The dollar rose against all the major currencies over the past week. The divergence meme we have emphasized has continued to unfold. The ECB eased policy at the start of the month. Less than 48 hours after the Fed hiked rates, the BOJ tweaked its asset purchase program to sustain it.
Holiday-thin markets make for more treacherous conditions than usual. The news stream lightens, and participation will fall off until January 4.
The key question for many short-term participants is whether the dollar’s downside correction of the rally that began in mid-October is complete. Given the extent of market positioning, we have yet to be persuaded by the prices that the adjustment is complete.
The Dollar Index has flirted with the 61.8% retracement of the decline that began with the ECB meeting (~99.25). There is a small downside gap created by the Dollar Index gapped higher the day after the Fed hiked. That gap is found 98.59-98.61. The technical indicators are mixed, with the MACDs about to cross higher and the RSI soft. While it is difficult to have much confidence in the near-term move, we continue to look for higher levels in the medium and longer-term. Without getting too fancy, we suspect that the June 2014 through March 2015 rally was a third wave of some magnitude. The April through mid-October was some sort of fourth wave consolidation. I suspect a fifth wave began mid-October.
The euro lost about 1.3% last week, and it tested impact support near $1.08. The 50% retracment of the post-ECB rally comes in just below there as does the 20-day moving average. A break would target the $1.0730 area (61.8% retracement objective). We have anticipated the persistence of the $1.08-$1.10 trading range for this corrective phase. Like the Dollar Index, the technical indicators we use are mixed.
The dollar recorded a big outside down day against the Japanese yen before the weekend, whipsawed by the unexpected moves by the BOJ. We see the move as largely operational adjustments that will allow the unprecedented large asset purchase plan to continue while minimizing the risks of dislocations. Japanese corporates are experiencing record profits, and their balance sheets are flush with cash. We don’t see the extension of the pre-Kuroda corporate lending schemes as significantly boosting CapEx.
The softer US bond yields and weaker stocks ahead of the weekend may have prevented more of a dollar recovery. Support is seen near JPY21, and a break signals a return to JPY120. Initial resistance pegged near JPY121.60, but the most significant hurdle is the JPY122.00-JPY122.33 band.
Sterling was sold to its lowest level since April last week. The third consecutive decline in average weekly earnings kept the pound under pressure. It had briefly traded at four-week highs at the start of the week, and with the new multi-year lows seen on December 17, a bearish outside down week was recorded. The next level of support is seen near $1.4800. However, the pre-weekend gain snapped a five-day declining streak. The inside day warns of the risk of a short-term pop toward $1.4950-$1.5000 where it may be a lower risk sale.
The US dollar hit a wall of sellers when it printed CAD1.40 after soft Canadian inflation figures before the weekend. The settlement on the lows warns of further corrective action in the days ahead. A break of CAD1.3820 signals a move back toward CAD1.3730-CAD1.3750. Canada reported poor September data, with GDP and retail sales falling 0.5%. Both are expected to have recovered in October. These reports nest week may also favor some backing and filling after the Canadian dollar fell more than 4% against the dollar (before reversing).
The Australian dollar was little changed last week though it did briefly trade below $0.7100 for the first time since mid-November. It managed to hold above the uptrend line drawn off the September and November lower. It comes in slightly above $0.7100 at the end of the year. On the upside, the $0.7250-$0.7280 may provide formidable resistance near-term.
There is little technical evidence that oil prices are bottoming. The fundamentals are negative. The end of the US ban on oil exports and the end of Iranian sanctions warns the global glut is bound to get worse. US producers brought 17 oil rigs back online, the most since July. US output has risen in five of the past eight weeks. Inventories continue to increase. The next price target is the crisis low near $32.50 (continuation contract). On a trend basis, a move toward $25 a barrel in H1 16 seems reasonable.
The US 10-year note yield pushed toward 2.32% after the Fed hiked rates. However, typically the early stage of Fed tightening produces curve flattening. True to form the 10-year note yield reversed lower to finish the week below 2.20%. The 10-year yield has spent very little time below 2 1/8% since late-October.
The losses before the weekend negated the lion’s share of the S&P 500 gain over the past week. The follow-through selling that materialized after the downside gap created by last Tuesday’s sharply higher open was filled casts a bearish pall over the technical outlook. The initial downside target we suggested last week near 1994 matched last Monday’s low a little above 1993. A break of this targets 1965.