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The US Dollar Finally Buckles

US Investment Grade Yields
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EDITOR NOTE: Technical analysis can sometimes sound confusing to non-technical readers, but it doesn’t take a genius to observe basic support and resistance levels. This week, the dollar continued to sink, breaking below another support level. Its next critical support price is around 90.94--a low that was briefly touched in 2017. Will the dollar bounce at that level or will it continue to fall? If it violated this low, then we’re looking at an even lower support price near the 88.00 range--the dollar’s 2018 lows. Whatever the technical case may be, fundamentally, the dollar is in trouble. We know it, you know it, and apparently, the whole world knows it too. In contrast, de-dollarization is on an uptrend, and so too is gold over the long-term.

Markets

The US dollar finally succumbed to all the pressure this morning. The trade-weighted greenback changes hands below 91.73/91.75 support. The former is the 76% retracement level of the 2018-2020 dollar rally while the latter is the 2020 low. A sustained break lower would set the stage for a fresh bout of dollar weakness. The mirror image in EUR/USD shows the pair in the high 1.19-zone for the first time since early September, charging for an attack of EUR/USD 1.2011 (YTD high)/1.2102 (76% retracement of 2018-2020 decline) resistance. USD/JPY sinks back below 104. US eco data could be pivotal. Better than expected November PMI’s temporary saved the US currency last week. This week we’ll get the Chicago PMI (today), manufacturing ISM (tomorrow), ADP employment change (Wednesday), weekly jobless claims, non-manufacturing ISM (both Thursday) and nonfarm payrolls (Friday). Next week then sees the final Fed meeting of the year with last week’s Minutes suggesting new (stronger) guidance on the central bank’s (net) asset purchases. Since June, the US central bank has been buying $80bn Treasuries and $40bn mortgage securities each month and they promised to do so “over coming months”.

Most Asian stock markets cede ground this morning (up to -1.5%) with China escaping the drop. November China PMI’s beat forecasts (composite at 56.4 from 56.2) while the PBOC unexpectedly injected liquidity to the system (see headline). The Chinese yuan is somewhat softer even against a weak dollar. USD/CNY trades just below 6.60. General risk sentiment is soured after Reuters reported that the Trump administration aims to add more Chinese companies to a list of firms blocked from American investment. Core bonds trade with a small upward bias with European futures pointing at a softer opening. A more guarded risk sentiment could temper the dollar’s faint, though that traditional negative correlation wasn’t really strong of late. Brent crude falls below previous resistance ($47.3/b) after an informal OPEC+ meeting didn’t yield the longed-for deal to delay the tapering of production cuts by one quarter from January 2021 to April 2021. Oil ministers hold the official scheduled conference today and tomorrow.

EUR/GBP on Friday tested the psychological 0.90 mark, but a break higher didn’t occur. Sterling takes the upper hand this morning after the Telegraph reported that the EU and UK seemed to settle their trade dispute on fisheries, removing at least one hurdle to a last-minute accord. EU leaders meet this week to discuss the next budget and pandemic-related fiscal support, but their gathering could also be used to discuss the state of brexit talks in case of a breakthrough.

News Headlines

The EC is working on proposals to make it easier to remove non-performing loans from banks’ balance sheets as it braces for an insolvency surge next year after several support programmes fade out. Among the ideas floated are measures to enhance the secondary market for the sale and purchase of bad loans and a network of national bad banks. Head of the ECB supervision Enria’s proposal for a European-wide bad bank fails to gain traction.

China’s PBOC injected 200bn yuan through its medium-term lending facility (1 year) at an unchanged rate of 2.95% and said it would conduct another operation in December to roll over loans maturing that month. The unexpected move is seen as trying to calm down market nerves after a series of bond defaults. The PBOC also injected a net 110bn yuan via reverse repo’s on Monday.

In a draft plan seen by the FT, the EU wants to bury the tensions of the Trump era with the US and urges it to seize the “once-in-a-generation” opportunity to build a new global and strategic alliance to protect its interests against “authoritarian powers”, including the likes of China. The paper proposes new cooperation on digital regulation over tackling Covid-19 to deforestation.

Originally posted on Action Forex

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