.2% gain, helped perhaps by signals from the
Lula, the past and likely next president, that he will tow a moderate
course. To put it into context, recall that the dollar peaked against the
Mexican peso last year in a spike to MXN22.1550 in late November. It carved
a low at the beginning of last week near the 200-day moving average
(MXN20.29). It appears that some momentum traders moved to reduce their
short dollar exposure. The greenback peaked around MXN20.5665 on January
20, the third consecutive daily advance, the longest in nearly two
months. Despite the risk off mood ahead of the weekend, the peso
strengthened by around 0.3%. The market has about 200 bp of tightening
priced in for the next 12 months. The next Banxico meeting is February
10.
Chinese Yuan: Despite reductions in the
one- and five-year loan prime rates, and signals of a more accommodative
monetary policy going forward, banks being encouraged to step up their lending,
the yuan remained strong. Indeed, ahead of the weekend, the yuan rose to
its highest level against the dollar since May 2018. There seems to be
two broad explanations for the yuan's strength. First is China's record
trade surplus. It reached $94.5 bln in December alone. Of course,
most invoices are not in yuan, yet the exporters costs are, so there is the
conversion of export proceeds. Second, and perhaps under-appreciated, is
the outperformance of Chinese stocks and bonds. The CSI 300 (free-float
weighed index of 300 companies listed on the Shanghai or Shenzhen exchanges) is
up 1.1% for dollar-based investors and Chinese bonds have outperformed the
other major bond markets. The 10-year yield is off six basis points this
year to 2.70%. The US yield is up 24 bp to 1.75% this year. The
yield on the 10-year German Bund is up almost 12 bp, and at 0.13%, the 10-year
Japanese government bond yield has doubled. Sure, China's interest rate
premium has narrowed, which may exclude a market segment, but other portfolio
investors see value. Recall the US dollar low in 2018 was set in March
near CNY6.2430.
Disclaimer
Reviewed by Marc Chandler
on
January 23, 2022
Rating:
