FX Technicals Ahead Of Christmas: Be Careful Playing Breaks

There were a few notable developments in terms of the price action in the foreign exchange market last week. The biggest was the four-day drop in sterling that took it down 2.5% on the week, which is the largest decline since the flash crash in October 2016 that saw it lose more than 4%. On the other side was the Norwegian krone. It was the strongest of the majors, gaining about 0.66% against the dollar and a little more than 1% against the euro. It is the third consecutive weekly rise against them, and it reached the best level in two months against the euro and at a three-month high against the greenback.

Dollar Index: A two-week decline was snapped with a little more than a 0.5% gain for the Dollar Index. It was sufficient to lift it back above the 200-day moving average. It stopped just shy of the 97.80 area ahead of the weekend, which corresponds to the (61.8%) retracement objective of the down move since November 29. The momentum indicators are constructive, and a step back toward last month's highs near 98.50 looks likely.

Euro: The euro reversed dramatically on December 13 after approaching $1.12. Our near-term bearish case took some time to materialize. The euro staged some corrective upticks in the first couple days of last week, but it faltered near midweek and fell to almost $1.1065 ahead of the weekend. This area also corresponds to the (61.8%) retracement of its run-up since the end of November. The technical indicators warn of additional near-term losses. Since around the middle of October, the euro has found bids on dips below $1.10. A re-test on that area seems likely.

Yen: The dollar edged ever so slightly higher against the yen last week. It was the first back-to-back weekly gain since October. Rising equities and global yields are often associated with a weaker yen. The greenback was confined to about a half a yen range all week (~JPY109.20-JPY109.70). One-month volatility fell below 4% for the first time ever. The technical indicators still seem to be mildly constructive, but the dollar has not traded above JPY110 in seven months.

Sterling: The British pound could not get out of its own way last week. We anticipated a disappointing election outcome or a “buy the rumor sell the fact” type of activity that left sterling vulnerable. Prime Minister Johnson made it clear in both word and deed that he has a mandate not to seek a soft Brexit. This seemed to have encouraged profit-taking as it would indicate the risk that uncertainty may still cast a pall over business activity. Recall, sterling was trading near $1.22 in the first part of October and was near $1.28 a month ago. In the futures market, the bulls went from gross long about 21.3k contracts in late September, the least in six years to being long 59.3k contracts as of December 17. Sterling finished last week at a hundredth of a cent below $1.30, returning to levels seen last on December 3. The MACD has turned down, and never confirmed the rally to $1.35. The Slow Stochastics have turned down decisively. A key question is how much the late longs are in weak hands. Further selling could spur a push toward $1.28, which is also where the lower Bollinger Band will begin the new week. The thinness of markets may deter some real money from stepping in as the speculators run for cover, but the possible re-weighting toward the UK is a force worth monitoring.

Canadian Dollar: A stronger than expected CPI report sent the Canadian dollar to almost two-month highs, but the gains were nearly completely reversed in response to the shockingly large drop in retail sales (-1.2%). Even when the volatile auto component is excluded, retail sales fell for the third consecutive month in October. The U.S. dollar bounced off of CAD1.31in the middle of the week and tested CAD1.3180 ahead of the weekend, which corresponds to the (38.2%) retracement objective of the greenback's drop since the December 3 high (~CAD1.3320). The next (50%) retracement target and the 20-day moving average are in the CAD1.3220 area. The MACD and Slow Stochastics are poised to turn higher.

Australian Dollar: A fairly good employment report helped offset some less favorable economic news, which included preliminary December composite PMI to (49.4) its lowest level since February. The Aussie saw follow-through selling after reversing lower on December 13 (from ~$0.6940) and fell a cent before the jobs data gave it a bid. Its third consecutive gain ahead of the weekend lifted it back above $0.6900 ahead of the weekend. This is also where the 200-day moving average is found (~$0.6905). This is arguably the fifth time this year, the Australian dollar is testing the 200-day moving average. Intraday penetration like we saw in the previous week has taken place before, it has not closed above it once. The Slow Stochastics have not turned up and suggest this pattern will hold. On the other hand, the MACD is extended but still rising

Mexican Peso: The dollar has fallen from about MXN19.60 at the beginning of December to a little below MXN18.89 at the end of last week. The dollar's downside momentum vs the peso has faded, and the MACD and Slow Stochastics are poised to turn higher. Even after the fourth rate cut of the year, Mexico's real and nominal interest rates remain high and attract carry plays. The dollar must move above MXN19.10 to be anything noteworthy.

Chinese Yuan: The dollar was back above CNY7.0 last week and rose to a six-day high around CNY7.160 at the end of last week. The dis-enchantment of the CNY7.0 level this year by Chinese officials has been successful, and it has bought the PBOC some flexibility. The cost was to be cited as a currency manipulator by the U.S. The broadly firmer dollar could spillover and help lift the yuan toward the CNY7.03-CNY7.05 area, which will have little significance.

Gold: The yellow metal rose about a third of one percent last week or about $5.3 an ounce to reach its best level (~$1495.1) before the weekend. Recall that the price of gold dipped briefly below $1450 in early November to record a three-month low. It has been trending gently higher since. The technical indicators are not generating strong signals. Higher interest rates and a stronger U.S. dollar typically provide headwinds to gold.

Oil: Light sweet crude oil for February delivery reached almost $61.50 last week, a seven-month high. It has been climbing a steep uptrend over the past week and a half, and although it was violated ahead of the weekend, support at $60 a barrel held. A break warns the near-term rally is over, and corrective forces may gain control. The first area of support is in the $58.80-$59.00, which houses a retracement objective of this month's rally and the 20-day moving average. The technical indicators are stretched and look poised to turn down.

U.S. Rates: The U.S. 10-year yield rose in the first four sessions last week to reach 1.95%, a ten basis point increase, before pulling back slightly at the end of the week. Last month's high watermark was just north of that, at 1.97%. The technical and psychological hurdle lies at 2.0%. The technical indicators for the March futures contract suggest that the 2% area is likely to hold. The futures contract tested the 128-00 support area several times, and it held. The downside momentum on prices (upside for yields) appears to be stalling. The speculative (non-commercial) position adjustment in the futures market has been more a case of the longs liquidating than shorts piling in. Over the past three weeks, the longs have liquidated around 120k contracts bringing their collective position to 591k contracts. The shorts have actually reduced their position, covering about 18k previously sold contracts, leaving them collectively with about 836.5k contracts.

S&P 500: The benchmark index gapped higher ahead of the weekend on its way to new record highs. The gap is found between about 3205.50 (last Thursday's high) and near 3216.00 (last Friday's low). It is a potentially important technical development. It could be a breakaway gap that signals continued strong momentum. Or it could be an exhaustion gap as if the last of the Fear of Missing Out money and window dressing could wait no longer. In the context of the other technical indicators, which also look stretched and poised to turn lower, the gap may draw prices. The fact that the weekly close was above the upper Bollinger® Band (~3219.3) suggests a cautious technical view.

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