by Marc Chandler
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The US dollar firmed against nearly all the major currencies in the last week of 2015. The exceptions were the Antipodean currencies and the Japanese yen. The relatively high short-term yields offered Australia, and New Zealand may have attracted some hot flows looking park over the turn. The yen's gains were all scored on New Year's Eve in thin turnover, as equity markets and US yields slipped lower.
Since the ECB eased policy on December 2, the US Dollar Index has been mostly confined to a 97.00-99.00 trading range. The consolidative correction has not ended, but the technical tone is improving. We note that the euro finished above a trend line drawn off the December's three highs 100.50 at the start of the month, 99.20-99.30 in the middle of the month, and 98.40 at the end of the month.
The five-day moving average is poised to move above the 20-day average, and the MACD's are set to turn higher. The 50-day average is accelerating away from the 200-day average. The RSI is neutral.
Participation may be slow to return to the foreign exchange market. The Dollar Index is unlikely to push through the 98.85-99.25 band until participants feel more confident that the US employment data on January 8 will show improvement. This is especially significant because recent economic data for Q4 warns of disappointing growth.
The euro has spent the month since the ECB meeting consolidating in a $1.08-$1.10 trading range. It has made two serious efforts to break to the topside but has been repulsed both times. The euro finished last week below its 20-day moving average for the first time since December 2, and the five-day moving average is set to slip below it on Monday. The RSI is curling over, and the MACDs are crossing over to the downside.
Just like the $1.10 level was flirted with some minor penetration, the same may happen near $1.08. That said, a convincing break could quickly see $1.0730, and perhaps another run at the at $1.05. It likely requires a US jobs growth above 200k and a strong rise in average hourly earnings.
The dollar's heavy tone against the yen helps explain why the Dollar Index's technical condition is not as bearish as the euro. The dollar has spent the entire last week of the year below a trend line drawn off the August spike (~JPY116.20) and the mid-October low (~118.00). At the end of next week, it is found near JPY121. The 20-day moving average is about JPY121.40 and falling fast. The five-day average is around 120.35 and also falling. The RSI is still headed lower while the MACD is bouncing in its trough. A break of JPY120 could quickly bring it into the JPY119.40-JPY119.60 area.
The fundamentals offer an important caveat against getting too bullish on the yen. The Japanese economy continues to struggle despite the hyper-aggressive monetary policy and a budget deficit of 6.5% of GDP. Reports that the BOJ will lower its FY2016 CPI forecast, after announcing operational adjustments a few weeks ago, can only fan expectations of further QQE in the year ahead.
In addition, we do not think Japanese investors have yet responded to the widening premium the US offers at both the short and long-ends of the coupon curve. The premium on two-year government money finished the year at 105 bp, having record its highest level 2008 of 110 bp the previous day. The US offers more than 200 bp more than the Japanese government on 10-year bonds. It made the highs for the year in post-Christmas activity.
Sterling fell 5.3% against the US dollar in 2015. A little more than 40% it was recorded in December. Expectations for a BOE rate hiked have are into H2 16, and an economy that appears to be losing some momentum have weighed on sterling. The US-UK 2-year spread favored the former by a nine-year high 46 bp in the last week of the year.
The UK budget deficit is overshooting, and the first budget of the Tory's majority government was somewhat less austere than many anticipated, given the rhetoric. This, coupled with an easy BOE stance, is not a policy mix often associated with a stronger currency. Sterling finished last week at its lowest level since April, falling two cents in four sessions. It is unlikely to fall another two cents in the next four sessions, but that appears to be the direction. A move above $1.4880 would suggest instead that a correction is at hand.
Sterling hit a low near $1.4565 in April and then made a spectacular recovery in two months to reach $1.5930. However, it is has been trending lower since, and there is nothing in the technical condition that suggest sterling's has neared a significant bottom. A test on the April lows seems likely, and a break could spur another 2% decline to bring it to the 2010 low near $1.4230.
