by Marc Chandler
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After a terrible first several weeks of the year, global capital markets stabilized in the past week. Chinese markets re-opened after the extended Lunar New Year holiday and proved not to be disruptive.
Chinese equities did not decline to catch-up to the performance of global markets in its absence and instead gained 3% on the week. The offshore yuan appreciated during the holiday, and the onshore yuan strengthened to converge with it. It traded in a narrow range after the markup.
The price of oil surrendered gains initially fueled by an agreement led by Saudi Arabia and Russia to freeze output, provided others would. However, the gesture was quickly understood to be hollow. The Iranians cannot agree to it. Otherwise, they would have suspended their nuclear ambitions for naught. Moreover, data suggests that both Saudi Arabia and Russia boosted their output in January. Many other oil producers (outside of Iran) have little spare capacity. The price of oil closed slightly lower on the week.
The April Brent and light crude futures contracts finished on a weak note. The technical indicators are mixed. Our bias is on the downside. The low for the April light crude contract was set near $28.75 in both late-January and early-February. This area may be retested. However, if the low is double-bottom, the April contract needs to rise above $35.00-$36.50 area.
Meanwhile, concerns about a US recession have slackened. Data continues to accumulate point to above trend growth in Q1 16 after a dismal Q4 15. The Atlanta Fed GDPNow is tracking 2.6% annualized pace. A strong January jobs report has been followed by a robust core retail sales and stronger than expected industrial output and manufacturing. The more than 4% rise in US stocks helped arrest the deterioration of financial conditions.
The US dollar turned in a mixed performance. The yen was the strongest currency gaining about 0.7%. The greenback's early bounce ran out of steam ahead of JPY115.00. Lower US bond yields and the reversal of oil's gains seemed to underpin the yen. The dollar closed poorly ahead of the weekend, and the technical tone is weak. The risk is of a move to marginal new lows, with the JPY110.50 area a reasonable target.
An important caveat is the G20 meeting next week will likely reiterate its two foreign exchange principles. The first is what we compare to an arms control agreement. Nations will not seek to manipulate currencies to promote exports. The second is the recognition the there are exceptions to the first rule. In particular, excess volatility is counter-productive.
Under previous governments, the BOJ may have been authorized to intervene. The recent dramatic appreciation of the yen without intervention speaks to the new thinking we have detected among Japanese policymakers. It also says something about the currency war meme that so many observers are still pushing, despite this and other evidence of numerous central banks resisting the downward pressure on their currencies. This, of course, includes China, where the PBOC has spent $100 bln last month prevent larger yuan depreciation.
If the yen was the strongest of the majors, the euro was among the weakest. It, sterling and the Swiss franc all lost about 1.2%. The euro finished the previous week near $1.1250 and dropped nearly two cents (~$1.1070) before finding a strong bid. The losses saw the euro retrace half of the gains registered from the January 29 low near $1.08. The 61.8% retracement is found near $1.1025. The technical signals are mixed. The RSI has stabilized, but the MACDs are still moving lower. The slow and fast stochastics are flashing contradictory signals.
We suspect the euro may gain in the early part of next week. However, with the two-year rate differential moving in the US favor, the euro recovery may be short-lived. The risk of action from the ECB next month is strong. The drop in US weekly jobless claims reported last week cover the month jobs survey period, and it points to another healthy national report. Although the Fed may not hike rates in March, the risk of a June increase seems higher than the 12% chance the market has discounted.
Old resistance (~$1.1060) now acts as support for the euro. A break of the $1.1025-$1.1060 area, warns of a push back to the lower end of the previous range that is found near $1.08.
Sterling traded sideways after the drop at the start of the week. It broke the trendline that connected the lows from January 21 (~$1.4080) and January 29 ($1.4150) and February 16 (~$1.4280). However, it managed to finish the week just above it. A move back through $1.4400 would lift the tone though the $1.4450 area may prove formidable. On the downside, a small three-day shelf has been carved in $1.4230-$1.4250 area. A break of it would signal another cent decline.
The Canadian and Australian dollars edged higher, gaining about 0.5% and 0.3% respectively, last week. The bounce in oil prices and the continued narrowing of the US two-year premium over Canada saw the greenback ease from CAD1.3850 on February 12 to CAD1.3655 on February 18. Poor retail sales (though firmer CPI) and the lower oil prices helped the US dollar recover 1% from the low point.
The technical indicators are mixed, but we read them to suggest that if the US dollar has not bottomed against the Canadian dollar, the low has been approached. A move above CAD1.3920 would boost the technical outlook for the greenback. Advancing beyond CAD1.40 would leave a potential double bottom in its wake. The measuring objective of the pattern would be in the CAD1.4350 area, which is beyond the 61.8% retracement of the US dollar's fall from the January 20 multi-year high near CAD1.4700, which comes in a little below CAD1.4300.
The Australian dollar overcame a disappointing employment report in the middle of the week to closed half a cent above the lows. The Aussie traded largely in a $0.7065 to $0.7185 range over the past week. The technical indicators are not generating a strong signal. We are more inclined to sell into bounces that could extend above $0.7200.
The US 10-year Treasury yield finished a couple of basis points lower in the week. Near 1.76%, it is well above the spike low below 1.53% seen on February 11. US core CPI rose 0.3% in January. It is up 0.5% in the past two months. In addition to the two drivers we have warned of (shelter and medical), clothing and autos also contributed to the increase. The year-over-year pace accelerated to 2.2%, last seen in June 2012. However, the renewed drop in oil prices and the apparent private sector demand for Treasuries offset the higher measured inflation.
The March note futures contract had a poor close before the weekend. A break of 130-00 would bolster the bearish technical view, and could signal a move toward 128-00. In terms of yield, we see near-term potential toward the 1.85%-1.88%.
The "W" pattern (a special case of a double bottom) that we have been looking for continues to play out. A move above 1950 is needed to complete the pattern. The measuring objective is near 2100. The five and 20-day moving averages have crossed to the upside. The S&P 500 gapped higher after the US Monday holiday and then again the following day. Those gaps are found near 1864.75-1871.50 and 1895.75-1898.90. We suspect the second one may be a normal gap, meaning that it will likely be filled in the coming sessions. The first gap, we think, is a breakaway gap and will not be filled. It is part of the bottom that has been carved.
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.
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