The strength of the US jobs report stopped the weaker dollar that was threatening to emerge. There are two risk events in the second half of next week, the UK election and Trump's decision on the December 15 tariffs. The market expects a Tory victory, allowing Brexit to proceed, and for the US to at least postpone the new tariffs. A surprise on either one would likely have significant impact on the foreign exchange market. Ahead of those events, we anticipate the dollar to recoup some more of its recent losses and the major currencies. 

Latam currencies have been under strong downside pressure, prompting intervention recently by Brazil and Chile. Latam currencies stabilized last week.They (Chile, Colombia, Brazil) accounted for three of the four best performing emerging market currencies last week. The Hungarian forint rounds out the top four. The JP Morgan Emerging Market Currency Index has edged higher in five of the past six sessions.  

After the recent sharp pullback, stocks look poised to rally into year-end. Emerging markets have lagged behind the major bourses, but could play some catch-up in a risk-on environment. The MSCI Emerging Market Index has gained 8% this year while the MSCI developed market index is up 21%.

US yields (2-yr to 10-yr) were virtually unchanged last week. Ten-year yields were lower in Europe, though the UK was a notable exception. Asia Pacific yields were higher. Gold gave back the week's gains after the US jobs report and now looks to have a running start at support near $1450. January light sweet crude oil reached almost $60 a barrel ahead of the weekend. It is the highest level in nearly three months. Optimism on trade, a larger than expected drawdown in US inventories, and indications that OPEC+ are promising to deepen output reduction helped lift crude prices.

Dollar Index

The jobs data allowed the Dollar Index to snap a five-day decline ahead of the weekend. It fell to about 97.35, a one-month low, which is also about the middle of this year's range. The pre-weekend gains carried it to approximately 97.85, retracing in one fell swoop 38.2% of the decline. The next retracements and chart points are found between 98.00 and 98.10. Also, after settling below the 200-day moving average on Wednesday and Thursday, it closed back above it (~97.65) before the weekend. It also had closed below its lower Bollinger Band (~97.50) but finished the week back inside. The MACD and Slow Stochastics are still reflecting the past downside momentum, and in the current context, they may be less of a guide. 

Euro

The euro reversed higher on the last day of November and saw strong follow-through buying to start the week in response to disappointing US ISM data and trade jitters. It peaked in the middle of the week a little above the highs set in late November just above $1.1100. Poor German factory orders data helped solidify the gap, and the US jobs data sent it back to $1.1040, almost retracing 61.8% of its bounce and returning to the 20-day moving average (~$1.1045). The technical indicators do not seem particularly helpful here, but after testing the upper end of the range, the risk is a test on the lower end, which is found in the $1.0980-$1.1000 area. 

Yen

Neither the stronger than expected US jobs data nor the rally in US equities managed to lift the greenback against the yen. The dollar has moved lower in six of the past seven sessions. The dollar posted a key downside reversal on Monday from which it was unable to recover. It set a new seven-month high near JPY109.75 before reversing lower and closing beneath the previous session's low. Follow-through dollar selling saw it slip marginally through JPY108.50 by the middle of the week, after which it moved sideways. It was unable to resurface above JPY109.00. The MACD and Slow Stochastics are pointing lower. A stronger band of support is seen between JPY108.00 and JPY108.25. 

Sterling

As the market participants were feeling more comfortable that the December 12 election will finally resolve Brexit, sterling was bid higher, pushing above $1.30, which has capped it, to about $1.3165, a seven-month high. The euro fell to a seven-month low against sterling (~GBP0.8410), and there seems to be little chart support ahead of GBP0.8300. There have been some calls for sterling to rise toward $1.35 on a Tory victory. We are concerned that much of the good news has already been discounted, leaving the market vulnerable to "buy the rumor sell the fact type of activity." In a possible scenario we have in mind, sterling would rally on the news and once the momentum stalls, some of the old longs will take profits. The technical indicators allow room for new highs. The caveat comes from the Bollinger Band.Sterling's five-session rally ended before the weekend, but the minor pullback was not sufficient to push it back into the range. It is three consecutive sessions now that it has closed above its Bollinger Band (~$1.3120). That said, as we have noted before, the Bollinger Band sometimes moves toward prices rather than prices converging with the band.

