The US dollar has been sold hard in the second half of December through last week. Regardless of one's medium or longer-term views, the technical indicators warn that the sell-off is stretched and in need of consolidation, if not a correction.
The dollar index has formed a shelf near 91.75. Recall that the 91.55 area, which was briefly violated last September, marks the 50% retracement of the 2014-2016 rally. The 61.8% retracement is near 88.40. A move above 92.30 may be needed to lift the tone. We see the 92.60-92.85 area as an important area. The RSI has already begun moving higher and the Slow Stochastic is set to turn higher. The MACD remains soft.
The euro approached last year's high, and even with the disappointing headline US jobs report, the euro's advance stalled. Important support is seen near $1.20, and a break would signal a move toward $1.1955 initially. The RSI did not validate last week's high, while the Slow Stochastic appears poised to turn lower early next week. The MACD looks to take a bit longer to cross over. On the upside, the $1.2165 area corresponds to a 50% retracement of the drop from the 2014 high. The 61.8% retracement is near $1.26.
The dollar ended last week with a three-day advance against the yen, which is the longest streak since the end of November. It held the 100-day moving average, which is found near the JPY112 chart support. The greenback bounced smartly to test a trend line drawn off early November and late December highs. It is found near JPY113.20 at the start of next week. The next hurdle is seen in the JPY113.65-JPY113.75 area. The technical indicators are mostly constructive, though the Slow Stochastic has not turned higher.
Sterling briefly poked through $1.36 but stopped well shy of the last September's high near $1.3655. Initial support is seen near $1.3500. The technical indicators appear stretched but not as much as the euro and dollar index. A slew of UK data will be reported next week and Q4 growth seems largely on pace with Q3. There are also widespread expectations of a cabinet reshuffle as early as next week. Sterling may respond positively (vs. euro) on signs that the hardline camp is weaker. There has been much talk of the strong foreign demand for UK Gilts, and next week's external account may be a useful reminder that a good part of inflows is simply the mirror image of the trade and current account deficits.
The Canadian dollar surged before the weekend in response to another stellar jobs report. The strength of the jobs report increased speculation that the Bank of Canada will hike rates when it meets on January 17. The US dollar was sold through CAD1.26 at the end of last year and CAD1.24 after the employment data. The CAD1.2390 area corresponds to the 6.18% retracement of the US dollar rally from last September's low near CAD1.2060, and the lower Bollinger Band. Substantive chart support is not seen until closer to CAD1.22. The RSI is stretched and the MACD is getting there, but the Slow Stochastic is bottoming and likely to turn higher next week.
News of a sharp deterioration of Australia's trade balance in October and November simply managed to stall the Australian dollar's climb. The Aussie was trading near $0.7500 in early December and finished the year near $0.7800. The gains were extended to almost $0.7870 before the trade report. Initial support in the $0.7835-$0.7840 area was tested. The RSI has turned down, and the MACD is poised to do so in the coming days. The MACD needs more work. A break of $.07760-$0.7780 is needed to boost confidence a top is in place. Note too that the Australian two-year yield is set to fall back below the US two-year rate (as was the case for most of the first half of December).
Amid a synchronized global upturn, a few supply shocks have helped jack up oil prices. WTI for February delivery rose 2% in the first week of the New Year. The 2.5 year high was set near $62.20 before profit-taking was seen ahead of the weekend. Before the bout of profit-taking, February crude closed above its upper Bollinger Band for two consecutive sessions. The RSI turned down and the Slow Stochastic is set to do the same. Here too, the MACD needs some more work. Watch the five-day moving average (~$62.20), which the contract has not closed below since the middle of last month.
The US 10-year bond yield is consolidating in a new and higher range of 2.40%-2.50%. The March note futures contract is bouncing in a trough marked by 123-12 on the downside and around 124-00 on the upside. The technical indicators are not generating robust signals at the moment, but given the risk that upcoming data show a tick down in CPI and slower retail sales growth, we suspect the risk is on the downside in yields (upside in price).
The S&P 500 gapped higher Wednesday and Thursday last week as the market advanced every session last week for a 2.6% gain. The NASDAQ rose 3.4%. These are the best weekly performances in a little over a year. The S&P 500 had edged lower in the last week of 2017 (-0.35%), but before that the last week this benchmark fell was in the week ending November 17. Obviously, at record highs, talk about resistance is spurious. Technical indicators are stretched, but only the downside gaps and the Bollinger Band suggest a cautious stance. The S&P 500 finished the last two sessions above the upper Bollinger Band (~2726).
In another way, last year's pattern carried into this year. The Russell 1000 Value Index rose 1.7% in the first week of the New Year, while the Russell 1000 Growth Index gained 3.3%. The Russell 1000 Growth Index had one losing week in Q4 17 and it was the last week of the year (-0.4%). The outperformance of growth over value is near the most extreme since the tech bubble, even while the directional correlation (conducted on the level of the two indices) remains strong (0.91 past 60 sessions).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.