Is the Dollar Due for a Bounce?

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgPTBiMokbmepMUl1vT4o8YRDkyDUx3hSAcPgIYbBQIMFXxob7dt-vxzDuzqUiwAZk12rG0rYMWpv_6W25bjU91hJ5yjhg0_36rfHAaCBCzuUdrtjl68fqUmfOLB_Uej9cZil5SDdase6TwtSfPz2_FmuwL57ApW81G6puOednZhu66mYDplcMWPQLoCg=s800"><img alt="" border="0" data-original-height="400" data-original-width="800" src="https://blogger.googleusercontent.com/img/a/AVvXsEgPTBiMokbmepMUl1vT4o8YRDkyDUx3hSAcPgIYbBQIMFXxob7dt-vxzDuzqUiwAZk12rG0rYMWpv_6W25bjU91hJ5yjhg0_36rfHAaCBCzuUdrtjl68fqUmfOLB_Uej9cZil5SDdase6TwtSfPz2_FmuwL57ApW81G6puOednZhu66mYDplcMWPQLoCg=s400" width="400" /></a></div><p><b><span>The US dollar had one of its worst weeks in a few months.&nbsp;</span></b><span>&nbsp;Although there has been some talk about the historical pattern of weakness after the first Fed hike in a cycle, many participants were surprised.&nbsp; The dollar struggled in the last couple of weeks of 2021, but this seemed to be explained by year-end position squaring amid light interest.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Broad measures of US and European equities sold off last week.&nbsp;</span></b><span>&nbsp;The pre-weekend recovery in the S&amp;P 500 and NASDAQ could help lift offshore markets on Monday, but investors may be hesitant with the US on holiday.&nbsp; The Asia Pacific region fared best.&nbsp; The 2.4% gain of the MSCI Asia Pacific Index was led by Hong Kong, the Philippines, India, and Singapore.&nbsp; In the first two weeks of the year, the MSCI Emerging Markets Index has risen (~2.5%), and its developed markets index has fallen (~-1.5%). The eight-basis point rise in the US 10-year yield reversed the earlier decline and it settled about 2.5 bp higher on the week. European yields were mostly lower.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>The US 2–10-year yield curve flattened by eight basis points last week to about 82 bp and is about two basis point steeper than where it settled on Xmas eve.</span></b><span>&nbsp; In contrast the German curve flattened by around one basis point last week and is about 11 basis points steeper since December 24.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>While US price pressures accelerated, lockdowns in China, and other virus-related disruptions threatening more inflation, the 10-year breakeven fell-five basis points last week (to almost 2.47%) and around 12 bp since the end of last year.</span></b><span>&nbsp; At 1.76%, the 10-year German breakeven is off about four basis points this year.&nbsp; &nbsp;On the other hand, the UK 10-year breakeven has risen eight basis points this year to 4.03%.&nbsp; It peaked last October around 4.25%.&nbsp; Japan's breakeven has risen by almost 11 bp to 0.55%.&nbsp; It has not been higher since 2018.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Let's look closer at the exchange rates:</span></b><span>&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Dollar Index:</span></b><span>&nbsp;Even with the modest bounce ahead of the weekend, the Dollar Index posted its biggest weekly loss in four months (~0.60%). It fell below the uptrend line from early September in the middle of last week (~95.10).&nbsp; The trendline starts the new week near 95.20, just above the weekly close.&nbsp; &nbsp;Although the decline caught us wrongfooted, we suspect that it can recover in the coming days.&nbsp; The losses brought two technical objectives in to view.&nbsp; The first was the retracement of the last leg up that began around 93.30 in late October.&nbsp; The (61.8%) objective was by 94.65, which it narrowly took out on an intraday basis.&nbsp; The second was a double top (November 24 and December 15) near 96.95.&nbsp; The neckline was about 95.55, creating a measuring objective of 94.15.&nbsp; It settled two days below the lower Bollinger Band before edging back into it ahead of the weekend (94.90). The MACD is terribly overextended and the Slow Stochastic is becoming stretched.&nbsp;<o:p></o:p></span></p><p><b><span>Euro:&nbsp;</span></b><span>&nbsp; The problem with short-term relationships is that they are short-term.&nbsp; The euro had appeared to be closely tracking the two-year German-US interest rate differential from early last September.&nbsp; The euro bottomed in late November as did the German discount.&nbsp; However, in the past two weeks, the German discount widened by about 18 bp to 1.54% and the euro rallied to its best level in two months.&nbsp; We did not expect an upside break of the $1.12-$1.14 range.&nbsp; Yet, with the outside down day ahead of the weekend (possible key reversal), the MACD at three-month highs, and the Slow Stochastic getting stretched, the euro looks technically vulnerable.&nbsp; After moving outside the Bollinger Band, it finished back within it (Upper band begins the new week near $1.1440).&nbsp; The continued threat of Russian hostilities in Europe, the shocking 0.5%-1.0% contraction in the German economy in Q4 (according to the official report), and a more volatile political situation (in Italy) continues to make us wary about chasing the euro.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Japanese Yen:</span></b><span>&nbsp; The dollar rose from about JPY113.15 a couple days after the December 15 FOMC meeting to a high on January 4 around JPY116.35, a six-year high.&nbsp; It took place as the US 10-year yield rose from 1.35% to 1.80%.&nbsp; It looked like a breakout, but in the eight sessions since the high, the dollar has fallen in seven.&nbsp; It reached JPY113.50 before the weekend to meet the (38.2%) retracement of the rally since the Fed's more hawkish turn in last September and test the lower Bollinger Band (~JPY113.45) The next retracement (50%) is near JPY112.75.&nbsp; The dollar reversed higher and set new session highs in the North American afternoon (~JPY114.25), and a possible hammer pattern was forged. The JPY114.60-JPY114.70 area may initial resistance. The momentum indicators are falling but are not stretched. The volatility of US equities appears to be loosening the relationship between the exchange rate and 10-year yields.