Canadian Dollar

The market got caught leaning the wrong way. The somewhat more optimistic Bank of Canada statement following its decision to leave rates steady sent the Canadian dollar sharply higher in an environment of broad US dollar weakness. The US dollar had been straddling the CAD1.33 and was sold to CAD1.3160 before the employment data. While the US surprised on the upside, Canada surprised on the downside. It was the second consecutive month that Canada lost jobs, including almost 40k full-time positions, the most in two years. The greenback quickly retraced (61.8%) of its decline and rose to CAD1.3270. It finished strongly, and it looks poised to test the upper end of its recent range that extends toward CAD1.3340. Despite the swing in the Canadian dollar, the market's expectation for the Bank of Canada policy did not change much. Before the employment data, the derivatives market reflect about a 77% chance that there were be no change in BOC policy through H1 20. Afterward, the chances were reduced to about 62%

Australian Dollar

In the first couple of sessions last week, the Aussie rallied from about $0.6755 to a little above $0.6860. It moved broadly sideways in the second half of the week between $0.6815 and $0.6860. It finished the pre-weekend session virtually unchanged. The technical indicators seem supportive, but if the uptrend does not resume, the sideways action could drag the measures lower. If a pennant formation is being traced out, it will project toward the 200-day moving average, which is found by $0.6915. If the US-China trade truce ends, the currency position among the majors that could be an outperformer is short the Australian dollar against the Japanese yen. The Aussie would likely be sold on ideas that tariffs mean slower growth and less appetite for risk. The yen would benefit from the sell-off in stocks and risk-aversion. 

Mexican Peso

The dollar began the week testing the MXN19.60 area, but pressure on other Latam currencies eased, and the equity market turned higher, and the peso takes a three-day advance into next week. The dollar finished the week below MXN19.30, near its 200-day moving average (~MXN19.2840) and retracing (~61.8%) of the rally since late October (~MXN19.2630). The technical indicators warn of further dollar weakness, and the potential extends back toward MXN19.00. The relatively high yields may attract funds over the holiday period. 

Chinese Yuan

The dollar was virtually unchanged against the yuan for the second consecutive week around CNY7.0350. The initial rally that took the dollar to almost CNY7.0750 seemed to complete the recovery. The dollar may now find support in the CNY7.00-CNY7.02 area. If the tariff truce ends, the yuan will likely weaken, not so much because of intervention but because of the policy implications and economic impact. When everything is said and done, the yuan is 2.2% lower this year, hardly enough to really offset the tariffs, and the trade figures show it.  

Gold

The yellow metal was turned back after the upside momentum faltered in front of the downtrend off the September highs. It comes in near $1480. The market appears to have a running start at support near $1450, and a break could signal a move toward $1430. The 200-day moving average (~$1405) is near the breakout from mid-year.  

Oil

Light sweet crude oil for January delivery rallied 7.3% last week, the most in six months, as the drop in US inventories was three-times larger than expected, and OPEC+ seemed to agree on an additional 500k-barrel a day cut in output. The agreement may be less than the optics suggest as some countries (e.g., Nigeria, Iran, and Russia) did not appear to be in compliance with earlier quotes that aimed to reduce output by 1.2 million bpd. Meanwhile, the US rig count continued to trend lower and slipped below 800 for the first time in more than 3.5 years. The increase in non-OPEC+ oil in 2020 may come from outside the US, such as Norway and Brazil. The Jan contract reached almost $60 a barrel at the end of last week, its best level since the middle of September and the attack on Saudi facilities. It is knocking up against its upper Bollinger Band, but the MACD and Slow Stochastics suggest the upside has not been exhausted. Above $60, the next important chart area is around $62, which is the high here in H2. The high for the year was set in April, near $64.35. 

US Rates

The inventory and jobs data before the weekend prompted Atlanta's Fed's GDP tracker to rise to 2.0% from 1.5% the previous day and 1.7% at the end of last month. The NY Fed's model is less sanguine. It sees a 0.6% growth in Q3 and not much better for Q4 (0.7%). At the end of November, the Q4 projection was closer to 0.8%. The June 2020 fed funds futures were also not on balance, impressed with last week's US data. The implied yield rose half of a basis point to 1.445% (1,55% now). The 10-year note yield rose about 2.5 bp after the jobs data. It was the third consecutive advance as Tuesday's 10 bp decline was retraced in full. On the week, the yield rose four basis points, and the technical indicators of the futures contract allow for additional losses (higher yields). The US 2-10-year yield curve steepened about six basis points to reach almost 23 bp. This is the steepest in three weeks and not far from the high for the year (June) of nearly 30 bp. The Fed's new economic projections may show most officials do not expect to have to change rates next year. 

S&P 500

From the record high set in the previous week to last week's low, the S&P 500 shed 2.6%. However, sentiment remains so bullish that the dip was seen as a buying opportunity. rather than lock in some profit. After gapping lower on Tuesday, the S&P reversed higher, leaving a hammer candlestick. It then gapped higher on Wednesday, leaving a bullish one-day island pattern. After consolidating on Thursday, the S&P 500 gapped higher on ahead of the weekend post-employment report. It came within about 0.1% of its record high. The price action suggests another leg higher. The initial potential may extend into the 3170-3200 area. However, it is soon bumping against its upper Bollinger Band (~3153). Last Friday's gap (~3119.5-3134.6) may draw prices and attract buyers. The wild card is what Trump decides on the December 15 tariffs.