The US dollar is finishing the year on a firm
note. It rose to a 10-month high against the yen before the
weekend. The euro remains within spitting distance of the bottom of its
two-year range near $1.05. Over the past month, dollar pullbacks have
been generally shallow and brief.
Next week’s FOMC meeting is the last big event
of the year. The dollar may continue to be well supported ahead of the meeting where a rate hike is fully discounted. The Fed officials
may revise up growth and inflation forecasts, and still not take into account
the extent of fiscal stimulus that may be
delivered. The President-elect’s team has indicated
the initial economic focus will be on trade, not taxes or stimulus.
Nevertheless, investors anticipate both
fiscal stimulus and a more hawkish configuration at the Federal Reserve. At
the same time, the ECB will be expanding its balance sheet by 780 bln euros
next year, and the BOJ’s extraordinary monetary policy is set to continue,
augmented by modest fiscal
stimulus. Also, while many emerging-market central banks have been
reducing their Treasury holdings to support their currencies, private sector
demand has been strong, with European investor interest reported. Americans
appear to be liquidating some of their holdings for foreign bonds.
Foreign investors have returned to the Japanese equity market, but it appears
to be mostly on a currency-hedged basis.
We had anticipated the US Dollar Index to fall
to 99.70 and possibly 99.00. It recorded a low a little below 99.45
in the knee-jerk response to what appeared at ECB tapering. It quickly
rebounded, and before the weekend was testing a short-term down trendline drawn off the November 24, November 30, and
December 5 high. It was found near 101.55 before the weekend and 101.30
at the end of next week. The speed of the Dollar Index ‘s recovery
means that MACDs and Slow Stochastics have not crossed higher to generate new
buy signals, though they may turn early next week. Remember, the 101.80
area is the 61.8% retracement of the decline since from the 121.00 level seen
in July 2001.
Euro bounces from the $1.05 level appear
to be getting more shallow. Technical indicators are not particularly
helpful given the sharp swings in both directions in recent days. That
said, the euro’s squeeze up to almost $1.0875 likely completed the upside
correction we had been anticipating. We expect the $1.05 support area
yield, with the euro heading toward $1.0430-$1.0450 before corrective pressure emerges again. If the $1.05 is not broken, momentum traders will be sorely disappointed, and a bounce back to $1.07 would not surprise.
The last session was the first since February
that the US dollar remained above JPY114.00. In fact, it made a new 10-month high near
JPY115.30. The JPY115.60 area corresponds to a 61.8% retracement of the
dollar’s decline since reaching almost JPY126 in June 2015. Above there,
the is initial potential toward JPY116.00-JPY116.20. The technical indicators have
not confirmed the new dollar highs, but the momentum is strong. Initial
support is seen near JPY114.50.
While the yen was the weakest currency last
week, shedding almost 1.5%, sterling was
just behind it with a 1.25% decline. Sterling snapped a two-week advance. Disappointing data,
broad dollar strength, and the UK parliament’s support for the government’s
timetable of triggering Article 50 took a toll. Early in the week, sterling had reached $1.2775, its highest level
since just before the flash crash, but just shy of the 100-day moving average
(~$1.2795). It has not traded above that moving average since the
referendum. The $1.25 area offers initial support,
and a break could see $1.24 in short order. A break of $1.23 would
likely signal the end of the two-month
correction. The RSI has turned down. The MACDs and Slow Stochastics
may rollover near week.
In contrast, the Canadian dollar was the
strongest of the majors, gaining 2% against the US dollar. Steady oil
prices at elevated levels and the fact that Canada’s discount on two-year money
finished at the lows for the week may have been contributing factors.
Typically, the Canadian dollar performs well in a strong US dollar
environment. Last month, the US dollar was
repulsed after testing the 50% retracement objective of the down move since the multi-year high was set at the start of the year a little below
CAD1.4700.
Technical indicators are getting stretched, and the Canadian dollar strengthened
six of the past seven sessions. If the move is not exhausted, there
may be one more leg down toward CAD1.3080. A move back above CAD1.3220
may be the first sign that the US dollar
has bottomed.
The Australian dollar has been stymied by
$0.7500. The surprisingly poor Q3 GDP (-0.5%) and larger trade
deficit (A$1.5 bln) neutralized the impact of higher metal prices and stronger
China imports. The technical indicators are mixed, which could be resolved by
some more sideways activity. A break of $0.7430 would likely signal
a test on $0.7380 initially but possibly back to $0.7300.
The US 10-year yield rose 11 bp between
Thursday’s low and Friday’s high. The 3.25% rally in oil prices over
those two days and the backing up in the European rates are probably the two
main culprits. The 2.50% level is technically and psychologically
important. The March note futures contract is pinned near 124-00, closing just below there before the weekend. The December 1 low was 123-20. Beyond that, there is little on the charts (continuation contract) until closer
to 122-24, the lows from 2014. The March contract has not been above its
20-day moving average since the election; It
is now near 124-30. While the MACDs and Slow Stochastics are
constructive, the RSI has turned down.
Technical indicators suggest the January light
sweet crude futures contract can move higher next week. The recent
highs in the $52.70 area are the next obvious target, but there may be scope for
a move toward $54. Support is seen
in the $49.20-$49.60 band. Although one may rightfully skeptical about
OPEC and non-OPEC output cuts, our reading of the charts suggests being patient
to pick a top in oil.
The S&P 500 rose for the past six
sessions. The streak is the longest since June 2014 when it also rose
for six sessions. It is the fourth gain in five weeks. While there
is a sense the market is stretched, the
technical indicators warn against getting bearish. The pre-weekend close was strong, near the session highs, for a new record. Dow Theory would note that both transports and industrials made new record highs, confirming the strength of the bull market. Over the past month,
with the exception of three or four
sessions, the five-day moving average has rarely been penetrated. It comes in near 2231. A break could be an early warning sign that
corrective pressures are getting the upper
hand.