US Dollar, Stocks, Bonds Rally – US 10-Year Yield Falls Below 3.0%

Summary: Stocks, bonds, and the US Dollar rallied into the G20 weekend leaders meeting in Buenos Aires. At the meeting’s conclusion, US President Trump and China’s Xi Jinping agreed not to impose additional trade tariffs upon each other for 90 days while talks are being held. The Dollar Index (USD/DXY) rallied above 97.00 to close 0.42% higher at 97.32 (96.98 Friday). EUR/USD fell 0.7% while the British Pound slipped 0.4%. Wall Street stocks rallied with the US S&P 500 jumping 0.8% to 2764.00, it’s biggest weekly gain in 7 years. Global bond prices rose. The US Ten Year yield slipped to close at 2.99% from 3.03%. Brent Crude Oil prices slid 1.4% to US$59.10 (US$60.00 Thursday).

 

  • EUR/USD – closed lower at 1.1315, trading to a low of 1.1305, just above the 1.13 crucial support level. Late last week, the multi-currency dropped to 1.1267, matching yearly lows. Euro-zone Annual Headline and Core CPI data were a tad lower than expected. German Retail Sales missed forecasts with a -0.3% reading for November against 0.4% expected.
  • AUD/USD – finished 0.3% lower at 0.7312 on general USD strength. The Aussie rallied on Friday to a near-4 month high at 0.7344 as risk appetite grew into the G20 leadership summit. Hopes for a China-US trade agreement buoyed risk sentiment.
  • US S&P 500 – jumped to close 0.8% higher for its best weekly performance since December 2011. Optimism on a trade deal between Trump and Xi Jinping in Buenos Aires lifted Wall Street.

On the Lookout: Markets face an eventful and data packed week ahead which culminates with the US Payrolls on Friday. This may well be one of the busiest weeks for the year before markets start to slow down into the December holiday season. For today, one can see Australia building approvals while China, Japan, Spain, Italy, France, Germany, Switzerland, the Euro-Zone, UK, Canada, and the US report on their respective manufacturing PMI data for November 2018.
FOMC members, Richard Clarida, John Williams and Randall Quarles all have speaking engagements. Fed Chairman Jerome Powell speaks anew on Thursday (early Sydney) as he addresses the Joint Economic Committee of the US Congress.

Trading Perspective:

  1. EUR/USD – The recent slowdown on Euro area economic data has weighed on the multi-currency. Euro-zone Headline and Core CPI were both printed lower-than-forecast. Technically the Euro has failed to breach the 1.1400-20 resistance area on the topside while a test if 1.1300 is on the cards. Tonight sees further data out of the Euro area as they report on their respective Manufacturing PMI’s. Market sentiment is bearish – a clean break of 1.1300 could yield 1.1200. The political climate in Europe is still fragile as the Italian government grapples with its budget. Weekend riots in Paris to protest high fuel taxes and rising living costs highlight the fragile environment. However, the last CFTC report (week ended Nov 27) saw net speculative Euro short bets increase to -EUR 55,100 contracts from the previous -EUR 47,200. The net Euro short bets are the highest reported since January 2017. Which is a warning sign that the Euro shorts are getting crowded and a squeeze higher is likely. If 1.1260-1.1300 holds we could see this back to 1.1500 again. Likely range today 1.1280-1.1380, look to buy dips. 
  1. USD/JPY – This pair rallied a touch, climbing to 113.55 from 113.45 on Friday. A rise in risk appetite on Wall Street’s optimism on the US/China bilateral meeting at the G20 on trade lifted the Dollar against the Yen to an overnight high of 113.72. USD/JPY has strong resistance at the 114.00-10 level which has held firm since early October when we hit 114.50-ish. I was in Tokyo last week for a short holiday and met with my ex-Japanese trader colleagues and they predict that without yield support, USD/JPY won’t break 114.00. Speculators are also short JPY contracts. The latest CFTC/Reuters report saw net speculative JPY shorts increase to -JPY 104,300 contracts from the previous -JPY 100,100. Total net speculative JPY shorts are the largest since February this year. Another danger sign that the short JPY trade (long USD/JPY) is getting crowded. Look for a likely trading range today of 113.10-70. A break of 113.10 will yield 112.60.  
  1. USD/DXY (US Dollar Index) – This Pair closed firm at 97.32, up 0.7% which mainly reflected the fall in EUR/USD. The Euro takes almost 60% of the basket of foreign currencies against the US Dollar in the Index. Euro area and Eurozone economic data have slowed with many leading indicators missing forecasts. That said, US data has not been consistently beating forecasts either. Germany’s Retail Sales dropped to -0.3% from a previous gain of 0.1. US Housing data continue to see dismal performances. US Pending Home Sales slumped to 2.6% in November (against a forecast gain of 0.8%). Net speculative USD long bets increased in the week ended November 27. Likely range for the Dollar Index today is 97.00-50. Look to sell rallies. Without yield support, it’s hard to see USD/DXY rallying any further. 
  1. US Ten Year Bond Yield – This Bond fell 4 basis points to 2.99% from 3.03%. At the start of November the US 10-year Bond Yield was 3.15%. The markets verdict on Jerome Powell’s latest speech, although he didn’t change much, was dovish. While the Fed is expected to hike rates this month, the outlook for further rate rises in 2019 is less likely. Powell’s speech to the US Congress Joint Economic Committee mid-week will be closely watched. The US Ten Year bond yield has been trading between 2.97 and 3.24 since mid-September. It’s difficult to see that range break just yet although the pressure now remains on the downside, with 2.80 in sight.

 

 

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