Can the Market Get more Dollar Negative?

The US dollar’s technical tone remains poor and market psychology is nearly universally hostile toward it.  Many believe that the US Administration is hostile to the international order and rule of law that previous American administrations constructed and advanced.  The de-weaponization of the foreign exchange market one of the hallmarks over the past couple of decades may also have been jettisoned.  
US Commerce Secretary Ross comment that there are always trade wars, offered valuable insight into the Administration’s mindset.  The world is a hostile place and it is dog-eat-dog.  There is no global community.  Foreign policy is the permanent pursuit of contingent goals, as Henry Kissinger taught.  This is so-called realism without the liberalism.
The dollar is as unloved as it has been in years.  It is off to its worst start since 1987, when the central banks had begun trying to stabilize it after the Plaza Agreement in September 1985, which drove the dollar lower.
The Dollar Index has approached a key technical area, and although the technical indicators we look at have not turned in its favor, the downside momentum may slow.  The 88.40 area is the 61.8% retracement of the Dollar Index rally that began in mid-2014.   The 200-month moving average is found near 88.25.  The Dollar Index’s low last week was 88.44.  A break below this general area would target 86.25-87.25. 

In a similar vein, the euro, the largest component of the Dollar Index, has also entered a significant technical area.  The 61.8% retracement of the euro’s drop from mid-2014 is found near $1.26.  The 100-month moving average is near $1.2575.  Above there, initial potential extends toward $1.28, which is where the monthly downtrend off record highs comes in (and $1.2780 at the end of February).  Technical indicators are stretched and market positioning is extreme.  Be on the lookout for a simple reversal pattern to signal a flagging of momentum.  A preliminary sign is a close above the previous day’s high, which has not been seen since January 9.  

The dollar’s pre-weekend attempt to recover against the yen was stymied by comments from the Bank of Japan’s Kuroda in Davos.  Kuroda claimed that finally, it was getting close to the 2% inflation target.  This turned the dollar around from the highs of the day (~JPY109.75) and sent it below the JPY108.50 low seen before Trump’s dollar comments.   The core rate, which the BOJ targets for December was reported several hours earlier unchanged at 0.9%, unchanged from November.  While it is considerably better than where it was at the end of 2016 (-0.2%), it is still not quite halfway towards the target and Kuroda made it clear after the BOJ meeting earlier in the week, that he was continuing with the strategy and course he had set.   He was speaking to an international audience.  It was a way of saying the policy is working not that patience and vigilance weren’t needed anymore.  

The low from last September was near JPY107.30 and this appears to be the next target on a close of the JPY108.50 area.   We do not expect to hear much of a pushback from Japanese officials.   We suspect as long as the move is orderly and broad-based, not just yen strength but dollar weakness, Japanese officials will accept a somewhat firmer yen. 
Sterling reached $1.4345, the highest level since the UK referendum in the middle of last year.  It finished last year near $1.35. The technical indicators are extended and the Slow Stochastic is trying to turn lower.   Sterling has not taken out the previous day’s low since January 11.  A break of such on an intraday basis, and ideally a close below the five-day moving average, which has not happened since the same day (January 11) could be preliminary signs the correction is at hand.  On the upside, $1.45 is seen as the next target. 
The technical indicators for the Canadian dollar as suggesting caution is in order.  The RSI is still trending lower, but the MACDs have stopped falling, and a possible divergence is unfolding in the Slow Stochastics.  The US dollar fell to nearly CAD1.2280 last week.  The next important support area is seen around CAD1.2200, where the greenback found support last August.  On the upside, the US dollar needs to get above CAD1.2400 to stabilize the situation. 
The potential turning point for Australian dollar went for naught as it failed to confirm a reversal pattern at the start of last week.  It posted the highest close since mid-2015 ahead of the weekend.   Like the Canadian dollar, the Slow Stochastics have not confirmed the new highs.  The MACDs are stretched but have not turned.  A close below $0.8000 could be among the first signs of the pending correction.  Beyond $0.8100, the $0.8250 area would beckon. 
US 10-year Treasury yields held above the 2.60% mark all last week.  US yields rose ahead of the weekend even though the first estimate of Q4 17 GDP missed the mark (2.6% instead of 3.0%), but the details were good.  Specifically, final domestic sales rose a smart 4.3%, the best in a few years.  Inventory and trade, two components which are not particularly sensitive to monetary policy took 1.8 percentage points off growth, and part of this seems to storm-related.  Inventories look lean and re-stocking could help lift growth later in 2018).  

Many are looking for a move toward 3% this year.  Several high-profile asset managers have already concluded that the roughly 35-year downtrend in US long-term yields is over.  Depending on precisely how one draws the trendline (art not science), it would seem to come in between around 2.67% and 2.80%.  

That said, the technical indicators for the March futures contract are warning against establishing new shorts.   A correction appears to be nearly at hand.  There are important data in the coming days, like the January jobs report, auto sales and the employment cost index, and important events, like the FOMC meeting, the Treasury’s refunding announcement and the State of the Union address.  A move in the March contract above 123-00 warns that the choppy consolidation may be a prelude some short-covering.  

March light sweet crude oil rose in four of five sessions last week to gain 4.5%.  It finished last year near $60.45 a barrel and made it to $66.65 before seeing some profit-taking.  A weak dollar, a drawdown in inventories, and strengthening world growth are supportive factors.  Brent is already above $70 and many see WTI headed there as well.

The S&P 500 was up four of last week’s five sessions for a 2.3% gain.  The 1.2% gain before the weekend was the largest single-day advance since last March.  A couple of asset managers chastised investors who have been boosted allocation to cash as measures of valuation get stretched.  The S&P 500 has had one losing week in the last ten and that was the end of 2017.  A new record was set before the weekend.  The S&P 500 has not closed or moved below its five-day moving average in two weeks.  A break now might suggest a pullback.  It is found near 2840.5 to start the new week.   Among G7 stock markets, only Italy is besting the US (9.0% to 6.7%). 

The Russell 1000 Value Index rose nearly 2% last week to bring this month’s gain to 5.9%.   The Russell 1000 Growth Index rose 2.3% last week to bring its year-to-date gain to 8.6%. Directionally, the correlation over the past 60 sessions is as high as it can be (~0.98), but when conducted on percent change basis, the correlation falls considerable (0.62). 

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