Last Wednesday and Thursday, the euro posted its first consecutive gain since early September. It hit near $ 1.1625 on Thursday, stopping just below its 20-day moving average and the month’s high of $ 1.1640. The $ 1.1640 area also marks the retracement (50%) of the euro’s losses since the FOMC meeting ended on September 22. , albeit barely, for the second time only this month.
The euro hit a new low for the year on October 12, near $ 1.1525. The $ 1.1490 is roughly the retracement (38.2%) of the euro’s rally from the March 2020 low2 around $ 1.0635. The 2-year US premium on Germany rose above 100bp last week for the first time since the start of the pandemic. It has increased by around 10bp since the FOMC meeting.
The greenback has appreciated against the yen in six of the past seven sessions. It rose from around 111.45 JPY to 114.45 JPY during this period and hit a new three-year high. Indeed, its four-week rally is the longest advance since April-May 2018. The rise in US yields (last week more short than long) is the main catalyst. More and more participants are talking about new opportunities for the carry trade, but momentum players also seem to have jumped at the opportunity.
We have identified the JPY114.50-JPY115.00 area as the possible high of a new range. The MACD has continued its uptrend and is approaching the year’s high set in March and April. The Slow Stochastic looks set to fall earlier next week after entering overbought territory. Initial support is now visible in the JPY113.00-JPY113.25 area.
The British pound had a good week, gaining 1% against the dollar to hit its best level in one month (~ $ 1.3775). It is up 2% this month, helped by aggressive support from UK short-term rates. Specifically, the implied yield on the December 2021 short-sterling futures contract rose 8.5bp last week, its sixth weekly advance, in which the rate jumped 24bp as market prices surged. increased before the end of the year.
There are two remaining meetings (November 4 and December 16). Momentum indicators are trending higher and the five-day moving average has crossed 20 days for the first time since mid-September. Pre-weekend gains near $ 1.3775 kissed the upper Bollinger Band. Look for pound resistance in the $ 1.3800 to $ 1.3850 area, which holds the retracement (50%) of its decline from the June 1 high when it last traded above $ 1.42, the 200-day moving average and trendline connecting May and September highs. Initial support is now probably in the $ 1.3650-1.3670 area.
The US dollar fell for the fourth consecutive week against the Canadian dollar. Since last month’s FOMC meeting, the Canadian dollar has been the strongest major currency, appreciating about 3.25% to its best level in three months. At the end of last week, the US Dollar approached the head and shoulder configuration measurement target that we are tracking for this project at around CAD 1.2300. The greenback has exceeded the retracement target (61.8%) of its rally since the multi-year low was set on June 1 near CAD1.2000, which rose slightly above CAD1.2365.
After diving below CAD 1.2340 before dropping back to CAD 1.2400. The MACD is at its lowest level for a few months but does not seem ready to recover. On the other hand, the Slow Stochastic has stabilized in oversold territory. Initial resistance is seen in the CAD1.2430 area. Since the Bank of Canada meeting on September 10, the June 2022 BA futures contract has sold and the implied yield has increased by around 28bp. It consolidated in the second half of last week. The swap market is anticipating a tightening of around 75bp over the next year.
The Australian dollar rose nearly 1.5% last week and finished above $ 0.7400 for the first time in more than a month, matching the retracement (38.2%) of the down from May high of nearly $ 0.7900. It traded above its upper Bollinger Band daily for the past week and closed above (~ $ 0.7415) for the second straight session before the weekend. Booming commodity prices are widely seen as a supporting factor, but they didn’t seem to do much good to the Aussie during the June-August period.
The economic reopening helps explain why the market may look past bad data, like the September jobs report. The Aussie has fallen in just three sessions so far this month and looks stretched. The MACD is overbought and is at its highest level in five months. The Slow Stochastic is also overbought and could decline next week. Initial support below $ 0.7400 is around $ 0.7375 to $ 0.7380. On the upside, last month’s high was closer to $ 0.7480.
The greenback’s four-week rally against the peso ended in style. It fell nearly 1.7% last week, the biggest weekly loss since June. The dollar hit a new marginal seven-month high just above MXN 20.90 on October 12, reversed lower and fell to MXN 20.32 ahead of the weekend, a new low for the month. Two factors helped the peso to recover. First, the tone of most Banxico officials and the minutes seemed to increase the chances that the central bank could raise rates by a quarter point more than previous moves. Second, the appetite for risk has been strong, which has helped drive stocks higher.
The MSCI Emerging Market Equity Index rose for the second week in a row after falling for the previous four weeks. Momentum indicators are heading lower for the dollar. With the pre-weekend drop, the greenback has shed just over half of its gains since the mid-September low (~ MXN 19.85). This retracement was found a little below MXN20.38. The next retracement (61.8%) is approximately MXN 20.25.
On October 14, the PBOC fixed the exchange rate of the yuan against the dollar at a level lower than what the models suggested (Bloomberg survey). The spread was large enough to suggest that officials may be signaling that they did not want to see a continued appreciation of the yuan. The market seemed to ignore this and took the yuan to a new four-month high before the weekend. Some observers link the return of foreign flows to the Chinese stock market to the strength of the yuan. The PBOC’s claim that the risks posed by Evergrande are “controllable” and unlikely to spread is precisely what other central banks said when the housing market bubble burst in 2007-08.
Investors seem suspicious and have taken other high yield Chinese bonds (mainly in the real estate development sector at around 20%). Given the slowing economy and low consumer inflation, we suspect officials don’t want the yuan to get much stronger from here, but to impose their will, it may need to step up. efforts. Initial dollar support could be in the CNY6.4200-CNY6.4250 range, with CNY6.45 the ceiling likely close.
This article was written by Marc Chandler, MarctoMarket.