The US dollar broke higher against the yen to start the year. It traded up to JPY116.35, its highest level in five years. However, within a few days it became clear that it was a false breakout. The dollar moved back within its old range (~JPY113-JPY115 +/- 0.5 yen). Indeed, the greenback finished last week near JPY113.65.

If the dollar is going to weaken, the euro is a major beneficiary. After trading mostly in the $1.12-$1.14 range since mid-November, the euro broke higher and set a two-month high on Jan. 14 slightly below $1.1485. This break also proved to be a head fake, too.

Frustratingly, correlations like the yen and US rates, as well as the Canadian dollar and US stocks, have broken down. That said, risk-off sentiment has broadly lifted the yen to the top of the major currencies through the first three weeks. It is up about 1.2%.

The Canadian dollar is second best, with an almost 0.8% gain. 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. 

On the other hand, emerging market currencies as an asset class have done well. The JP Morgan Emerging Market Currency Index has risen for three consecutive weeks to start the new year. This matches the longest advancing streak in 2021. Latam currencies account for three of the top five performers.

The Chilean peso is the world's best with a 6.7% gain. The South African rand is second, appreciating by about 5.6%. Peru and Colombia are next (~4.4% and 3.1%, respectively). 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%). 

Dollar Index

The bounce in the Dollar Index we anticipated after the key reversal materialized (Jan. 14) but stalled just above the (50%) retracement objective (~95.75) of the decline from the Dec. 15 high near 96.90. The trendline from that high and early January highs comes in around 96.00 and is also the next retracement (61.8%) target.

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. A move above 96.00 would target 96.40 initially.

Although intraday penetration of the 20-day moving average (now around 95.75) occurred, DXY failed to close above it. Initial support is seen in the 95.25-95.40 area. A break of 95.00 warns of a push lower, probably below the Jan. 14 low (~94.65).

Euro

After approaching $1.1485 on Jan. 14, it was sold back to $1.1300 ahead of the weekend, the middle of the old $1.12-$1.14 trading range. The trendline off last year's low (~$1.1185 on Nov. 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.

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. On the other hand, a break of $1.1280 would be a blow to the late longs.

In the futures market, speculators added to their gross long position for the fifth consecutive week in the reporting period ending Jan. 18. At almost 212 thousand contracts, it is the largest gross long position since last August. The bearish speculators have reduced their gross short position for the last four weeks, and at about 187.3 thousand contracts, it is the smallest since late September.

Japanese Yen

After falling from JPY116.35 on Jan. 4 to JPY113.50 on Jan. 14, the dollar bounced last week and flirted with JPY115 on Jan. 18. 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.

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. The MACD is falling but the Slow Stochastic is moving sideways near its recent trough. A break could spur a test on the early December lows near JPY112.50.

British Pound

Sterling looks particularly vulnerable. It finished last week on its lows and below the 20-day moving average for the first time since Dec. 21. Recall that after rallying more than a nickel from mid-December to mid-January, it stalled near the 200-day moving average (~$1.3735). Since posting the three-month high on Jan. 13, sterling fell in five of the next six sessions. T

he retreat brought it to spitting distance of the (38.2%) retracement objective found near $1.3530. A break would bring the next retracement (50%) into view around $1.3460. 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.

The market has priced in a slightly greater chance of a BOE rate hike on Feb. 3, now a little above 90%. 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-19 restrictions will be lifted. 

Canadian Dollar

The US dollar's high for 2021 was recorded on Dec. 20 near CAD1.2965. It subsequently sold off to about CAD1.2450 on Jan. 13. 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.

The market is more confident after the December CPI report that the Bank of Canada will hikes the target rate 25 bps on Jan. 26. Over the past week, the market increased the amount discounted to almost three-quarters from slightly more than half on Jan. 14. The near-term risk is on the US dollar's upside, and we suggest two targets.

The first is the CAD1.26 area, which is the neckline of the head and shoulders topping pattern (which projects to around CAD1.2250). The second is the CAD1.2640-CAD1.2650 area, which corresponds to a (38.2%) retracement of the sell-off since Dec. 22 and the 20-day moving average. The US dollar has not closed above the 20-day moving average since Dec. 28.

Australian Dollar

The Aussie climbed three cents from early December through Jan. 13. 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.

The MACD is flat but appears to be rolling over. The Slow Stochastic did not confirm the mid-January high, leaving a bearish divergence, and it is moving lower. A break of the $0.7150 area could signal another half to three-quarters of a cent decline. 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.

The Australian dollar, however, has been particularly strong against the New Zealand dollar, rising to levels not seen in around six months. The cross is closed above the upper Bollinger Band for the past two sessions. Initial support is seen around NZD1.0650. More important support is near NZD1.06, which is also the neckline of a “W" pattern on the weekly charts. If valid, the measuring objective is close to NZD1.09.

Mexican Peso

Of the half dozen most active Latin American currencies, the Mexican peso is the worst performer so far this year after the Argentine peso. 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. 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.

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. It carved a low at the beginning of last week near the 200-day moving average (MXN20.29). It appears that some momentum traders moved to reduce their short dollar exposure.

The greenback peaked around MXN20.5665 on Jan. 20, the third consecutive daily advance, the longest in nearly two months. Despite the risk-off mood ahead of the weekend, the peso strengthened by around 0.3%. The market has about 200 bps of tightening priced in for the next 12 months. The next Banxico meeting is Feb. 10.

Chinese Yuan

Despite reductions in the one- and five-year loan prime rates, signals of a more accommodative monetary policy going forward, and banks being encouraged to step up their lending, the yuan remained strong. Indeed, ahead of the weekend, the yuan rose to its highest level against the dollar since May 2018.

There seems to be two broad explanations for the yuan's strength. First is China's record trade surplus. It reached $94.5 billion in December alone. Of course, most invoices are not in yuan, yet the exporters costs are, so there is the conversion of export proceeds. Second, and perhaps under-appreciated, is the outperformance of Chinese stocks and bonds.

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. The 10-year yield is off six basis points this year to 2.70%. The US yield is up 24 bps to 1.75% this year.

The yield on the 10-year German Bund is up almost 12 bps, and at 0.13%, the 10-year Japanese government bond yield has doubled. Sure, China's interest rate premium has narrowed, which may exclude a market segment, but other portfolio investors see value. Recall the US dollar low in 2018 was set in March near CNY6.2430.