&nbsp;<o:p></o:p></span></p><p><b><span>British Pound:</span></b><span>&nbsp; Sterling rose for the fourth consecutive week for the first time since May.&nbsp; Over this run since Xmas eve, it has appreciated by about 2.15%.&nbsp; Only the Canadian dollar (2.10%) has been able to match it among the majors.&nbsp; Sterling managed to take out the 200-day moving average (~$1.3735) on an intraday basis last Thursday and Friday but could not close above it. The halfway mark of the sell-off from last year's high (~$1.4250 on June 1) was met slightly above $1.3700.&nbsp; The (61.8%) retracement is around $1.3835, near those highs from the second half of October.&nbsp; After rallying more than a nickel in a month, it is not surprising that both momentum indicators are overextended.&nbsp; The MACD and Slow Stochastic appear poised to turn down.&nbsp; Initial support may be around $1.3600-$1.3615, but the (38.2%) retracement is by $1.3530.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Canadian Dollar:&nbsp;</span></b><span>&nbsp;The greenback recorded its high for 2021 on December 20 against the Canadian dollar (~CAD1.2965).&nbsp; It has been under strong selling pressure since.&nbsp; It saw CAD1.2455 on January 13 before reversing higher, which left a bullish hammer candlestick in its wake.&nbsp; Follow-through dollar buying ahead of the weekend lifted it to around CAD1.2570.&nbsp; The next upside target is near CAD1.26, which you may recall is a neckline of a possible head and shoulders' pattern that projects toward CAD1.2250.&nbsp; It is not unusual for the price action to come back and retest the neckline after the violation.&nbsp; There does not seem to be a rule of thumb of how far it can go back into the pattern to negate it, but a move above CAD1.2650 would begin being worrisome.&nbsp; &nbsp;The momentum indicators are overextended but will need follow-through US dollar gains to turn.&nbsp;<o:p></o:p></span></p><p><b><span>Australian Dollar:&nbsp;</span></b><span>&nbsp; The 1% decline ahead of the weekend, pushed the Aussie down around 0.75% for the year, making it the weakest of the major currencies.&nbsp; The New Zealand dollar is off around 0.30% since the start of the year.&nbsp; They and the Swiss franc are the only major currencies not to have gained against the greenback over the past two weeks.&nbsp; The Australian dollar did poke above $0.7300 on January 13 for the first time since mid-November but could not hold it on a closing basis.&nbsp; It briefly slipped below $0.7200 before the weekend, giving back half of the rally from the previous week's low (~$0.7130).&nbsp; The momentum indicators are pointing in opposite directions.&nbsp; A convincing break of $0.7200 target the $0.7130-$0.7150 area initially.&nbsp; The New Zealand dollar's price action is similar.&nbsp; It approached $0.6900 on January 13, the high since late November sold off ahead of the week to almost $0.6790.&nbsp; It managed to close slightly above $0.6800.&nbsp; A break of the $0.6800 area may spur losses back to the $0.6700-$0.6730 area.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Mexican Peso:&nbsp;</span></b><span>&nbsp;The dollar has been grinding lower against the peso.&nbsp; Marginal new lows have been registered for the past six sessions.&nbsp; The low ahead of the weekend was around MXN20.2820, just above the 200-day moving average (~MXN20.2780) and its weakest level since late October.&nbsp; The MACD has flatlined in oversold territory, while the Slow Stochastic is also overextended, but did not confirm the new lows. A close above MXN20.45 might be a signal of an impending greenback recovery.&nbsp; We note that Mexico's 10-year dollar-denominated bond is selling off sharply.&nbsp; The yield has risen in nine of the past 10 sessions and has increased to 3.45% from 2.97%. The peso has appreciated about 1% over the past two weeks, while the JP Morgan Emerging Market Currency Index has risen by about 1.1%.&nbsp; &nbsp;Latam currencies account for half of the top 10 EM currencies at the start of the year.&nbsp; The Chilean peso leads the fx market with nearly a 4% gain against the dollar over the past two weeks.&nbsp; It fell almost 2.7% in December and 16.5% all last year.&nbsp; The newly elected president Boric is inheriting an economy (takes office on March 11) that grew 12% in 2021 driven by the fiscal stimulus and spending fueled by early pension withdrawals.&nbsp;<o:p></o:p></span></p><p><b><span>Chinese Yuan:&nbsp;</span></b><span>&nbsp; A record trade-surplus and the broadly weaker US dollar challenged Chinese officials who have made it clear that it does not think further yuan strength is justified.&nbsp; The dollar tested the New Year's Eve low near CNY6.34.&nbsp; It has not traded below there since May 2018.&nbsp; The greenback's recovery before the weekend may help it hold above CNY6.35.&nbsp; &nbsp;State-owned banks (aren't they all?) bought dollars in late mainland session, which seemed to underscore the official protests.&nbsp; On the margins, it may boost the chances that the PBOC cuts the rate of the one-year medium-term lending facility at the start of next week.&nbsp; The one- and five-year Loan Prime Rate is set early on January 20.&nbsp; These are ostensible market driven rates, and the five-basis point reduction of the shorter rate (to 3.80%) in December does not seem particularly meaningful. However, if it was allowed to fall again some may conclude it errored on the conservative side in December.&nbsp; Officials seem loath to admit mistakes.&nbsp; Still, if officials do not up their game, their street-cred will likely suffer.&nbsp;&nbsp;<o:p></o:p></span></p><p> </p><p><o:p>&nbsp;</o:p></p><p><br /></p><p><span>Disclaimer</span></p><div>
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