Is The Australian Dollar Signaling A Resumption Of The U.S. Dollar's Advance?

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Includes: CROC, DAUD, DEUR, DGBP, DJPY, DRR, ERO, EUFX, EUO, FXA, FXB, FXC, FXE, FXY, GBB, JYN, MXNS, OIL, SPY, TLT, UAUD, UDN, UEUR, UGBP, UJPY, ULE, URR, USDU, UUP, YCL, YCS
by: Marc Chandler
Summary

The US dollar's downside correction may have ended the middle of last week.

The FOMC left little doubt that a rate hike will be delivered next month.

Oil prices are over-extended and participants should be on the lookout for a reversal.

The S&P 500 is caught between two gaps, but technical indicators are still in favor of a continued recovery from last month's sell-off.

The US dollar strengthened following the midterm election and the Federal Reserve's signal that it intends to continue gradually hiking interest rate. The Antipodean currencies have been the strongest over the past month and the past week. The New Zealand dollar gained 1.6% to lead the majors higher over the past week, which brings to a 4.3% gain over the past month. The Australian dollar was up about 0.6% for the week and 2% over the past month. Both central banks met, but neither signaled the likelihood of higher rates any time soon, and the clear divergence from the Fed may signal the end of their bounces.

The Canadian dollar and Norwegian krone were the weakest of the majors, losing about 2/3 of one percent. Softer than expected inflation from Norway ahead of the weekend accounted for the bulk of krone's decline. Some jitters about NAFTA 2.0, the drop in oil prices and softer equity prices appeared to be the main drags on the Canadian dollar. Last week, we had expected a continuation of the uneven downside correction in the dollar. This mostly materialized in the first half of the week, while it appears to have ended, though technical confirmation is still awaited.

Dollar Index: The Dollar Index was virtually flat on the week. That means it recovered from the decline that took it to near 95.65 in the middle of the week and ended the week with the highest close since the year's high was recorded on October 31 near 97.20. The 96.00 area that it has been gravitating around marks the halfway point of last year's decline. The next significant retracement level is found near 98.00. The technical indicators, however, are not generating strong signals, warning choppy conditions may prevail.

Euro: The euro's recovery fizzled at $1.1500 in the middle of last week, and it quickly returned to the lower end of its range. Consider the low for the year was set on August 15 1/100 of a penny above $1.13, according to Bloomberg. The euro returned within 1/100 of a penny of that low at the end of October. The low before the weekend was about $1.1325. The 200-week moving average is almost $1.1315. The euro has not broken this moving average since just after the US election in November 2016. Neither the weekly nor the daily technical indicators suggest a sustained break lower is imminent. The $1.1450-$1.1500 area is still expected to contain bounces.

Yen: The dollar poked through JPY114.00 ahead of the weekend, for the first time since October 5. A decline in yields and stocks helped stall the momentum. The dollar had trended higher since October 26 when it briefly dipped below JPY111.40. The high for the year was set in early October near JPY114.55. The MACD and Slow Stochastics are extended but do not show a top, but we suspect the risk-reward has shifted for short-term trend followers and momentum players. A pullback toward JPY112.75 should not be surprising.

Sterling: Sterling's 4.75-cent rally since the end of October (that began after trading a little below $1.27 on two consecutive days) faltered last week after the US midterm election results but before the Fed's meeting concluded. The dollar's recovery and the to-and-fro on Brexit pushed sterling below $1.30 ahead of the weekend. The close was poor, and a break of the $1.2940 area would reinforce the sense that a high is in place. Last month's high was set near $1.3255, and the September high was almost $1.33. The line connecting them may start with the June high (~$1.3470) and intersects near $1.32 at the end of next week.

Canadian Dollar: The Canadian dollar was the weakest of the major currencies last week, falling about 0.75% against the greenback A little more than half the loss was recorded ahead of the weekend as risk-off took a toll on stocks. There are some jitters over reports about disputes as the final language of NAFTA 2.0 is hammered out. Directionally, the correlation between crude oil and the Canadian dollar is as strong as it often gets (~0.85 on a rolling 30-day basis and 0.75 on a rolling 60-day basis). The US dollar finished the week flirting with the CAD1.32 area, the upper end of where it has been for the past three months, and the upper Bollinger Band. The next important chart area is found near CAD1.33, and the weekly technical studies are constructive. The US dollar has been knocking on a down trendline drawn off the Q3 highs that came in near CAD1.31. It finally posted its first weekly close above it.

Australian Dollar: The Australian dollar often seems to lead the broad direction of the US dollar. Its recent bottom was before the others. On October 26, it recorded its low for the year around $0.7025. It briefly traded above $0.7300 on November 8 before reversing lower and experienced a bit of follow-through selling ahead of the weekend. The close was poor, and a high may be in place. A break of the $0.7180-$0.7200 area now would offer confirmation of this less favorable outlook.

Mexican Peso: The dollar spiked higher against the peso sparked by the referendum opposition to a new airport revers. After rallying to nearly MXN20.50, the greenback retreated to MXN19.57, nearly where it had begun. There was a collective sigh of relief by the large foreign owners of Mexico's local currency debt. However, President-elect AMLO's suggestion that banks cancel various fees, associated with retail banking, like checking and printing of account balances, exacerbated underlying fears that the new government will not be business-friendly. The dollar was turned back ahead of the weekend near MXN20.40, after surging 3.4% since the mid-week low to finish closer to the session lows. The high for the year was set in the middle of June around MXN20.90.

Oil: The reversal in oil prices has been stunning. Since reaching a four-year high in early October, the price has crashed more than 20%. The WTI contract for December delivery has fallen for ten consecutive sessions, which appears to be a record, taking the price below $60 a barrel for the first time in seven months. It has declined for the past five weeks. Of course, the technical indicators are stretched, and participants should be on the lookout for a daily reversal pattern. That said, given the volatility, the magnitude of the decline is not excessive in the sense that it remains above its lower Bollinger Band (~$59.20). A near-term corrective target could be around $62.

US Rates: The US 10-year yield eased a few basis points last week and finished below 3.20%. It got above there on the back of the employment data, but the momentum has stalled. A record indirect bid for the new 10-year at the refunding and Japan's balance of payments data showing $20 billion purchases of US Treasuries in September suggests there is foreign demand. A couple of Japanese life insurers have indicated plans to boost non-hedged holdings of foreign bonds. The December note futures appears to be carving out a range between 117-16 and 119-05. The break in the range set the day after the election (117-23 to 118-08) will set the near-term direction. The technical indicators are mixed. The two-year yield set a new cyclical high as it edged closer to 3% on November 9. The 2-10yr yield curve flattened by five basis points last week (to 25 bps), the most since last August.

S&P 500: The S&P 500 is caught between two gaps. The pre-weekend high (~2,794.1) was a little below the previous day's low (~2,794.9). The other took place the day after the election. The S&P 500 spent the last two sessions of the week working its way back to the gap. The gap was entered ahead of the weekend, but it was not closed. It extends to last Tuesday's high (~2,756.8). The close was strong and had the first weekly close above the 200-day moving average (~2,763) in nearly a month.

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.