News that the US Administration would, in fact, impose tariffs on steel and aluminum on national security grounds seemed to weigh on the dollar, but the dollar-bloc currencies still struggled. Brexit uncertainty weighed on sterling. Here is the near-term technical outlook for the dollar, placed in the context of macroeconomic and political developments.
Investors have much to digest. The new Chair of the Federal Reserve appears to have finally convinced the market that the FOMC’s call last December for three rate hikes was probably right and that there is a greater chance of four hikes than only two.
Investors also have to contend with US tariffs on steel and aluminum justified on national security ground. Although we argue the most likely scenario is not a tit-for-tat retaliation but a WTO challenge, the risk of a trade war is not inconsequential.
Meanwhile, accumulating data suggests the global synchronized growth, which was a key theme at the end of last year and the start of this year, may be easing. Some real data has confirmed the softness seen in the numerous surveys. At the same time, after recovering for the past couple of weeks, equity markets slid over the past week, renewing anxiety.
Many ask about the proverbial put that the Federal Reserve seemed to have under Powell. Given that the valuations are judged to be elevated, Fed officials have taken the recent jump in volatility in stride. However, should market disruptions materially impact the economy or threaten the Fed’s mandate, officials are likely to respond. To say the same thing in the vernacular, the put exists, but the strike is lower.
The Dollar Index reached almost 91.00 on March 1, the highest level since January 18 before selling off. At the highs, it was threatening the upper Bollinger Band for the first time in four months. However, it met a wall of sellers, around the time that the tariffs were announced. There were follow-through losses, and the Dollar Index retraced 38.2% of the rally since February 16 (~89.10) and the 20-day moving average near 89.80. It closed poorly, and the next support is seen in the 89.25-89.60 band. The MACD and Slow Stochastics have not turned down like the RSI, but the MACD could cross lower next week.
The euro was sold through $1.22, which was the neckline of a possible double top. It closed below it on Wednesday and saw additional selling on Thursday that briefly nicked the 38.2% retracement of the euro’s advance since early last November (~$1.21750). The euro was sold to levels last seen in the middle of January. However, it recovered sharply, and posted a key reversal, closing about Wednesday’s high.
Follow through buying ahead of the weekend (and the political events in Germany and Italy) and surpassed the 20-day moving average (~$1.2325). The euro the 38.2% retracement (~$1.2310) of the recent setback The next target is $1.2355 and then $1.2400. Although the weekend political events may elicit a reaction, the technical indicators favor the upside.
The dollar was moving lower against the Japanese yen since running out of steam near JPY107.70 on February 27. The high from the previous week was around JPY107.90. What appeared to push the dollar below the JPY105.55 low from February 16 was comments from BOJ Governor Kuroda. He suggested that the policy framework would be re-examined in April 2019 and that policy can normalize before the inflation is hit.
The market took this as a fresh hawkish sign, though we suspect next week’s BOJ meeting and press conference will correct this impression. The dollar fell to JPY105.25. Important psychological support is seen at JPY105. The technical indicators mixed, but do not seem to prevent additional losses. If there is a double top near JPY108, and the neckline near JPY106 has been convincingly broken, the measuring objective is near JPY104. BOJ Governor Kuroda could use next week’s press conference to better clarify the meaning of his recent comments that spurred speculation of the end of the extraordinary monetary policies before the 2% inflation target is reached.
Sterling was among the poorest performing major currencies last week, losing about 1.2% against the dollar. The main driver was Brexit not economic data or expectations for the Bank of England. Prime Minister May’s position is increasingly challenged. Some Tory rebels reportedly are supporting an amendment to a trade bill that requires her to negotiate remaining in the customs union. Other Tories have lobbied hard for a quick, clean and decisive break. The EU itself has provided a draft agreement which May summarily rejected.
With the latest decline, sterling tested the 50% retracement (~$1.3690) of the rally since early November. The technical indicators warn of downside risks, and the next retracement objective is near $1.3540. However, sterling closed firmly ahead of the weekend, and a move above $1.3850 would begin repairing the technical damage.
The weak dollar environment may mask sterling’s weakness. The euro rallied strongly and reached its best level against sterling in more than three months. It finished the week a few ticks above the upper Bollinger Band. The technical indicators suggest that this may be a breakout, in which case GBP0.9000 is the next target, but further out, the potential is toward the high from, last August near GBP0.9300.
The Canadian dollar was the weakest of the major currencies, losing almost 2% against the US dollar. It was the second weekly decline and the fourth in the past five weeks. The US dollar has risen about 5.3% against the Canadian dollar since the end of January and is testing the CAD1.2920 area that capped it in Q4 17. That area corresponds to 50% retracement of the greenback’s losses since last May/ A convincing move above there would target CAD1.30 on the way to CAD1.3130, the 61.8% retracement objective.
The technical indicators are getting stretched but do not stand in the way of additional US dollar gains. The one note of caution is coming from the Bollinger Bands, where the greenback is pushing through the upper band (~CAD1.2870). Also, the US dollar has risen for ten of the past 11 sessions against the Canadian dollar, which is unusual.
The Australian dollar went into the weekend with a four-day losing streak. It has weakened eight of the last 11 sessions. With the losses below $0.7740, it has given back more than 61.8% of the December-January rally from about $0.7500 to $0.8135. The technical indicators are soft, and further losses appear likely. The $0.7650-$0.7700 is the next technical target, and recovery back through $0.7780-$0.7800, would remove the downside pressures.
Oil prices fell almost 3.3% last week and managed to avoid a four-day losing streak by a late recovery before the weekend. Light sweet crude oil for April delivery approached $60 a barrel, a two-week low, before rebounding, perhaps helped by the heavier dollar. A break would target the February lows near $58. A larger than expected oil inventory build in the US appeared to have gotten the ball rolling. US crude inventories have risen in four of the past five weeks for a total of almost 12 mln barrels. Also, OPEC output has been lower than usual due to Venezuela and UAE.
Falling stocks and some inflation concerns (which to the extent they are linked to tariffs on steel and aluminum) seem misplaced or exaggerated, Powell’s testimony saw the US 10-year yield consolidate below the recent high near 2.95%. On the downside, the yield did briefly slip below 2.80%, but the generic yield was virtually unchanged on the week at 2.86%, and only with the help of a five basis point increase before the weekend. The March futures contract rose through the resistance we identified at 121-00, but prices reversed and look poised to retest the lower end of the range near 120-00. The market may be hesitant about pushing it much lower ahead of the US employment data at the end of next week.
The S&P 500 lost nearly 2.5% last week, but it started the week gapping higher. It filled the gap as part of Turnaround Tuesday’s reversal. Stocks were under pressure prior to the tariff announcement. The lows for the week were recorded on Friday (~2647.3) before a smart rebound of nearly 2% and returned to the 20-day moving average (~2697.2). The 38.2% retracement of the week’s drop is found just above there at 2701.5. The S&P 500 held above the 61.8% retracement of the bounce from the mid-February swoon. If it were to go below there (~2630), the medium term technical outlook would deteriorate. Otherwise, we think recovery from the last month’s sell-off continues.
The Russell Value 1000 Index fell 2.0% last week. It fell 5% in February. The Russell Growth 1000 Index fell 1.9% last week and lost 2.8% in February.