Dollar Correction Poised to Continue

technical condition of the US dollar, which has been advancing through most of
the Q4 16, has been deteriorating in our assessment. 
This led us to anticipate a consolidative or
corrective phase. Although the holiday-thinned market conditions may have spurred
exaggerated price moves, like the euro ahead of the weekend, it now appears
that this phase is set to continue.

We have argued that the dollar rally was part of a larger
portfolio adjustment that began in early October, with the US election
providing extra fuel to a move that was already underway.
  For example, the anticipation of
the hike by the Federal Reserve at the
December FOMC meeting was building before the election, and most data was
stronger than expected, lifting the economy to something close to two-times
trend.  The broader changes in the investment climate included bearish
curve steepening, rising equities, higher oil,
and lower gold prices.  Markets may move at different speeds, but dollar’s
pullback is likely part of a larger correction to the powerful Q4 16 moves.
In the last trading
session of 2016, the Dollar Index slipped through its 20-day moving average
(102.15) for the first time in a couple of weeks,  but managed to close
just above it (~102.20). 
It could
have put in a third point in a trend line that connects, the November 9
(~95.90), December 8 (~99.45) and December 30 low (~101.95).  
Nevertheless, the technical indicators remain bearish. The Dollar Index has
been stalling.  Consider the highs from the past three weeks, 103.56, 103.65
and 103.63. The week’s 0.8% loss snaps a three-week advance.  Last week,
we suggested the potential of this pullback extends to 101.00-101.50.  This still seems reasonable at this juncture,
though the risk is over an overshoot to the downside.  The 100.70 area may
be key for the outlook for Q1 17.
The euro spiked briefly through $1.0650
on the last trading session of the year.  Although this proved premature as the
euro quickly surrendered the gains, the near-term outlook is constructive.
  The fading
upside momentum in the Dollar Index was matched
by the euro, its largest component.  The
euro’s lows from the last three weeks are $1.0367, $1.0352, and $1.0372.  The MACD and Slow Stochastics have
turned up, and the five-day moving average is set to cross above the 20-day
average in the coming days.  Last week, we suggested potential toward $1.0675, but the way the correction has
unfolded, it looks like there is scope for gains beyond there.  The $1.0715 area represents a 38.2%
retracement of the euro’s gains since the US election.  The 50% retracement objective is near
The dollar marched higher against the
yen for six consecutive weeks but has not
fallen for two.  
Indeed, at the end of last week, the greenback slipped below its
20-day moving average against the yen for the first time since the day after
the US election. We had anticipated a move to JPY116.50 last week.  The dollar fell to almost JPY116 last
week, roughly corresponding to a 50% retracement of the rally since the
December 8 low near JPY113.15.  The
next target we identified was the JPY115.25-JPY115.50 area.  A trend line
off the highs since December 15 comes in near JPY117.20 at the end of the week
(January 6), though the JPY17.60 area may offer more important resistance.  
Sterling finished 2016 above its 5-day
moving average for the first time in two weeks.
  It reached
almost $1.2390 before the weekend.  The
$1.2400 level is a 38.2% retracement of sterling’s losses since the December 14
high a little above $1.2720.   Support
is seen near $1.2325. The RSI is
firming.  The Slow
Stochastics are about to turn higher, and the MACDs look poised to cross higher as well.The upside
beckons.  The 50%
retracement is found near $1.2460.  The 61.8% retracement is near $1.2525.
 The US dollar initially extended
its strong recovery against the Canadian dollar but ran out of steam in front
of CAD1.36, where it peaked in November. 
 The pullback in the last two sessions of 2016 was sharp.
 It retraced 38.2% of the nearly three-week rally to almost the tick in front of
CAD1.3400.   The RSI has turned lower, and the MACD and Slow Stochastics
appear set to turn lower in the coming days.  The 50% retracement
objective is near CAD1.3340. 
The Australian dollar reached almost
$0.7250 before the New Year, but proceeded to sell-off, briefly dipping below
$0.7200 and posted a poor close. 
 Nevertheless, the technical indicators suggest the near-term
risk is on the upside.  The downside momentum that pushed the Aussie from
$0.7525 in mid-December faded in the $0.7160-$0.7175 area.  This band is
an important support.   The MACDs
and Slow Stochastics are turning higher. The $0.7250 area needs to be taken out, and the next target is near $0.7300,
though the correction may extend toward $0.7350-$0.7380.   
Oil prices are firm but are moving
broadly sideways.
  The February
light sweet crude futures contract has been
largely confined to a $51-$54 range last month.  The contract has
not traded below its 20-day moving average since November 30.  It is found
a little below $53.  The technical indicators are not generating a strong
signal, but while we suspect a top is close, there is risk of another push higher first.  
The US 10-year yield rose from 1.77% to
2.64% in a six-week rally that began after the jobs data in early November. 
 However, in the past two weeks, the yield has
pulled back to 2.43%.   The pullback may not be complete. The 2.35%-2.40% area offers better value.
 The March note futures finished 2016
with two consecutive closes above the 20-day moving average. The five-day
moving average will likely cross above the 20-day moving average in the days
ahead for the first time since the end of September.   The technical indicators
point to additional near-term gains.  After finishing 2016 at 124-09,
there is potential toward 125-00 to 125-16.
Year-end profit-taking may have
prevented the Dow Jones Industrials from going through 20k and saw the S&P 500 finish the year below its 20-day moving
average for the first time since November 4
when it recorded a four-month low.
  The sell-off gave
back nearly half of December’s gain (~2232.50).  The technical indicators
we use warn of additional losses.  The 2200 area offers initial support, but near-term potential may extend to
2160.  The 200-day moving average is near 2135, and a test on it often
brought in new buyers last year.  

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