Assessment of the Dollar’s Technical Condition Into the End of the Year

While few will be trading in the week between Christmas and New
Years, we thought it might be helpful to
review the dollar’s technical condition. 
 We make two overall points. 
First, although
the dollar’s rally strengthened and extended after the November US election,
this leg up of the dollar’s longer-term rally began at the end of Q3.  
T
he anticipation of new
policies by the Trump Administration, part of the story, but other forces that
were also impacting, such as the divergence of
monetary policy.  The US economy was approaching the Fed’s targets, and the December hike was telegraphed
in earnest starting in September (when we had thought a hike was likely).
 



The eurozone economy is expanding near trend, but the
low price pressures meant that it was premature to expect the ECB to abandon
its asset purchase operations.
  It is more difficult to assess BOJ
monetary policy, which shifted toward targeting the 10-year yield.  The
BOJ appears to be buying fewer JGBs, so its balance sheet growth has slowed.
  Perhaps the significance will be better appreciated if the rise in US
rates continues to exert a pull on
Japanese bond yields.  

Second, the technical readings are getting stretched and the technical indicators suggest a correction is in the offing.  Thus far, where they have occurred, the dollar
pullbacks have been shallow, and mostly shy of
technical retracement targets.  The dollar’s rally has truly climbed
a wall of worry.  As they have for several weeks, many remain concerned
that the market is getting ahead of itself.  Trump, they say, will be
unable to deliver the kind of fiscal stimulus the market expects.   Also, they argue that the market is gone a long distance toward pricing in three
Fed hikes next year.   Investors who put much stock in the dot plots could
be disappointed (again). 
Nevertheless,
the value of appreciating the technical condition of the market is that allows the quantification of the risk. 
 It is far from perfect, to be sure, and admittedly,
it is more an art than a science (though some would say the same about
macroeconomics), but it can assist in risk (money) management. 
Most broadly,
the Dollar Index rose in four of last week’s five sessions. 
 It has risen seven of the past 10 sessions and 10 of the past 15.  It has
risen for three consecutive weeks, and in six of the past seven, and nine of
the past 12 weeks. This could be a
definition of an uptrend.  Yet a yellow light is flashing, meaning that
the market is likely to have a proper correction soon.  The Slow
Stochastics and MACDs are about to turn down.    
What level
would the Dollar Index have to break to suggest
a correction is at hand? 
 The 102.50 area is notable.  It
corresponds to recent lows and a 38.2%
retracement of the rally since the Fed’s hike.  A break of that area could
signal potential toward 101.00-101.50. 
The euro did
fall to new multiyear lows last week near $1.0350, but that seemed to be more a
function of thin trading. 
 Consolidative trading, even if
choppy, characterized the euro’s price action.  It closed little changed
on the week.  A  move above $1.0510 would likely signal that the consolidation
is morphing into a correction.  That level corresponds to a 38.2%
retracement of the drop since the Fed’s hike.   Above there, the
$1.0550-$1.0570 area beckons, but corrective potential extends toward as
$1.0675. 
The dollar
broke down to JPY116.55 after finishing the previous week near JPY118, but it
happened at the start of the week.  
And for the rest of the week, the greenback consolidated at
higher levels, spending practically no time below JPY117.00.  It appeared
the dollar was tracing out some wedge of pennant formation, which is most often continuation patterns.
 However, our reading of the technical indicators suggests that maybe it is not a wedge but a gradual grind lower.
The downtrend is clear.  It comes in near JPY117.65 at the start of next
week and JPY117.50.  The technical indicators are consistent with a retest
and possible break of JPY116.50.   The next target is in the
JPY115.25-JPY115.50, which corresponds to retracement objectives and congestion
area from earlier this month.  
Sterling fell
each day last week.
  It was the worse performing major
currency, losing 2% against the dollar.  It has fallen in 12 of the past
15 sessions in this three-week slide that has taken it to its lowest level
since early November.  It has the feel of year-end
related adjustments more than fundamentally driven, though the rate discount to
the US is historically large.   How it performs near $1.2200, which is the
61.8% retracement of the rally since the flash crash in early October.  A
break could send it back into the $1.2080 area.  The technical indicators
are not in agreement.  The MACDs recently turned lower, but the Slow
Stochastics are overextended to the
downside. The RSI is tracking prices lower. 
After sterling,
the Australian and Canadian dollars were the poorest performers among the major
currencies last week (-1.7% and -1.4% respectively). 
 Although the unexpected contraction in Canada’s
October GDP (-0.3%) weighed on the Canadian dollar before the weekend, the
Australian dollar fell more.  Recall that among the currency futures; the Australian dollar was the only one
(that we track) in which speculators were net long.  
The Aussie has
fallen in seven of the past eight
sessions. 
 It is down three consecutive weeks
and eight of the past 12.  Before the weekend it neared the May/June lows
(~$0.7145).  There weekly close below $0.7200 is important because it
corresponds to the 61.8% retracement of this year’s rally.  A move above
there would help to stabilize the tone, but the technical indicators suggest
this is unlikely. The next downside
target is found around $0.7065.
  
The US dollar
has approached the 50% retracement of this year’s drop against the Canadian
dollar from multiyear highs in January.  
The retracement is found near CAD1.3575
and repulsed the greenback last month.  It has a running start, with oil
prices easing and the interest rate discount to the US widening.  The
technical indicators are consistent with a continued uptrend.  The 61.8%
retracement is near CAD1.3840, but before it gets there, the CAD1.3760 area may
be important.  It corresponds to the measuring objective of the earlier
flag pattern.  
The February
light sweet crude oil futures contract was
little changed last week. 
 A break of the $52.00-$54.00 range
is potentially important.  The technical indicators are not generating
strong signals.  The rally spurred by the swing in market sentiment from
OPEC is dead to it has re-established order appears to have run its course, and
the market has reverted to watching US
inventories.  Technically, a break of the $50.80-$51.00 area, the neckline
of a potential head and shoulders top, would warns of a more significant
pullback.  
US 10-year Treasury yields drifted lower last week.  Yields slipped a few basis points at
the start of the week and then went sideways in narrow ranges. Unable to push
through 2.52%, but the high yield print generally
slipping to 2.56%.  The low on the March 17 10-year futures contract has
been steadily but slowly climbing since December 15. Indeed before the weekend
the futures contract returned to the closing level on December 14 when the Fed
announced its hike with the median dot plot suggesting three hikes next year.
 That level 123-13 also corresponds to the 50% retracement from the
December 14 high.   The next retracement objective is 123-21.   The
technical indicators favor additional near-term gains.  

The S&P 500
were virtually flat last week. 
 Momentum has evaporated, but rather
than correct lower, it is moving sideways.  This may be serving to keep some nervous longs invested.  A
break of 2250 would be the first sign that the correction may have begun. Since November 4, the S&P 500 rallied 9.3% before the consolidation
began.  The Slow Stochastics rolled over first,
and the MACDs are in the process of turning lower.  The RSI is drifting
lower.   It is also unusually rich relative
to its 200-day moving average.  It has been more than two standard
deviations (2~253) above its 200-day moving average since December 7.  

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