Dollar Bottom may be Near

<br /> Dollar Bottom may be Near – Marc to Market<br />


(greetings from Hong Kong)

Position adjustment in the foreign
exchange market continued to dominate the price action. 
 The dollar tended to trade heaviest against those
currencies that speculators were short, like the euro, yen, and sterling. It tended to rise against currencies that
speculators were long such as the Australian and Canadian dollar.  
Judging from
the market’s (initial) response to the inability of the US House of
Representatives to agree on an alternative to the Affordable Care Act, the
prospect of bringing forward tax reform may have appeased investors. 
  We are less sanguine but recognize that the dollar’s
resilience ahead of the weekend could be a preliminary sign that recent fall
may be nearly over. 
The Dollar
Index’s price action has been streaky this year. 
 Leave aside the first week of the New Year, when the
Dollar Index was practically flat.  It fell for four weeks, then rose for
four weeks, and now just completed its third consecutive weekly decline.
 The technical indicators warn that the downdraft
is not over.  Key support is seen in
the 99.20-99.45 area.  It corresponds to the lows of the past four months.
 It is also where some see a large head and shoulders top pattern, which
if convincingly violated could suggest a measuring objective near 94.50.
 Before getting there, the  Dollar Index rally, since last May’s
lows, would be half given back near 98.40
and would retrace 61.8% of its gains if it fell to 97.15.  Nearby
resistance is seen at 100.00.
The euro has
tested, backed off, and has again approached an important technical milestone
around $1.0820-$1.0830. 
 It corresponds to the 50%
retracement of the sell-off since the US election.  It is also where the
euro peaked in early February.  The early December high was near $1.0875,
and the 61.8% retracement $1.0935.  The MACDs and Slow Stochastics are
getting stretched.  In this situation, be on the lookout for a reversal pattern that would turn the indicators
lower.  In terms of levels, $1.07
looks significant, and the euro has not traded below it since the Fed hiked,
and the populists were denied the reins of power in the Netherlands.
The dollar’s eight-day
drop against the yen was arrested before
the weekend. 
 In this span, the greenback fell
from near JPY115 to almost JPY110.60.  The technical indicators have not
turned, warning that a low in price may not yet be in place.  We
anticipate demand will emerge ahead of
the JPY110 level.  The risk-reward would seem
to shift, and the start of the new fiscal year on April 1 could see investment outflows.  A move above
JPY112.00 may help stabilize the tone.
rallied a little more than four cents since the Fed’s hike.
  The hawkish dissent at the Bank of
England and a less neutral sounding statement, coupled with a better than
expected retail sales report (despite softer income growth), helped sterling
outperform all the major currencies since March 15 save the yen.   Over
this period, sterling has not closed
below its five-day moving average
(~$1.2465) and to do so now could signal a pullback of two cents toward
$1.2320, the 50% retracement of the recent advance, and the 20-day moving
average.   On the upside, a move
above $1.2530 signals scope for another half-cent
rise before meeting what is likely to be stiffer resistance. 
While short-run
streaks have characterized the recent price action of several currencies, the
Canadian dollar is an exception. 
 It has been particularly choppy.
  The US dollar’s recent peak against the Canadian dollar was on March 9,
nearly a week before the Fed’s hike, and took a big
step down on the announcement.  It covered half of this year’s range over
eight sessions, moving from CAD1.3535 to CAD1.3265.   The CAD1.3250 is the
50% retracement of the US dollar gains since late January’s low near CAD1.2970.
 The 61.8% retracement is near CAD1.3185, while the 200-day moving average
is a little above CAD1.3190.  We note that the (60-day) correlation
between (percentage) change of the two-year interest rate differential between
the US and Canada and the exchange rate is around 0.65, the strongest in more
than a decade.   The RSI and Slow Stochastics are somewhat more favorable
than the MACDs, but they may turn with any additional US dollar gains.  
The only major
currency weaker than the Canadian dollar last week (-0.2%) was the Australian
dollar  (-1%).  
similar correlation between the Australian dollar and the two-year rate
differential is at 0.48, and over the past decade,
it rarely is above 0.5.  The Aussie’s pullback last week held $0.7600,
which is an important congestion area and the 61.8% of the gains it has scored
since briefly dipping below $0.7500 on March 9.   The technical indicators
favor the peeling back more of the
Aussie’s recent gains.   The price action reaffirms and strengthens the
resistance around $0.7700 and sets up an important test on $0.7500, with modest
support seen first near $0.7550. 
May light sweet
crude futures contract made a new
four-month low in the middle of last week (~$47). 
 It snapped back leaving a potential bullish
divergence in the RSI and Slow Stochastics.  The MACDs look poised to
cross higher on the slightest of upticks now.  A push through the $48.60-$49.00 band would lift the tone, after
falling in three of the past four weeks.  While a near-term recovery may
be at hand, the longer-term technicals, warn of further downside risks.  
The US 10-year
yield has risen in only two of the eight sessions since March 14.  
The yield remains well entrenched in its
four-month range of roughly 2.30% to roughly 2.60%.  The third rate hike
in the current gradual cycle and the second one in four months failed to change
the pattern. Yields run up on the anticipation of a hike and then come off when
it is delivered.  Although the
downside momentum eased, it is not clear that the low yield print on this leg
is in place.  The May futures contract closed firmly, and the market seems to want to test the range between
124-23 and 125-00, which could be a formidable cap. 
The S&P 500
has also only risen in two sessions since the Fed hiked. 
 In the bigger picture, the S&P 500 is
consolidating gains scored in a six-week advance.  The consolidation means
a drift lower, which has been sufficient to push the five-day average below the
20-day for the first time since early January.  Last week’s pullback
stopped just shy of the 38.2% retracement of this year’s rally (~2337). The 50%
retracement is near 2317.   The technical indicators warn of the risk that
the correction continues, though a move above 2369 would indicate that phase is


Dollar Bottom may be Near
Dollar Bottom may be Near

Reviewed by Marc Chandler

March 25, 2017

Rating: 5

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