Rates Still Key to Dollar’s Outlook

Gold dollar key

The US dollar rose against most of the major currencies last week. The exceptions were the Australian and Canadian dollars, which remained resilient in the face of higher US rates and weaker Chinese imports. Some attribute the Aussie’s and Loonie’s gains to the fourth consecutive weekly gain in oil and the CRB Index.

The US 10-year yield rose for its second consecutive week. It has moved from 1.54% at the end of September to 1.80% in the middle of last week before consolidating for the past two sessions. Like the 10-year yield, the 2-year yield rose to four month highs near 89 bp. It has risen for three consecutive weeks.

The backing up of US rates cannot simply be reduced to expectations of a hike before the end of the year. By Bloomberg’s calculation, those odds have risen from 50.6% at the end of September to 56.6% now. Inflation expectations also appear to be rising. The 10-year breakeven (the difference between conventional yield and the TIPS) have risen steadily since mid-September when it was below 1.50%. It almost reached 1.7% last week, a six-month high.

Another market measure is the five-year five-year forward. It too reached a six-month high. It is consolidating after pushing through 1.86%.

The Dollar Index rose to its best level since March. It reached the high in the second half of last week by briefly poking above 98.00. Initial support is seen near 97.40. Recall that it closed September a little above 95.45. The RSI, MACDs, and Slow Stochastics allow for additional gains, but the levels are getting stretched. The Dollar Index is also bumping up against the upper Bollinger Band that is found near 98.00. In technical analysis the crossing of the 50- and 200-day moving averages have special significance. The 50-day average is set to cross above the 200-day average next week.

The euro broke below this year’s uptrend line, which is found by connecting the January, June, and July lows. It comes in a little above $1.1035 to start the new week and finishes a little below $1.1050. Initial resistance is seen in front of previous support near $1.1080. The next immediate target is the July low by $1.0950. Technical indicators give scope for additional euro declines, but the readings are approaching extremes and the lower Bollinger Band is at hand (~$1.1023).

The dollar has risen against the yen for three consecutive weeks. It is the longest streak in nearly five months. The dollar closed several sessions above the 100-day moving average for the first time since February. The increase in US rates seems to be the driver. The greenback edged above the September high (~JPY104.30), but has not made a clean break, perhaps due to the proximity of the 61.8% retracement (~JPY104.45) of the dollar’s decline since seeing JPY107.50 on July 21. Above here, the next target is JPY105, then JPY105.60. Support is seen near JPY103.20-JPY103.40.

UK Prime Minister May may not be able to sell a hard Brexit to the House of Commons or a soft Brexit to other EU countries. Sterling suffers, and its weakness is no longer taking place as interest rates fall and stocks outperform. After the flash crash, sterling spent the week largely consolidating around the middle of the flash crash range. The spring is coiling. Wednesday’s range was within Tuesday’s. Thursday’s range was within Wednesday’s range. Friday’s range was within Thursday’s. Often this pattern is a continuation pattern. A break of $1.2080 would be significant. On the other hand, a High Court ruling giving Parliament the right to vote on May’s Brexit strategy could see a bout of short-covering. A move above $1.2375 is needed to signify anything of technical importance.

The US dollar posted a downside reversal against the Canadian dollar on October 13 and saw follow through selling on October 14. For the first time here in October, the greenback closed below its 20-day moving average. Technical indicators warn of additional downside risk in the days ahead. The low thus far in October was set near CAD1.3070. The US dollar has not traded below CAD1.30 since early-September. The risk to this negative technical view comes from the Bank of Canada meeting on October 19. Without easing policy, it may be more dovish than the market expects.

The Australian dollar remains impressively resilient. It made a new low for the move on October 13 near $0.7500 as buyers emerged after the two cent pullback since the last test on the $0.7700 nemesis. The next day it had completed a 61.8% retracement of this month’s losses (~$0.7630). The technical indicators appear to be consistent with another run at $0.7700.

The US 10-year yield finished the week just below 1.80%, the highest since early June. The yield has risen for two consecutive weeks. The next target is near 1.90%, but the technical condition warns that the yield is unlikely to make it that far before a correction. The December note futures closed near its session lows before the weekend, after slipping through 130-00. Initial support is seen in the 129-12 to 129-17 band.

The November light sweet crude oil futures contract spent the week consolidating within the $49.15 to $51.60 range set at the start of the week. Since the middle of last month, the contract has rallied nearly $10, and technically is stretched. The RSI is flat but elevated. The MACDs are about to turn lower, while the Slow Stochastics have already turned down. Initial support is seen at the lower end of last week’s range, while a break would signal a move toward $48.75, and possibly $47.90.

The S&P 500 had a poor close before the weekend, but it failed to lend support to the US bond market. It was the second weekly decline after a three-week advance. The bounce off the October 13 low near 2114 saw follow through buying on October 14, lifting the S&P 500 to almost 2150 before the bears showed their hand. The technical indicators allow for a push back toward 2114 and possibly a little lower. However, a new low may complete the short corrective phase. On the upside the 2150 area is important.

A discussion of the speculative positioning in the futures market can be found on our Mind on the Markets blog here.