The dollar’s technical tone is mixed. Contrary to our expectations, the dollar-bloc currencies underperformed. Still, the Dollar Index gained for its fourth consecutive week. The 10-year Treasury yield flirted with 2.80% before recovering toward the middle of the recent range. The dollar continues to be pinned in its trough against the yen, but given unfolding scandal, the approaching fiscal year end, and risk-off sentiment may continue to support the yen.
Investors remain convinced that the Federal Reserve will lift its interest rate target when its meeting concludes on March 21 with new forecasts and a press conference. Recent disappointing data, especially average hourly earnings, and retail sales, coupled with a core CPI that has been stuck at 1.8% for three months has seen some investors come to accept our view that the Fed is unlikely to signal four hikes this year, even if some of the doves revise up their hikes from two to three. The Atlanta Fed’s GDPNow tracker and several money center banks have revised their Q1 GDP estimate to below 2%.
The Dollar Index is taking a four-week advancing streak into the week ahead. It is the longest advance since last October. Yet it is not really rallying as much as consolidating the decline that began the year. In fact, the Dollar Index remains slightly below where it finished last month. The technical indicators collectively appear somewhat supportive, but the 91.35-91.40 band seems to be blocking a run at 91.00., which is the key to any meaningful recovery.
The euro was slightly softer for the second consecutive week. ECB’s Draghi and Praet’s insistence on continued patience (with the current monetary settings) coupled with a slight downward revision to the February CPI (1.1.% from 1. 3% in January and an initial estimate of 1.2%) weighed on the euro over the past three sessions.
Still, the euro is up a cent since the start of March. The trendline we identified last week, drawn off the February 2 high held on the mid-week test, which increases its significance. It is found near $1.2345 at the end of next week. The technical indicators are not generating a strong signal but seem to favor some more softness. The $1.2250-$1.2270 offers initial support, while a sustained break of the $1.2155 area is needed to confirm a top.
In the second half of February, the dollar could not overcome offers near JPY108. Here in the first half of March, it struggles at JPY107. Several factors have encouraged investors to keep the dollar in its trough against the yen.
The unexpected decline in US 10-year yields, briefly below 2.80% on the prospects of weaker US growth did the greenback no favors. A scandal in Japan may see an important proponent of Abenomics forced out of office (Finance Minister Aso?) and weaken Abe. There may be some seasonal pressure due to the coming fiscal year end, though in the week ending March 9, Japanese investors were buyers of foreign bonds since last August.
The dollar recorded the lows for the week ahead of the weekend near JPY105.60. Bloomberg has it finishing the week at JPY106.00. JPY105 is psychological important in part because it is seen the last significant hurdle before a test on JPY100. While the dollar has been chopping in a fairly narrow range, the technical indicators have corrected. It seems that onus is on the dollar to take out resistance. Otherwise, the JPY105 area will be tested.
Sterling rose against the dollar for the second consecutive week even though the investors reduced the chance of a BOE rate hike in May from a little more than a 75% chance to a little more than 2/3. Here in March, Bloomberg data shows only two sessions in which sterling has fallen against the dollar. Sterling has also done well this month so far against the euro.
The $1.40 level was flirted with last week hit what appeared to be a wall of offers. Sterling backed off, briefly dipped below $1.39 before the week but closed firmly, and is positioned now, to have a running start at a re-test. A break would initially target $1.41 but would also lift the medium-term outlook. Some investors may be cautious ahead of indications where the EU Summit will allow Brexit negotiations progress to the next stage.
Our reading of the near-term technical indicators of the Canadian dollar was dead wrong last week. Rather than be among the strongest currencies, it was by far the weakest, losing 2.2%. The central bank still wants to remove accommodation, but cautious is the operative word given the domestic and foreign risks.
The US dollar rose to new nine-month highs against the Canadian dollar and took out the CAD1.30 level that had previously checked the advance. It finished the week on its highs just below CAD1.31. The CAD1.3130 area corresponds to the 61.8% retracement of the greenback’s decline from CAD1.38 last May. We suggest the next target after the retracement objective is near CAD1.3250.
After climbing to its best level in several weeks in the first half of the week, the Australian dollar fell hard in the last two sessions. The two-day decline was the largest since mid-2016. The losses saw Aussie trade briefly at the lowest level since the end of last year.
Weakening metal prices and a general risk-off mood, coupled with a central bank that appears to be in no hurry to raise rates may be the main culprits. The discount to US rates has widened and will continue to do so. The losses undermined the technical outlook and near-term potential extends toward $0.7650. Large speculators in the IMM futures are net short Aussie for the first time in two months.
The May light sweet oil futures contract successfully tested support near $60 in the first part of last week before turning higher. The nearly 1.9% gain ahead of the weekend, helped perhaps by news of much stronger than expected US manufacturing output (1.2% vs. median estimates of 0.6%) ensured the second consecutive weekly advance and the fourth in the past five weeks. The weekly close above $62 and the technical indicators suggest near-term scope for another dollar or so advance. The highs from late February are found near $64, and this is the main technical obstacle for a run at the highs near $66 seen at the end of January.
Soft US economic data appears to have spurred short covering in the 10-year Treasury note futures market. The bears covered nearly 90k previously sold futures contracts, which was roughly quarter of the gross short futures position. The 10-year yield briefly dipped below 2.80% but finished the week in near the middle of the 2.80%-2.90% range, which even if fray, remains in play. Technical indicators are not generating a strong signal, though the rule of alternation would imply that since the lower end of the yield range held, market participants may now turn to test the upper end of the range.
At the start of last week, the S&P 500 had traded at its best level since gapping lower on February 2. However, a potential key reversal (outside down day after making new highs for the move) on Tuesday saw follow-through selling over the next couple of sessions. The market tried in vain to fill a downside gap from the higher opening on March 9. The failure to fill the gap may have encouraged new buying before the weekend. The technical indicators are mixed, but a break of 2735-2740 likely signal a test on 2700, if not 2650.
The Russell 1000 Value Index lost 1.28% last week (S&P 500 -1.25%), and it is now slightly lower on the year. The Russell 1000 Growth Index fell 1.45% and is still 6.1% higher since the end of last year.