Dollar Bears Tighten Their Grip

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The consolidation/correction in the US dollar that we anticipated on technical grounds was brief and shallow.  A series of developments seemed to play into the bear’s hands.  The developments from the shift in how China sets the reference rate,  the wariness of some to expand its Treasury holdings, to less super-long bond buying by the BOJ and a more hawkish twist in the record of last month’s ECB meeting all seemed to provide new grist to sell the greenback.  The UK appears to have won over support from Spain and the Netherlands for softer terms for Brexit and this helps send sterling sharply ahead of the weekend after having fallen to two-week lows the previous day. 

Sentiment toward the dollar remains nearly uniformly bearish.   In fact, we suspect the way the market responded to the news developments probably says more about psychology and sentiment then it does about the actual developments. That fact that even the comments from the Bundesbank President Weidmann that interest rate hikes were not imminent failed to spur much of a reaction in the euro.

The Dollar Index is slid below the 91.00 low set early September last year.  A convincing break warns of potential toward 88.50.  Another technical calculation suggests that the chart formation since September projects toward 90.00.   The euro is stretched and below the lower Bollinger Band (~91.25). This and the  Slow Stochastics suggests some near-term caution may be in order, but the RSI and MACDs warn that the downside remains the path of least resistance.

The euro rose through last year’s high before the weekend. It was bid through $1.22 in light Friday afternoon activity in the US. The euro’s pullback in the first part of the week held $1.19, which was also the 20-day moving average.  The euro finished well above the upper Bollinger Band (~$1.2130), and coupled with the extended positioning may favor near-term caution, but the momentum suggests that higher levels should be anticipated.   We see potential for the euro to rise into the $1.25-$1.27 area from a technical perspective.

The dollar frayed the JPY111 level but managed to close the week above it.  It approached the low from late November near JPY110.85.  If this area is convincingly violated, the next technical target is near JPY110.  The technical indicators are mixed and not generating a clear signal.   A move above JPY112.00 would help lift the tone.

Besides the soft US dollar environment, sterling was also aided ahead of the weekend by reports suggesting Spain and the Netherlands are more sympathetic to the UK’s situation and seek softer terms of Brexit.  Sterling rose to through $1.37 after finishing last year just above $1.35.  Sterling is approaching the 61.8% retracement objective of the losses that followed the referendum in June 2016 (~$1.38).  Near there is the 38.2% retracement of sterling’s losses since mid-2014 (~$1.3885).  The surge in the last two sessions has left sterling above its upper Bollinger Band (~$1.3660).  Besides that, the technical indicators appear mostly constructive.  The $1.36 area, which had acted as resistance, may now offer support.

The fear that the US may withdraw from NAFTA weighed on the Canadian dollar.  However, the greenback’s bounce fizzled near CAD1.26, a tad more than the 38.2% retracement of the down move since December 19. The Canadian dollar’s pared the week’s losses, though it still lost about 0.5%,  making it the only major currency that lost ground against the dollar last week.  The market seems to be nearly as sure as it can be (~88%) that the Bank of Canada will deliver a 25 bp rate hike on January 17.  A break of CAD1.2440 could spur a move to CAD1.2375.  A break warns of the risk of a return to CAD1.20.

The Australian dollar’s 0.7% rise last week extends the advance for a fifth week.  Strong building approvals and retail sales on the back of US dollar weakness underpinned the Aussie.  It traded above $0.7900  for the first time since last September, and the $0.8000 are beckons.  Of these five major currencies, we provide technical analysis for, the Australian dollar looks to be the most vulnerable.  The Slow Stochastics are rolling over and the MACDs appear poised to do the same in the coming day.  A close below $0.7850 would be the first sign of weakness, but it may take a break of $0.7800 to be convincing.

Oil prices continued their march higher.  Falling US inventories, reports that OPEC is showing greater restraint than it had promised, coupled with the weaker dollar, helped lift WTI for February delivered by nearly 5% last week.  The February was bought on the small pullback before the weekend and closed on its session highs.  The four-week nearly 12% advance has left the technical indicators stretched, but only the Slow Stochastics are turning lower.  A close below $63 may be needed to encourage ideas that a top may be in place.

The US 10-year yield rose to near 2.60% in the middle of last week and spent the second half of the week consolidating.  A move back below 2.50% would be disappointing for the bond bears.   The price of the continuation contract of the 10-year Treasury note futures fell to six-year lows at the end of last week.  The technical indicators give little reason to believe that a low of any importance is in place, but the inability sustain the downside momentum despite the slightly firmer than expected CPI and firm retail sales (prompting the Atlanta Fed’s GDPNow tracker to increase its Q4 estimate to 3.3% from 2.8%) may be a warning of a coming bounce.

In the first nine sessions of 2018, the S&P 500 gapped higher three times, including before the weekend.   This illustrates the powerful momentum at work.  In this period the S&P 500 has only had one losing session (January 10 when it lost 0.1%).  The technicals are stretched but there no compelling sign that a top is imminent.  Growth stocks marginally outperformed value stocks last week.  The Russell 1000 Growth Index rose 1.6%.  Since the end of September, this index has fallen on a weekly basis once and that was the last week of 2017 when it surrendered 0.4%.  It is up nearly 5% here in 2018.  The Russell 1000 Value Index rose 1.6% last week after 1.7% the prior week.  Although the divergence was minor in recent days,  the outperformance of the Growth over Value is the is making new extremes since the tech bubble in 2000.