The US dollar rose against all the major currencies last week. It seemed primarily a function of position squaring in year-end dealings. Elevated expectations of US tax reform, some renewed talk of an infrastructure initiative, and data that gave no reason to doubt a Fed hike next week, helped bolster the dollar, after the downside momentum eased the prior week.
The euro fell through the November uptrend line early last week and continued to trend lower. It recorded six sessions without an advance, the longest such since November 2016. The euro approached the 61.8% retracement objective of the November gains (~$1.1710), which also corresponds to the low from late last month. The technical indicators are moving lower. The $1.1700 area is important support. A break could spur a test on even more significant support in the $1.1550-$1.1600 band. The US two-year premium over Germany increased by seven basis points to 2.54%, while the 10-year premium widened a couple basis points. At 2.075, it is the widest in eight months.
The US 10-year premium over Japan was flat over the course of last week at 2.32%. However, the dollar rose four of the five sessions and seven of the last nine sessions. The dollar tested the 61.8% retracement of the November decline (~JPY113.25) a couple of time, but made it through there ahead of the weekend. The next target is in the JPY113.80-JPY114.00 area. The five-day average crossed above the 20-day average earlier in the week, and the technical indicators are moving higher. Initial supported is pegged at JPY113.00.
Most observers seem to recognize that several key Brexit issues, like Northern Ireland and role of the European Court of Justice, could come back and haunt the negotiations, even though the EU appears to have agreed that sufficient progress has been made to begin talks over the future relationship. Sterling was unable to make a new high for the week on the indication that an agreement was struck and recorded its lowest close since November 28. The 20-day moving average caught the lows since mid-November and that is where we peg initial support (~$1.3325). The technical indicators are trending lower and a break of $1.3300 risks another cent decline.
The Canadian dollar is stuck in a clear range, perhaps a rectangle pattern. The lower end is seen near CAD1.2660 and the upper end is seen near CAD1.2920. The upper end of the range corresponds to the 50% retracement of the US dollar’s slump from May through September. The lower end was frayed intraday on December 5. The statement after the central bank meeting the following day showed no urgency to remove additional accommodation. The broad sideways trading weakens the signals generated by the technical tools we use. The two-year interest rate differential widened in the US favor by five basis points over the course of last week, but it too appears range-bound.
The Australian dollar fell in four sessions last week and eight of the past 11. It lost 1.4% last week to test a six-month low near $0.7500. The central bank is clearly on hold. A mild disappointing Q3 GDP, due to softer consumption, and a much smaller October trade surplus (A$105 mln vs expectations for ~A$1.4 bln and A$1.6 bln in Sept) reinforced the signal from the Reserve Bank of Australia. A note of caution comes from the Bollinger Band, which the Ausise closed below (~$0.7520) for the last two sessions. A bounce into the $0.7540-$0.7560 may offer a new selling opportunity.
Light sweet crude oil for January delivered gained more than 2% over the last two sessions, but closed lower for the second consecutive week. The build in US gasoline stocks warns that some of the oil surplus was shifted into the products. The recent pullback has been sufficient to drive the five-day average through the 20-day average for the first time since mid-October. However, we would fade this cross-over and look for higher prices. Initially, resistance is seen near $58. A convincing move above there would likely signal a move to new highs for the year. The current high was set on November 24 a little above $59. The low for the year was set on June 21 near $43.40.
The US 10-year yield has largely been confined to a 2.30% to 2.40% since late September. The range is not rock solid as there have been several false breaks. However, it is interesting to note that the five, 20 and 50-day moving averages converge in the middle of the range. The December 10-year note futures contract is showing little propensity to move out of the 124-06 and 125-06 range. The technical indicators are not generating strong signals, which warn that range-trading may persist.
The S&P had a tough start to the week. Carrying over from the previous week the S&P 500 fell for four sessions, its longest losing streak since March, abut still managed to close higher for the third week in a row. It gapped higher ahead of the weekend and did not look back. The gap is found between roughly 2641 and 2644. Indications from key Senators that the Alternative Minimum Tax would not be included in the final bill may helped equities recover. The NASDAQ also gapped higher ahead of the weekend, but it was not quite enough to lift in on a weekly basis. Once again, investors seemed keen to buy the pullback in the stock market.
The Russell 1000 Value Index began last week by extending its advance for a fifth session, but turned lower only to recover in the last two sessions of the week. It managed rise 0.3% on the week, which allowed it to extend its winning streak for a third week, the longest here in Q4. The Russell 1000 Growth Index almost 0.35% for the week, and more impressively, extend its advancing streak for the 11th week. It has not had a weekly decline since the last week of September. During this advance, it has not closed once below its 20-day moving average, which is as slipped below twice on an intraday basis this month.