Gains Ahead of the Weekend Lift Dollar’s Technical Tone

The US dollar gains in the wake of the jump in hourly earnings and a decline in the underemployment rate reversed what had been losses for the week.  The gains appeared to mark the end of a downside correction that began in mid-August.  The S&P 500 posted its second weekly loss since the end of June.  Has a corrective phase begun?  

The US dollar rose against the major currencies last week.  The sole exception was the Swedish krona. More than a third of its 1.15% weekly advance was recorded ahead of the weekend in what appeared to be position-squaring ahead of the September 9 election.

The Dollar Index rose 0.25% last week, owing to the pre-weekend gain, and snapped a three-week decline.  It made a new low for the week before rallying on the jobs report that showed a new cyclical high in average hourly earnings growth.  It proceeded to rise above the previous day’s high (~95.20), and closed above it, leaving a bullish reversal pattern in its wake.  The 20-day moving average (~95.50) and the recent high (95.70) pose the near-term hurdles.   A move above the latter would signal a likely run back toward the year’s high near 97.00.  A break of the pre-jobs data low (~94.85), on the other hand, signal a deterioration of the technical tone.

The euro underperformed ahead of the weekend, and due to that weakness (-0.6%), it finished lower (-0.4%) on the week.  Poor European data, including and especially disappointing German factory orders, industrial production, and exports, coupled with idiosyncratic developments elsewhere saw the euro sold on the crosses. Of note, the euro fell to its lowest level in more than a year against the Swiss franc ahead of the weekend.  For the past two, and a half weeks, the euro has carved out a $1.1530-$1.1730 trading range. The lower end of the range ( ~ $1.1520also corresponds to the 50% retracement of the euro’s recovery from the August 15 test on $1.1300.  A break of that area likely points to a return to $1.13, though initial support may be seen near $1.1465, the 61.8% retracement.  Note that there are several billion euros in options expiring early next week struck at $1.15.

The dollar recovered against the yen before the weekend after initially falling to three-week lows below JPY110.40 in the immediate response to the Trump’s suggestion that the US may focus on its bilateral trade with Japan next.  Since late July, with only a few exceptions, the dollar has been in a JPY110-JPY112 range. It finished the week near the middle of the range. The inverse correlation between the dollar-yen exchange rate and the risk assets, like the MSCI Emerging Markets, has changed.  Both the rolling 30- and 60-day correlations (on levels) are now positive.   

After falling to its lowest level since August 20 (~$1.2785) in the middle of the week, sterling reversed higher and closed above the previous day’s high.  The bullish pattern saw follow-through buying and sterling briefly traded above $1.30 ahead of the weekend.  The strong US data proved too much, and sterling was stopped ahead of last week’s high near $1.3040.  It closed poorly (1.2920), retracing half of this three-day bounce, and left a bearish shoot star candlestick. There may be some support near $1.2880, but a break of $!.2830 would signal the resumption of the downtrend. The euro, which had tested the GBP0.9100 area in late August approached GBP0.8900 before the weekend to record its lowest level since mid-August.   That corresponds to a 38.2% retracement of euro’s rally since the mid-April low near GBP0.8620.  The 50% retracement is found near GBP0.8860 and the trendline off the April, May, and June lows interests near GBP0.8845 at the end of the week ahead.  

The US dollar rose 1% against the Canadian dollar last week.  It was the largest gain in three months.  Two-thirds of the gain was registered before the jobs data at the end of the week. The US dollar encountered strong sales when it poked through CAD1.3200 on September 6 and staged a key downside reversal.  There was follow through greenback selling but was exhausted near the 38.2% retracement (CAD1.31) of its rally from the late August low (a little below CAD1.29).  The US dollar appears to be tracing out a flag pattern or a pennant, which is seen as a continuation pattern.  This points to stronger US dollar, suggesting potential toward CAD1.34, the highs seen in the second half of June.  

Perceptions that trade tensions are escalating and interest rate differentials undermine the Australian dollar.  It too had been posting small gains before the US jobs data.  The 1.15% fall before the weekend, that took it to its lowest level since March 2016 (~$0.7100). It closed on its lows and below its lower Bollinger Band (~$0.7135). Although some of the technical readings are getting stretched, there is nothing that suggests an important low is at hand. In the larger picture, we have been watching a double top on the weekly bar charts from September 2017 and January-February this year near $0.8125-$0.8135 and a neckline around $0.7500.  The objective is roughly $0.6900.  

The October light sweet crude oil futures contract fell a little more than 2.8% last week.  Supply issues dominated.  There were estimates that OPEC (Saudi Arabia) has boosted output. The storm that had threatened the US Gulf had lifted October oil to $71.40 subsided and unwinding those gains may have contributed to the momentum.US oil inventories may be being drawn down in general, but not in Cushing.  Stocks there have risen for the fourth consecutive week and the build over this period is the most since April.  The October futures contract recorded new three-week lows before the weekend (~$66.85), which met the 61.8% retracement objective of the rally from the mid-August low (~$64.00).   The close was firm, near session highs, the technical indicators do not give much confidence that a low is in place.  

In July and August, the US 10-year yield tested the 2.80% area.  This seems to mark the lower end of the range.  The yield was boosted by the strong hourly earnings contained in the jobs report.  Also, next week is the last week that companies can use last year’s tax rate to deduct costs of topping up pension funds, which appear to have been a part of the strong demand for Treasuries and strips (separating the principal from the coupons).   Yields look poised to probe the 3.0% area again.  The September note futures tested the 119-23 area, which is the 61.8% retracement of last month’s rally that peaked on August 22 (120-24).  The technical tone is weak, and momentum is on the downside.  The 119-00 area beckons.

The S&P 500 began September with a strong rally in tow.  It had fallen in only one week since the end of June.  Over this period it gained about 7.35%.  Last week’s pullback (~1%) managed to approach a 50% retracement objective (~2859.5) of the last leg up that began on August 15.  It briefly traded below the 20-day moving average (~2868.4) for the first time since then but closed above it.  The Slow Stochastics and MACDs warn that the low may not be in on this pullback.  The downdraft in recent days was sufficient to close the gap created by the higher opening on the August 27, which had also appeared on the weekly bar charts.  There is another gap that had been created by the sharply higher opening on August 16, and it may attract prices.  It is found between 2827.95 and 2831.45.  The 38.2% retracement of the summer rally (from the end of September) is near 2830. The first sign that the correction is over may be a move above the five-day moving average (now ~2887).