Key Chart Patterns in FX

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The foreign exchange market has been an island of stability even as the equity market becomes more volatile.  We review the technical outlook for the dollar, oil, 10-year yields and the S&P 500, within the context of fundamental factors.

There are several dominant patterns in bilateral US dollar exchange rates.  It might be helpful to focus on these as the macro investment climate has become unhinged with the US threatening to escalate the already elevated trade tensions.  Indeed, the trade tensions, which have contributed to the rise of equity market volatility, have left the currency market largely nonplussed.

Three-month volatility in the euro (~6.6%), yen (~7.7%) and sterling (~7.7%) are all below the 20-day moving averages (6.9%, 8.2%, and 8.1% respectively).  The same pattern holds true for the Canadian (7.4% vs. 7.6%) and Australian (8.0% and 8.4%) dollars.

Euro:  There are two dominant technical considerations.  The first is that the euro has been in a fairly well-defined range since mid-January of $1.2200 to $1.2450. There have been a few exceptions, but the euro has not closed outside of that range in over a month, and then, in early March, it was on the downside.

The second dominant technical consideration is an uptrend beginning a year ago when it became clear that populism-nationalism was not going to sweep across Europe.  That trendline drawn off last April’s lows and connecting to last November and December lows now is found a little above $1.2250   The daily technical indicators are less constructive than the weeklies.  With the lower end of the range and trendline holding, a bounce toward $1.2375-$1.2400 should not surprise.

Yen:  The dollar appears to be trying to bottom against the yen.  It posted a key reversal on March 28.  There are some dollar bullish divergences among the technical indicators we look at, and the dollar appears to have traced out a head and shoulders bottom pattern.  The neckline is found around JPY107 and has a measuring objective near JPY110.   The dollar found support near JPY107 ahead of the weekend despite the pullback in US yields and drop US stocks.   A move below JPY105.70 would negate the pattern, but a break of a trendline drawn off the March 28 low, which comes in near JPY106.35 on Monday and rises to JPY107.10 on April 13, would be an early warning sign.

Sterling:    Since the ides of March, sterling has been mostly confined to a $1.40-$1.42 range.  It threatened to break out to the downside on April 5 with a low near $1.3965 but was saved by the escalation of trade tensions with Trump’s threat to retaliate against China’s retaliation. If the broader dollar weakness helped stabilize sterling, it was not sufficient to convincingly push it through the nearby ceiling near $1.4100.

Canadian Dollar:  The US dollar appeared to have traced out an head and shoulder top pattern and penetrated the neckline at CAD1.28.  The pattern that was formed mostly in March projects to around CAD1.2475.  That target is beyond the 61.8% retracement of the US dollar’s rally in February and the first half of March (CAD1.2585) and is near the lesser used 76.4% retracement (~CAD1.2455).  A move back above the neckline would undermine the validity of the pattern.

Australian Dollar:  The Australian dollar fell almost a nickel from its late January high near $0.8135 to its low at the end of March.  It remains stuck in its trough, reaching an eight-session high on April 5 (~$0.7625), but was turned back for the third time since mid-March in front of the 20-day moving average (~$0.7630). The technical indicators are supportive, but the unenthusiastic price action warns that the downside risks may not have been exhausted, which is reflected in the technical studies on the weekly bar charts.   A break of $0.7600 sets the stage for a test on what is likely to be more formidable support near $0.7500.

WTI:  Light sweet crude for May delivery fell 4.6% last week, bringing the two- week slide to 6%.  It closed at its lowest level since March 19, a below the $62 support, which is also where a trendline off the mid-February and mid-March highs was found.  The technical indicators are trending lower.  The next support is seen near $60.   A break of $58 would warn of risk toward $50.

US Rates: The US 10-yield was a largely 2.80%-2.90% range from early February through late-March.  Nearly everyone was expecting a break to come to the upside, but it has come to the downside.  The yield reached almost 2.70% at the start of last week and climbed to nearly 2.84% before falling back ahead of the weekend.  The yield still rose on the week (four basis points), for the first time since the first full week in March.  However, it closed below the 2.80% old floor.  The June note futures contract held support near 120-16 and looks set to rechallenge the recent high near 121-12.

S&P 500: The sharp pre-weekend losses and poor close (just above the 200-day moving average and near session lows)  will weigh likely weigh on Asian and European markets at the start of the new week.  The S&P 500 may gap lower. The earnings reporting season kicks off proper on April 18 with Alcoa, and the main economic data is the CPI, where the core may resurface above 2.0% for the first time in a year.    This means that there is little to distract investors from the deteriorating technical condition.  A break of 2585 likely signals a retest on the mid-February low a little below 2533.