Corrective Forces Emerge, Tempering the Dollar’s Rally

Several trend moves of the past couple of weeks are correcting. Signs of the correction began yesterday in North America.
 The dollar was unable to sustain gains despite a string of stronger than
expected data, including January CPI, retail sales, industrial output, and the
Empire State manufacturing survey for February.  

There does not
appear to be a fundamental trigger. 
 Market expectations for more Fed
hikes this year than the last two combined solidified.  This is evident in the Fed funds futures strip, and the US 2-year premium over Germany
edged closer to 2.05% multi-year high set at the end of last year.
 Comments from NY Fed President Dudley, on the back of Yellen’s testimony
to Congress, also suggested the strengthening of the Fed’s conviction by
acknowledging that the balance of risks is
shifting to more growth than expected rather than less.  

The Dollar
Index had moved higher for ten consecutive sessions before reversing
yesterday’s gains to close lower. 
 Yesterday and today’s losses have
seen the Dollar Index retrace 38.2% of the advance since February 2.  That
retracement objective was near 100.80.  The 50% retracement is found near 100.50 and the 61.8% retracement
by 100.20. 

The euro
recorded a reversal pattern yesterday–a hammer candlestick–,
and there has been following through euro gains today.
  It had been sold to almost $1.0520
yesterday before the short-covering bounce lifted it to new session highs in
late turnover, and managed to finish the North American session at $1.06.
  Short covering today lifted the single currency to $1.0640, which is the
38.2% retracement objective, but it does not appear over.  The 50%
retracement is seen near $1.0675 and the 61.8% retracement is $1.0710.  

Softer US
yields, weaker Japanese stocks, and the corrective pressures have seen the
dollar back away from yesterday’s test on JPY115 to return to JPY113.50. 
 At JPY113.80, the greenback surrenders 38.2% of its
recent gains.  The 50% mark is at JPY113.30, and the 61.8% retracement objective is
found near JPY112.90.  
Sterling is firmer, but cable appears to be being held back by the
unwinding of long sterling cross positions.
  It had dipped below $1.24 yesterday
for the second time this month, and demand once again emerged.  Sterling
is testing resistance in the $1.2530-$1.2540 area,
and a move through there would set up a more important technical test in the
$1.2570-$1.2585 band.  
The Australian
dollar had pushed above the $0.7700 cap yesterday but is struggling to sustain
the potential breakout after disappointing jobs data, despite the corrective
forces weighing on the greenback.
  Australia created 13.5k new jobs,
but they were all part-time positions,
and the participation rate eased to 64.6% from 64.7%, which accounts for the
decline in the unemployment rate to 5.7% from 5.8%.  
created an average of 31k full-time jobs a
month in Q4 2016. 
was too good to be true. In Q3 it lost an average of 38k jobs a month.
 In January, it shed 44.8k full-time jobs and
grew 58.3k part-time positions.   
The Australian
dollar rallied from $0.7165 on January 2 to a little through $0.7730 today.
The nearly 8%
advance is led the major currencies.
 The Aussie fared well even during the US dollar’s recent streak.  As
corrective forces unfold, the Australian dollar looks vulnerable.  A move
back toward $0.7600 seems likely, but only a convincing break of that area
would be of technical significance.  
The Canadian
dollar, in contrast, seems largely sidelined. 
 It is up about 0.25% today with the
US dollar near CAD1.3050.  The technical indicators suggest the potential for the US dollar to move higher,
perhaps back toward CAD1.3100.  Yesterday’s high (~CAD1.3120) and the
20-day moving average (~CAD1.3110) offer nearby resistance.  
The main US
equity indices closed at new record highs yesterday.  
Although the MSCI Asia Pacific Index
closed higher (~0.45%), it struggled.  Japanese, Korean, and Taiwanese
markets fell.  China, Australia, and
India rose.  In Europe, the Dow
Jones Stoxx 600 is set to end its longest advancing streak in 18 months (seven
sessions) that had carried the benchmark to its best level since late 2015.
 Today’s modest loss (~0.3%) is being led
by energy, consumer staples, industrial, materials,
and financials/real estate sectors.
 Information technology, telecom,
and healthcare sectors are gaining today.
The US economic
calendar does not have the heft to arrest the corrective pressures. 
 The US reports January housing starts and permits,
the February Philly Fed survey and the weekly jobless claims.  Recall that
housing starts surged 11.3% in December and some payback is likely in January.
Permits, which are included in the
Leading Economic Indicators are expected to edge higher after falling 0.2% in
December. The Philly Fed survey rose from 8.7 in November to 23.6 in
January.  It has been higher only a handful of times since the end of the
financial crisis.  Some moderation is
expected, and the Bloomberg median forecast calls for an 18.0 reading.  
After Yellen
and Dudley recent comments, there is unlikely to be new news from Fischer
 He appears on Bloomberg TV shortly, and San Fran’s Williams speaks at a fintech conference toward the end of the North
American session.   While many still see March as too early to move, given
the tone of Yellen and Dudley’s comments, many see June as too far away.
 There is beginning to be a greater focus on May.  Although there is
no press conference or updated forecasts at the May meeting, the thinking is that
by raising rates then, it would create new degrees of freedom for the Fed
moving forward.  


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