The Canadian dollar is the worst performing major currency in 2015, depreciating 16% against the US dollar. It has been dragged down by the Bank of Canada rate cuts, and arguably the anticipation of another one in 2016, widening discount to the US on two-year borrowings, and the drop in oil prices.
There is some technical reason to look for near-term correction for the Canadian dollar. The RSI and MACD are moving lower for the US dollar. The five-day moving average may cross below the 20-day average next week. We suspect momentum players have not adjusted to the improved technical readings. A break of CAD1.3800, and especially CAD1.3770, would likely begin forcing the Canadian shorts to cover. There may be some support near CAD1.3730 on its way toward CAD1.3660.
The Australian dollar's technicals do not look as constructive as the Canadian dollar. For the last third of 2015, the Aussie traded in a $0.7000-$0.7400 trading range but has not closed below $0.7100 since mid-November. It had a good run in over the last couple of weeks, moving from the lower end its range to the upper end, reaching almost $.7330 at the end of last week. We think would more surprised by a break of $0.7400 than a grind back toward $0.7200.
The Mexican peso fell about 14.4% against the dollar last year. It and the Canadian dollar's depreciation explains a large part of the dollar's strength on a trade-weighted basis. The dollar may have posted a downside reversal on the last day of the year. It first extended its advancing trend since the middle of the month, and then turned and finished below the previous day's low.
We are wary of attributing too much significance to the price action due to the lack of participation, but the technical indicators are consistent with this signal. Initial dollar support may be seen near MXN17.15. It requires a break of the MXN16.90-MXN17.00 to signal anything significant from a technical perspective.
The price of February light sweet crude oil futures has not closed above its 20-day moving average for two months (November 3), but it is flirted with it at the end of last week (~$37.90). The unseasonably warm weather in most of the US, flooding in the Midwest, which jeopardizes the safety of some significant pipelines, and continued strong inventory growth (record levels in Cushing) speaks to the excess production.
Since the last November high, the February contract fell 21% by the third week in December before consolidating into end of the year. Technical indicators, like the RSI and MACDs, suggest potential for continued corrective action in the days ahead. There is a trend line drawn off the early- November highs (~$50), the late-November highs (~$45), the early-December highs (~$43.40) and the late-December highs (~$38.15). By the end of next week it intersects near $36.30, so even continued sideways action will violate the downtrend. This coupled with the prospects of colder weather (by mid-January) could see further corrective action, though a move above $40 is needed to denote something significant from a technical perspective.
The March 10-year Treasury note has been recording higher lows since early November. This translated to the cash yield seeing diminishing gains above the 2.30% level. There is a clear near-term downtrend line in the March contract that was traced out in December. It is drawn of the Dec 11 high (127-10), the Dec 21 high (126-24), and the Dec 28 (126-13). It is found near 126-01 on Monday and 125-22 at the end next week. However, the market may be cautious about taking the contract above 127 ahead of the employment report on January 8.
The March two-year note futures contract finished 2015 on a similar trendline. The technical indicators suggest scope to move back into the 108-24 to 109-00 area. The US two-year yield doubled from 54 bp in mid-October to almost 110 bp on December 29. A pullback was seen at the end of last week and a further move is likely first part of next week, but the participants may be reluctant to push it much lower than 100 bp pending the US employment report.
We had thought the S&P 500 looked technically constructive going into the last week of the year and noted potential toward 2076-2080. It made it up to 2081 before reversing for the last two sessions and finishing the year just below 2044. The S&P finished 2015 off almost 0.75%, which when combined with the dividend, points to a gain for investors of a little less than 1.5%. The broader market did a little worse. The Russell 3000 was down almost 1.50% on the year, and the dividend yield returned 0.5% to investors.
The technical indicators we use are not generating strong signals for the near-term direction. We are watching a trend line connecting the late-September low (~1872) with the mid-December and late-December lows (~1993 and ~2005 respectively). It is found near 2022 at the start of the week ahead and around 2031 and the end.
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
Tags: Bank of Canada,Dollar Index,U.S. Average Earnings
