A Couple of False Breaks and a New Four-Year High in the Yuan

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhyOQD-DpVKgFa_9vBorbQhStMJ5wlHwHrW84nMnGfENcd5SJ3iNuqNxIEXQ2Al7BdQxJbZdGZXNHnCE43sPbRPcmj35Qn759D9TKBbPAZZNZ44yzwA023mna5oHVM_z-_45afszImQGJUzveYiauHr1L_FPKcVW3MTBBE26KpoLiAD05_q4qxvUGsMQw=s570"><img alt="" border="0" data-original-height="366" data-original-width="570" src="https://blogger.googleusercontent.com/img/a/AVvXsEhyOQD-DpVKgFa_9vBorbQhStMJ5wlHwHrW84nMnGfENcd5SJ3iNuqNxIEXQ2Al7BdQxJbZdGZXNHnCE43sPbRPcmj35Qn759D9TKBbPAZZNZ44yzwA023mna5oHVM_z-_45afszImQGJUzveYiauHr1L_FPKcVW3MTBBE26KpoLiAD05_q4qxvUGsMQw=s400" width="400" /></a></div><p><b><span>The US dollar broke higher against the yen to start the year.&nbsp;</span></b><span>&nbsp;It traded up to JPY116.35, its highest level in five year.&nbsp; However, within a few days it became clear that it was a false breakout.&nbsp; The dollar moved back within its old range (~JPY113-JPY115 +/- 0.5 yen).&nbsp; Indeed, the greenback finished last week near JPY113.65.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Ok, if the dollar is going to weaken, the euro is a major beneficiary.</span></b><span>&nbsp; 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.&nbsp; This break also proved to be a head fake.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Frustratingly, correlations like the yen and US rates, and the Canadian dollar and US stocks have broken down.&nbsp;</span></b><span>&nbsp;That said, risk-off broadly has lifted the yen to the top of the major currencies through the first three weeks.&nbsp; It is up about 1.2%.&nbsp; The Canadian dollar is second best, with an almost 0.8% gain.&nbsp; 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.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>On the other hand, emerging market currencies as an asset class have done well.</span></b><span>&nbsp; The JP Morgan Emerging Market Currency Index has risen for three consecutive weeks to start the new year.&nbsp; &nbsp;This matches the longest advancing streak in 2021.&nbsp; Latam currencies account for three of the top five performers.&nbsp; The Chilean peso is the world's best with a 6.7% gain.&nbsp; The South African rand is second, appreciating by about 5.6%.&nbsp; Peru and Colombia are next (~4.4% and 3.1% respectively).&nbsp; 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%).&nbsp;<o:p></o:p></span></p><p><b><span>Dollar Index:</span></b><span>&nbsp; &nbsp;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.&nbsp; The trendline from that high and early January highs comes in around 96.00 and is also the next retracement (61.8%) target.&nbsp; 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.&nbsp; A move above 96.00 would target 96.40 initially.&nbsp; Although intraday penetration of the 20-day moving average (now around 95.75) occurred, DXY failed to close above it.&nbsp; Initial support is seen in the 95.25-95.40 area.&nbsp; A break of 95.00 warns of a push lower, probably below the January 14 low (~94.65).<o:p></o:p></span></p><p><b><span>Euro:</span></b><span>&nbsp; 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.&nbsp; &nbsp;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.&nbsp; . 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.&nbsp; On the other hand, a break of $1.1280 would be a blow to the late longs.&nbsp; In the futures market, speculators added to their gross long position for the fifth consecutive week in the reporting period ending January 18.&nbsp; At almost 212k contracts, (each contract is notional value is 100k euros), it is the largest gross long position since last August.&nbsp; 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.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Japanese Yen:</span></b><span>&nbsp; &nbsp;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.&nbsp; 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.&nbsp; &nbsp;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.&nbsp; The MACD is falling but the Slow Stochastic is moving sideways near its recent trough.&nbsp; A break could spur a test on the early December lows near JPY112.50.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>British Pound:&nbsp;&nbsp;</span></b><span>Sterling looks particularly vulnerable.&nbsp; It finished last week on its lows and below the 20-day moving average for the first time since December 21.&nbsp; Recall that after rallying more than a nickel from mid-December to mid-January, it stalled near the 200-day moving average (~$1.3735).