(In Asia on an extended business trip. Updates will be less regular for the next few weeks.)
The US dollar turned in a mixed
performance last week. It recovered in the second half of the week against the euro and
yen. It was an unusual week in that the New Zealand dollar was the
strongest of the major currencies, gaining 1.8% against the US dollar, while
the Australian dollar was the weakest, losing almost 1% against the greenback.
Disappointing US retail sales and a split among the Federal Reserve
Governors over the appropriateness of a rate hike this year weighed on the
dollar. NY Fed President Dudley comments
and the better-than=expected consumer confidence report helped spur a six bp recovery in the US 2-year note yield and
a recovery in the dollar.
To be sure, it was not only the US side that was driving the exchange rates. The dollar recovered smartly from the JPY118 area tested at mid-week and
managed to finish the week just below JPY119.50. This was aided by the
Japanese government downgrading its economic assessment and the final estimate
of August industrial production.
Recall when the preliminary estimate was first released on September 26, the 0.5%
decline shocked the market where the consensus forecast was for a 1.0%
increase. The revised estimate compounded the injury; showing that August industrial output actually declined
1.2%. Even though the BOJ has shown no sign that it is preparing
new stimulative measures, many in the market, still smarting from last year's
surprise (when on a 5-4 vote the BOJ increased the base target to JPY80
trillion from JPY60 trillion) expect additional easing to be announced at the end of the month.
In a similar vein, the message from the
ECB is that the asset purchase program can be
adjusted in terms of size, length
of operation, and composition. Despite the introduction of rotating
voting on the ECB, the institution works by consensus. That consensus is
still being forged. Draghi's press conference following next week's ECB
meeting can be expected to take another step in this process. Many in
the market expect a consensus will be reached
by the end of the year.
The Australian dollar was capped with the help of increased
expectation for another rate cut this year. What spurred
the shift in the pendulum of expectations was one of its largest banks raised a
variable rate mortgage rate by 20 bp. The risk of an offsetting RBA rate
cut rose from about a 1 in 7 chance to a 50/50 call.
Foreign officials just as much as most
investors expected the Federal Reserve to hike rates in June or at least
September at the start of the year. Yet
US monetary tightening has not been delivered and this, so the argument
goes, led to a tightening of monetary
conditions abroad, at least through the exchange rate. That
tightening impulse needs to be offset,
hence the greater pressure now on Europe and Japan to ease.
We would not want to push the logic of
this argument too far. Conventional wisdom and the IMF argued that it was best for
the world economy if the Fed did not hike rates this year. The
best thing for the world economy is a
strong and vibrant US economy. However, and this is critical, what it means to be strong
and vibrant has downshifted.
Given labor forces growth and
productivity, it is unreasonable to expect US growth to sustain the 2.7% four, and eight-quarter
average annualized growth pace that it has delivered. This is to say the US has been delivering above trend growth for two years.
As the business cycle matures, the
pace of growth may moderate. The risk for Q3 GDP, which will be reported at the end of the month, is on the
downside of the consensus 1.9% expectation, as net exports and inventory
drawdown weighed on growth. Still, final demand (GDP minus inventories) may be a better
indication in this context of economic health.
The euro reversed
lower after testing $1.1500. Before the weekend, it made new lows
for the week and closed near it, a little below $1.1360. This has left a
potentially bearish hammer pattern on the weekly euro charts. The euro has advanced about 3.5 cents since the
start of the month. The stalling of the upside momentum in recent days is
important. The shorts are betting that
the longs that are squeezed out now are unlikely to re-establish ahead of the ECB
meeting. The immediate target is near $1.1315, but a break of the $1.1265
area, which corresponds to a retracement objective and the 20-day moving
average, would be more significant.
The end of the week stock market rally and the move in US 10-year yields back above
2.0% helped the dollar recover against the Japanese yen. It had slumped to JPY118, the lower end of the recent range
but snapped back toward JPY119.65 at the end
of the week. The shooting star candlestick pattern may have been
recorded last Thursday and follow through buying was seen on Friday. The
JPY120.00-JPY120.60 band of resistance block the way higher.
Sterling did a better job that the euro
and yen in holding on to the gains scored in the first half of last week. Sterling reached a high near $1.5530
on Thursday before finishing the week near $1.5440. It stalled near the
downtrend line drawn from the August 25 high (~$1.5820), and the September 18
high (~$1.5660). It was marred last
Thursday but closed well below it. Indeed, it closed on its session lows.
Old resistance near $1.5380 should now offer support, and may extend to
$1.5350. A break of the $1.5280-$1.5300 area would confirm the third
consecutive lower high since the year's
high was recorded in June near
$1.5900.
From a technical perspective, the US
dollar stopped at an interesting place
against the Canadian dollar last week as it approached the CAD1.2800 area. This area corresponds to a 50%
retracement of the last leg up the greenback recorded which began in mid-June
near CAD1.2130. It peaked at 11-year highs at the end of September near
CAD1.3460. The RSI and stochastics suggest that the 4.7% slide in the US
dollar may be complete. The initial hurdle is cited in the CAD1.2950-85 area, and a move back through
CAD1.3070 would bolster the credence of this view.
The Australian dollar briefly traded above
the 100-day moving average (~$0.7350) and stalled in front of $0.7400. A band of congestion extends toward $0.7440. It
finished the week near $0.7265. The $0.7200 area is key to the near-term
technical picture. A break signals scope for another cent decline,
initially. If it holds broad, sideways trading
is likely.
In contrast, the New Zealand dollar has
been above its 100-day moving average for over a week. Recall that the
Kiwi tumbled 16 cents (~20%) between late-April and mid-August. Last week's gains brought it within
striking distance of the 50% retracement objective found near $0.6940. Initial
support is seen near $0.6750. If
this does not hold, it may warn of the risk of a return to $0.6600.
The December crude oil futures contract
stabilized at the end of last week. It slid for four sessions after
poking through the $51 on October 9. Nearby resistance is seen in the $48.60-$49.30 area. It has
largely been
confined to a $45-$50 a barrel range since late-August.
The US 10-year yield also stabilized after
briefly falling below 2.0%. It is
difficult to get excited about the upside unless the 2.10%-2.13% area is breached. Moreover, early in the week
ahead, the 50-day moving average of the yield is likely to move below the 200-day
average (golden cross). Those moving averages crossed over in the futures
market (continuation contract) in early October. On the downside, it noteworthy
that the 1.96% area, which corresponds to
a 61.8% retracement objective, on a closing basis repeatedly.
The S&P 500 closed above the 2020
area, which was the top of a bullish "W" pattern. It closed the week near its highs
for the third consecutive week. Despite the positive momentum, it is
approaching some potentially formidable technical levels. The 2032 area
is the 61.8% retracement of the decline
from the record high (~2135) in May to the lows seen
in late-August and again in late-September (~1867). Above there lies the
200-day moving average now near 2040. The downtrend drawn off the record
high comes in near there at the start of the new week. There was shelf
before mid-August around 2050 that also may offer technical resistance. A move below 2020 would be disappointing, but it may take a break of 1990
to signal the upside attempt has been aborted.
disclaimer
Will USD's Recovery in the Second Half of Last Week be Sustained?
Reviewed by Marc Chandler
on
October 17, 2015
Rating:
Reviewed by Marc Chandler
on
October 17, 2015
Rating:
