Uneven Dollar Correction May Continue

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Includes: FXA, FXB, FXC, FXE, FXY, OIL, SPY, TLT, UUP
by: Marc Chandler
Summary

The dollar's pullback has not alleviated the overextended technical condition against some pairs.

There is heightened near-term uncertainty in part due to conflicting trade signals and equity market volatility.

10-year U.S. yields look poised to retest recent highs. Mind the gap in the S&P 500.

Source: Dreamstime.com

The US dollar turned in a mixed performance last week. Favorable economic data and a recovery in equities helped the Antipodean currencies advance the most. The New Zealand dollar rallied nearly 2%, and the Australian dollar gained 1.5% on the week. Their central banks meet next week, but there is little chance of a change in policies. Hopes of an EU-UK agreement lifted sterling a little more than 1%. The euro was little changed. The funding currencies, which are often confused as safe havens - namely, the Japanese yen and Swiss franc - were the weakest of the majors, losing 1.1% and 0.65% respectively. The outcome of the US midterm election and the FOMC meeting are next week's highlight. These events coupled with confusing, if not contradictory, indications on trade from the US administration, undermining near-term conviction. The inability of the S&P 500 to sustain the recovery momentum also leaves investor confidence fragile. The technical condition that had warned of the risks of a correction has not been alleviated by the dollar's pullback.

Dollar Index: The year's high was recorded in the middle of last week near 97.20 before a sharp sell-off took it a little below 96.00, which corresponds to a retracement objective and the 20-day moving average. A strong jobs report and reports suggesting the ECB was considering a TLTRO (which Draghi had identified at the recent ECB meeting as a possible measure if needed), helped the dollar index recover to 96.60, which marks a 50% retracement. A move above 96.75 would likely signal the start a run to new highs.

Euro: The prospect that a trade war between the US and China could be averted helped the euro recover after it came within 1/100 of a cent of the year's low, which was set in mid-August. We assume that, given the strong divergence in play, the euro's correction would be part of its latest leg down rather than of the larger move that began in late September. The move we think is being "corrected" began on Oct. 16 near $1.1620. The euro's recovery faded (~$1.1455) as it recouped nearly half of what it had lost. If this area is overcome, $1.1500 comes in view. The close before the weekend was soft, back below $1.1400. A break of $1.1350 may signal a move to new lows. The next important technical target is a little below $1.12.

Yen: It appeared that the recovery in equities and US Treasury yields weighed on the yen. For the last five weeks, the dollar has alternated between gains and losses against the yen. Over the period, the dollar is slightly weaker (JPY113.20 vs. JPY113.70 at the end of September). The technical indicators suggest follow-through gains in the coming days. Although there are some intermittent resistance levels, the major hurdle remains at JPY115.

Sterling: A powerful short squeeze lifted sterling a little more than 3.25 cents against the dollar on some optimism on a Brexit deal and hopes of a trade agreement between the US and China. Sterling stopped in an important technical area (~$1.3030) that corresponds to a retracement objective of its last leg down and the 100-day moving average. The MACD and Slow Stochastics are turning higher but the price action ahead of the weekend was poor. How it acts in the $1.2870-$1.2900 area may help clarify the technical picture.

Australian Dollar: The Australian dollar had spiked to almost $0.7000 on October 26 and recovered smartly to $0.7100, which at the time boosted our confidence in a downside correction for the US dollar. The Aussie set a high ahead of the weekend near $0.7260 before reversing sharply and to close below $0.7200. It appears to be a mirror image of the previous week's close. The technical indicators remain constructive, but a break of the $0.7150 may turn them lower. A move above the 100-day moving average (~$0.7270) removes the last obstacle in the way of $0.7400.

Canadian Dollar: The trading range between the US and Canadian dollar's last week was at its narrowest in a couple of months, and at the close, it was little changed (~CAD1.3110). The greenback slipped to a new low for the week before the jobs and trade data (~CAD1.3050). US jobs data were stronger than Canada. Also, the first monthly trade surplus since the end of 2016 in August was revised away, and the balance remained in deficit in September. Resistance is seen in the CAD1.3180-CAD1.3210 band. The US dollar has not closed above CAD1.32 since July.

Oil: December WTI plummeted 6.6% to bring the four-week collapse to almost 16%. The price is near three-month lows (~$62.60). It closed below the 200-day moving average (~$65.35) for the first time in a year. It needs to resurface above there or risk additional losses. The next target is near $61 and then $57.50. Output appears to be increasing among the major producers, and the US is granting last-minute exemptions for eight countries to still buy Iranian oil.

US Rates: The US 10-year yield rose 13 bp last week, fully recouping the previous week's decline, plus some. It closed a little above 3.20% for only the third time in the cycle. The high for the move was set on Oct. 10, almost at 3.26%. The yield rallied 8 basis points after the jobs data despite the weaker equity tone, which is the most in a month. The 10-year note futures bottomed near 117-16 on Oct. 8 and rallied to 119-06 on Oct. 26, and was trending lower before recording an outside down day ahead of the weekend (trading on both sides of the previous day's range and settled below the previous session's low). The impulsive nature and the magnitude of the decline point to a return to the lows (high yield). The two-year yield roughly 10 bp resulting it a slightly steeper yield curve, which around 31 bp is above its 100-day moving average *(~28 bp). Three-month LIBOR continues to creep higher. It rose 6 basis points last week to 2.58%. It is the 11th consecutive weekly rise, which began with the rate near 2.31%.

S&P 500: The S&P 500 gapped higher on Wednesday. The gap was narrowly entered before the weekend but remains open. It is found between Tuesday's high (~2685) and Friday's low (~2700). An outside day was recorded before the weekend, but the close was neutral. Initially, we expected it to be a measuring gap, which would imply a move to 2800. However, it could still turn out to be a normal gap that is filled shortly. The technical indicators are stretched - the MACD and Slow Stochastics have yet to turn higher. The 200-day moving average is near 2765; resurfacing above it would lift sentiment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.