The US dollar had a good week, appreciating against all the major currencies but the Swiss franc, and most emerging market currencies, with a couple of notable exceptions, including the Turkish lira and the South African rand. However, the dollar’s gains seemed to be more a function of negative developments abroad rather than positive developments in the US.
The market continued to pull back expectations for the trajectory of Fed tightening. The implied yield of the December 2019 fed funds futures fell 3.5 more basis points after a 14.5 bp decline the previous week. Ahead of the weekend, the yield touched its lowest level since early September. The benchmark 10-year yield slipped a couple of basis points over the course of the week, bringing the three-week decline to 17 bp and pushing the yield to spitting distance of the psychologically important 3.0% level.
Although global stocks continued to move lower, and yields eased, the most dramatic move happened with oil. It is was the seventh consecutive weekly decline. The WTI for January delivery reached a four-year high in early October a little over $76.55 a barrel. It reached a low at the end of last week just above $50, shedding 11% over past four sessions. Those losses pushed the price beyond the 50% retracement (~$51.50) of the two-year recovery. The 61.8% retracement is near $45.50.
Technically, the market is over-extended. The latest developments, including the US unwillingness to isolate Saudi Arabia, despite the large steps toward energy independence and the continued build of US inventories, helped fuel the continued sell-off. The market is still reeling from the unexpected exemptions granted to Iran’s largest oil customers from the US embargo. Reports indicate more US capacity will come online next year. A move above $55-$56 would begin to stabilize the technical tone.
Dollar Index
The Dollar Index closed at the week’s high near 97.00. There is a band of resistance that extends to 97.20. The 61.8% retracement of the recent drop is seen a little above 97.05. The downside correction ended on November 20 and was marked by an outside up day, where it traded on both sides of the previous day’s range and closed above the previous high. The price action also reinforces the significance of support in the 96.00 area.