&nbsp; Since posting the three-month high on January 13, sterling fell in five of the next six sessions.&nbsp; The retreat brought it to spitting distance of the (38.2%) retracement objective found near $1.3530.&nbsp; A break would bring the next retracement (50%) into view around $1.3460.&nbsp; &nbsp;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.&nbsp; The market has priced in a slightly greater chance of a BOE rate hike on February 3, now a little above 90%.&nbsp; 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.&nbsp;<o:p></o:p></span></p><p><b><span>Canadian Dollar:&nbsp;</span></b><span>&nbsp; The US dollar's high for 2021 was recorded on December 20 near CAD1.2965.&nbsp; It subsequently sold off to about CAD1.2450 on January 13.&nbsp; 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.&nbsp; 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.&nbsp; Over the past week, the market increased the amount discounted to almost three-quarters from slightly more than half on January 14.&nbsp; The near-term risk is on the US dollar's upside, and we suggest two targets.&nbsp; The first is the CAD1.26 area, which is the neckline of the head and shoulders topping pattern (which projects to around CAD1.2250).&nbsp; 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.&nbsp; The US dollar has not closed above the 20-day moving average since December 28.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>Australian Dollar:&nbsp;</span></b><span>&nbsp;&nbsp;The Aussie climbed three cents from early December through January 13.&nbsp; 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.&nbsp; The MACD is flat but appears to be rolling over.&nbsp; The Slow Stochastic did not confirm the mid-January high, leaving a bearish divergence, and is moving lower.&nbsp; A break of the $0.7150 area could signal another half to three-quarters of a cent decline.&nbsp; 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.&nbsp; The Australian dollar, however, has been particularly strong against the New Zealand dollar, rising to levels not seen in around six-month.&nbsp; The cross is closed above the upper Bollinger Band for the past two sessions.&nbsp; Initial support is seen around NZD1.0650.&nbsp; More important support is near NZD1.06, which is also the&nbsp;<i>neckline&nbsp;</i>of a “W" pattern on the weekly charts.&nbsp; If valid, the measuring objective is close to NZD1.09.<o:p></o:p></span></p><p><b><span>Mexican Peso:&nbsp;</span></b><span>&nbsp;Of the half dozen most active Latin American currencies, the Mexican peso is the worst performer so far this year after the Argentine peso.&nbsp; 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.&nbsp; 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.&nbsp; 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.&nbsp; It carved a low at the beginning of last week near the 200-day moving average (MXN20.29).&nbsp; It appears that some momentum traders moved to reduce their short dollar exposure.&nbsp; The greenback peaked around MXN20.5665 on January 20, the third consecutive daily advance, the longest in nearly two months.&nbsp; Despite the risk off mood ahead of the weekend, the peso strengthened by around 0.3%.&nbsp; The market has about 200 bp of tightening priced in for the next 12 months.&nbsp; The next Banxico meeting is February 10.<o:p></o:p></span></p><p> </p><p><b><span>Chinese Yuan:</span></b><span>&nbsp; &nbsp;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.&nbsp; Indeed, ahead of the weekend, the yuan rose to its highest level against the dollar since May 2018.&nbsp; There seems to be two broad explanations for the yuan's strength.&nbsp; First is China's record trade surplus.&nbsp; It reached $94.5 bln in December alone.&nbsp; Of course, most invoices are not in yuan, yet the exporters costs are, so there is the conversion of export proceeds.&nbsp; Second, and perhaps under-appreciated, is the outperformance of Chinese stocks and bonds.&nbsp; 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.&nbsp; The 10-year yield is off six basis points this year to 2.70%.&nbsp; The US yield is up 24 bp to 1.75% this year.&nbsp; 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.&nbsp; Sure, China's interest rate premium has narrowed, which may exclude a market segment, but other portfolio investors see value.&nbsp; Recall the US dollar low in 2018 was set in March near CNY6.2430.&nbsp; &nbsp;<o:p></o:p></span></p><p><br /></p><p><span>Disclaimer</span></p><div>
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