Greenback Looks Vulnerable

Canadian Dollar: 

The US dollar reversed lower on January 2 and did not look back, through the flash crash and the equity market and oil gyrations. The US dollar fell nearly 2% against the Canadian dollar last week, for only the second weekly loss since the end of September. The sell-off is was sufficient to push the five-day moving average below the 20-day moving average for the first time since early October. The US dollar is testing a trend line from the late September and November lows that comes in near CAD1.3360 at the start of the new week. Additional support is seen near CAD1.3330. The move looks exaggerated, and we suspect a dovish tone from the Bank of Canada when it meets on January 9. 

Australian Dollar:

The flash crash saw the Aussie drop from just below $0.7000 to about $0.6740 according to Bloomberg, and then it proceeded to rally strongly to close higher on January 3 and follow-through buying on January 4 brought it above $0.7100 and the 20-day moving average in a month. The $0.7145 area corresponds to a (61.8%) retracement objective of December's slide that began near $0.7400. The technicals look more constructive than the fundamentals, and a move toward $0.7200 cannot be ruled out.  

Oil:

Front-month Brent and WTI oil futures contracts are starting to the new week with a five-day rally in tow. The key to the February WTI contract is the $50 mark. A move above it would complete a bottoming pattern that projects into the $57 area. The five-day moving average has been below the 20-day moving average since mid-October. It could cross above toward the end of this week, with a little luck. The drop in price will curb new investment, while the Saudi's seem intent on fulfilling its commitment despite the risk of being targeted with new tweets from Trump.  

US Rates: 

The latest forecasts by the Fed indicated that officials could be patient and raise rates twice this year after four times last year. No fewer than seven Fed officials, including the Troika of Powell, Clarida, and Williams, the leadership, speak in the days ahead. When they say patience now, they appear to be signaling that it will not raise rates in March. The Fed funds futures strip reflects a market that thinks the Fed cycle is complete. We are not convinced that the Fed agrees with that assessment. While officials are willing to reconsider the unwinding of the balance sheet, we suspect there will be material change until later this year. We would pencil in an end of the balance sheet unwind this year or early next year. The drop in US yields leaves bonds rich, and this could impact the participation in the upcoming auctions. The March note futures looks set to fall toward 121-00, which would put the generic yield closer to 2.80%.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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