Markets Lack Near-Term Conviction

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Leaving aside the larger and longer-term views, market participants are split over the dollar’s near-term outlook.  The steady beat of favorable US economic news will slow next week, just given the calendar.  

The focus shifts to the ECB meeting, where participants are wary of a hawkish ease.  This would mean that even if the central bank extends its purchases, as widely expected, it may signal that it is not an open-ended commitment. 

We suggest the near-term price action should be respected, which is to say that the consolidation of the dollar’s gains that we anticipated could evolve or morph into an outright correction.  What we propose to do is identify levels that could signal a genuine dollar correction drawing from technical analysis.

The Dollar Index snapped a three-week advance.  A convincing break of the 100.65,  would likely signal a deeper setback that pushes the basket to 99.70 and possibly 99.00. The technical indicators that we noted were mixed last week have all turned lower.  After the US jobs data, the Dollar Index tested a downtrend line on the hourly bar charts to set the session high.  A move above there (~101.10) would likely help blunt some of the technical negativity.

The euro rose to ten-day highs before the US jobs data just shy of $1.07.   Here too the technical indicators point to downside risk for the dollar.   However, ahead of the political events on December 4 and the ECB meeting on December 8, participants have been reluctant to buy euros, preferring sterling or the Swiss franc to play for a near-term bounce.   It is not as clean of a bottoming pattern as the potential topping pattern in the Dollar Index, but a move above $1.0710-20 would likely point to a stronger euro recovery that could see $1.0800-$1.0850.  A move below $1.06 may confirm this relatively flat consolidation.

The dollar stalled in front of JPY115, having reached JPY114.80 on December 1.  It retraced more than 38.2% of the week’s gains (from November 28 low near JPY111.35), which was found near JPY113.50.  The 50% retracement is found at JPY113.10, and the 61.8% is near JPY112.70.  The RSI did not confirm the new high, leaving a bearish divergence in its wake.  The Slow Stochastics have been moving lower, and also did not confirm the new high recorded.  The MACDs have not turned down but are set to do so early next week.

Sterling is near two-month highs.   It is flirting with the 50% retracement of the down move since early September (~$1.3445) which is found near $1.2645.  There is little between there and the 61.8% retracement ($1.2830).  The RSI and MACDs allow for additional near-term gains, but the technicals are getting stretched, and sterling finished the week above the upper Bollinger Band (~$1.2320)   There is more talk/hope of a soft Brexit, and this is understood to be sterling positive.  Supreme Court hears the government’s appeal, though no decision is expected for several weeks.

The Canadian dollar was the best performing major currency last week (+1.7%) after the Norwegian krone (1.8%).  Two fundamental considerations were at work.  First is the 11.6% rally in oil price following OPEC’s announcement.  Second is the seven basis point narrowing of the Canadian discount to the US on the two-year money.  The US dollar fell to CAD1.3255 before the weekend, a two-month low.  The five and 20-day moving averages crossed for the first time since late October.  Technical factors warn of the risk of additional near-term US dollar losses, though it closed near its lower Bollinger Band (~CAD1.3290).  A break of CAD1.3200-CAD1.3230 could spur a move toward CAD1.30.  The Bank of Canada meets next week, but policy is on steadfastly on hold.

The Reserve Bank of Australia meets in the week ahead.  Policy is also on hold.  The Australian dollar looks constructive.  Look for a move through the 20-day moving average (a little below $0.7500, and area that capped the Aussie in recent sessions), which also corresponds to a 38.2% retracement of the drop since the election.  The 50% retracement is found at $0.7545 and the 61.8% at $0.7600.

Leaving aside whether one thinks that OPEC members will really deliver the output cuts they have promised, or whether non-OPEC oil producers participate in cuts, the technical indicators in the light sweet crude oil futures warn that further price rises.  The next target is the double high from October near $52.75.  The June high was another dollar higher.  Initial support is pegged near $50.

The US 10-year yield rose to almost 2.50% on December 1, but this could have very well completed the move that began from around 1.80% before the election.  The market will have to fish for a bottom in yields.  The first place to look may be near 2.30%.  The December 10-year note futures fell to 124-11 on December 1 and finished the week nearly a big figure higher.  Technically, there is near-term scope toward 126-00. Above there is the 20-day moving average near 126-19 and then 126-28.

The S&P 500 snapped a three-week 6% advance.  The Slow Stochastics have rolled over, and the MACDs are about to turn.  The RSI is flat in the high 50s.   A push back to 2177-2180, the 20-day moving average and the 38.2% retracement of the post-election rally is the first downside target below the 2187 low on December 1.  Below there is 2170.