The recovery in equities that saw the S&P 500 set new record highs, the US raise $120 bln in coupon sales, and an ECB that promised to "significantly" boost bond purchases immediately fizzled ahead of the weekend. The US dollar rebounded too after key supports held and interest rate differentials widened further.
Although the price action has felt choppy, a few trend moves have been underway. Consider that US Treasury yields (3-year through 30-year) have moved higher for the sixth consecutive week. The CRB Index rose for the seventh consecutive week and has only fallen one week this year. It is up over15.5% so far this year. Crude oil consolidated in recent days after rising dramatically since the bottoming on Nov. 2 (The outcome of Georgia's special election that gave the Democratic Party its parity in the Senate is not even identifiable on the chart of oil or bonds).
The dollar finished the week on a firm note. Divergence has been underlined. The ECB's intention to (significantly) step-up bond purchases, while the US goes from a $1.9 trillion fiscal stimulus measures to initiating infrastructure negotiations that could be as large as the stimulus. On top of that, an executive order forces states to ensure that all willing adults can be vaccinated in early May. Still, the dollar's advance seems mature. Against many currencies, the nadir was reached in the first week of January.
Dollar Index: On last week's pullback, the Dollar Index largely held the (38.2%) retracement objective of this month's rally, which came in near 91.40 (actual low ~91.36) and bounced. It stalled in front of 92.00. A move above there signals a retest on the 92.50 area seen earlier in March. We had suggested a 92.75 measuring target from a bottoming pattern and note that the 200-day moving average is near 92.85 now. The momentum indicators are elevated and may be rolling over but do not stand in the way of a marginal new high.
Euro: The single-currency extended its post-US job report losses in the first part of last week, falling to almost $1.1835. It rebounded to about $1.1990, which corresponds with the (38.2%) retracement objective of the downtrend since the Feb. 25 high near $1.2245. Ahead of the weekend, it tested the upper end of a band of support that is seen been $1.1895 and $1.1915. A break signal a test on the recent low near $1.1835 and the 200-day moving average (~$1.1840). Recall that around last November election was $1.16. The MACD and Slow Stochastic appear to be turning up from over-extended territory. It seems to be closer to the end of the boxer's punch than the start of it.
Japanese Yen:The dollar pushed to almost JPY109.25 early last week, backed off to around JPY1080.35, and made another attempt to establish a foothold about JPY109. However, for the second time last week, it failed to close above it. The MACD continues to trend higher, but the Slow Stochastic is rolling over. The 50-day moving average is poised to cross above the 200-day moving average (deadman's cross or golden cross) around the middle of next week. The JPY110 area offers psychological resistance for the dollar. It has not finished a month above it since April 2019. Rising oil prices impact Japan through the trade channel (boosting imports) and the exchange rate that appears sensitive to rising US rates. A break below the JPY108.30 area could signal a near-term top is in place and project initially toward JPY107.60. The BOJ may confirm a change in tactics in its ETF purchases, but the exchange rate seems to be more a function of international developments rather than domestic.
British Pound: Sterling peaked around $1.4235 on February 24, solidified a shelf in the $1.3780-$13800 area at the start of last week. The subsequent buying lifted sterling briefly and marginally above $1.40. However, as part of the broad dollar recovery, sterling tumbled to around $1.3860 ahead of the weekend. The trendline drawn off the December lows and early February low begins the new week near $1.3850, and a convincing break could signal a 1.5-2.0-cent decline. The technical indicators are mixed. The MACD has returned to neutrality and has gone mostly sideways in recent days. The Slow Stochastic, on the other hand, is curling up from oversold territory. The close before the weekend was near the middle of the session's range. A convincing move above $1.40 would target the recent high. The Bank of England, like the other major central banks that have met since bond yields have risen, is expected to highlight the weakness of the labor market and the transitory and technical nature of the anticipated increase in prices.
Canadian Dollar: The US dollar fell by about 1.5% against the Canadian dollar last week, the most among the major currencies and the largest weekly loss of the year. The jobs reports showed employment surged by nearly 260k last month, which was more than three times greater than the median forecast in Bloomberg's survey. Unemployment fell to 8.2% from 9.4% even while the participation rate was steady. The greenback fell to a margin new three-year low, around CAD1.2460. The snapback in the labor market, coupled with the spillover of the US fiscal stimulus, and progress with the vaccine, should allow the Bank of Canada at its April meeting to signal its intentions to taper its C$4 bln weekly bond purchases perhaps by the end of Q2. The momentum indicators favor further US dollar weakness. The next important band of support is CAD1.2250-CAD1.2350, and I suspect the CAD1.2400 area may be sticky. However, the immediate note of caution is that the US dollar finished the week below its lower Bollinger® Band (~CAD1.2500).
Australian Dollar: Ahead of the weekend, the Australian dollar tested the $0.7800 level and found sellers waiting that took it back down nearly 1% before bids were found just in front of the previous session's low. The MACD and Slow Stochastic are turning up as the correction since the Feb. 25 high above $0.8000 appears to have run its course (bottoming near $0.7625). A move above $0.7820 is needed to reanimate the uptrend. The pre-weekend activity may have been consolidative in nature. The Aussie rose a little less than 1% (more than all but the Canadian dollar and Norwegian krone, among the majors) to post its first increase in three weeks. This coming week, Australia is expected to report a pick-up in job growth and retail sales in February.
Mexican Peso: The US dollar began last week, extending its advance to almost MXN21.6360, its highest level since spike as US polls closed last November. The dollar's four-day rally was followed by a three-day slide that saw it shed about 4.2% and saw it approach the previous week's low near MXN20.55. Although the dollar consolidated ahead of the weekend against the peso, the momentum indicators suggest the path of least resistance is lower for the greenback. The next area of chart support is close to MXN20.35. For the first time in a year, the 60-day rolling correlation of the dollar-peso exchange rates and the 10-year yield has turned positive, and that correlation is the highest since early 2017 (0.83).
Chinese Yuan: Chinese stocksare underperforming this year. Among the large markets, it is the only one that is down. An attempt to lend official support to stocks during the National People's Congress was not successful, as reported in the press. The PBOC's ability to manage the currency has been a bit more successful. The US dollar set new highs for Q1 last week (~CNY6.5440) and then pulled back to around CNY6.4775, just above the 20-day moving average (~CNY6.4760) which may mark the near-term range. A week before top Biden administration officials will meet with senior Chinese officials for the first time, the US deemed it necessary to tighten up the sanctions on Huawei. It would seem to deter a goodwill gesture by Chinese officials of allowing the yuan to rise, even if the greenback is otherwise bid, for example. Meanwhile, while the interest rate premium offered by Chinese government bonds over Treasuries (10-year) has narrowed by more than 60 bp to about 160 bp this year, the low volatility contributes to portfolio construction decisions. The 3-month implied volatility for the yuan is about 5.5%, which is nearly a percentage point below the least volatile of the majors (euro).
