Dollar had a Poor Week but Technicals Warn Against Chasing it Much Further

The dollar fell against the major currencies, but the yen and Norwegian krona, and slippage against the yen was minor around 0.15%.  The krone’s weakness was notable.  It lost 0.9% against the dollar to trade at 18-year lows.  It lost around 2% against the euro to trade at record lows.  It is difficult to identify the fundamental driver as the central bank is the only major one to be raising interest rates.  Indeed, it has doubled its deposit rate to 1.5% this year. 

The Swedish krona, despite a weak economy and a central bank that seems to be out of step, was the second strongest major currency last week behind sterling with a gain of nearly 1.6%.  It had registered a 10-year low against the euro earlier this month, which seemed to have sparked interest in krona-denominated bonds.  With a Brexit Agreement struck between the UK government and EU, sterling surged about 2.5% last week and traded near $1.30, its best level in five months.  It closed firmly and settled above its upper Bollinger Band for the past three sessions.

Dollar Index:   The Dollar Index lost almost 1.15% last week for its third consecutive weekly fall.  It was the biggest decline in four months and the longest losing streak since the one that carried over from the end of last year.  The Dollar Index settled in the middle of an important band of support in the 97.00-97.30 area, which lies just below the 200-day moving average (~97.40).  It closed well below its lower Bollinger Band (~97.55).  The technical indicators also suggest the move is getting stretched.  A technical bounce could extend into the  97.75-98.00 area without improving the technical outlook.

Euro:  The single currency rose for the past four sessions and in seven of the past eight.  It set new highs for the week in late dealings ahead of the weekend (~$1.1170) to reach its best level since mid-August.  The next important technical level is a little above $1.12, where the 200-day moving average is found and that (61.8%) retracement of the sell-off from the late June high above $1.14.  The technical indicators are stretched but no sign of turning lower. However, it closed well above its upper Bollinger Band (~$1.1130). 

Japanese Yen:  The dollar ended a five-day advance against the yen in the middle of last week and takes a three-day losing streak into next week.  That said, the greenback was in narrow ranges and continues to trade in the upper end of the range that has dominated since June near JPY109.00.  The 200-day moving average is just above there, and the false break on August 1 carried the buck to about JPY109;30.  What level does the dollar need to fall below to suggest the market has given up on the topside?  We suspect it is around JPY108.30, but our confidence would increase on a break of JPY108.00.  The MACDs and Slow Stochastics have not turned lower but the former in the coming days, and the latter may not be far behind.  A trendline from the late August lows (~JPY104.45) and the early October lows (~JPY106.50) comes in near JPY107.50 at the end of next week.  

Sterling:  The pound rallied eight cents over the last seven sessions to almost $1.30 on optimism that a no-deal Brexit can be avoided, and a new deal was struck between the UK government and the EU.  It closed firmly ahead of the weekend.  The technical indicators are stretched, but the strong momentum is evident. Sterling closed above its upper Bollinger Band that has also risen sharply in recent days (from around $1.2570 on October 10 to about $1.2935 on October 18).  It has traded above $1.30 since May.  Disappointment with weekend developments would likely see a quick test on the $1.26-$1.27 area.  

Canadian Dollar:  The US dollar has fallen against the Canadian dollar for the past two weeks and four of the past five.  It finished last week (~CAD1.3125) at its lowest level since the end of July, which is beyond the (61.8%) retracement of what appears to a three-month correction.   There may be mild chart support around CAD1.31, but there is little deter a test on the year’s low near CAD1.30.  However, it finished last week a little below its lower Bollinger Band, suggesting caution is in order at the start of the new week.  The technical indicators reflect the downside momentum that has built.  A bounce toward CAD1.3160-CAD1.3180 may offer a better entry opportunity for new shorts.

Australian Dollar:  Despite weak Chinese data, the Australian dollar rallied the last three sessions to extend its recovery to the third consecutive week.  It has closed on its highs last week and reached its best level in a month just shy 0f $0.6860.  Recall it began the month at multi-year lows near $0.6670.  The (50%) retracement of the down move from the July high near $0.7080 is found near $0.6875, A little above there is last month’s close around $0.6900.  Since last December, the 200-day moving average has repeatedly held back corrective gains, though, in April, there was some brief penetration.  It is found now around $0.6970.    However, it also closed above its upper Bollinger Band (~$0.6835), suggesting that adding new long exposure now is risky. A bullish trend remains in place provided the Aussie holds above $0.6760, though we would initial support around $0.6820.   

Mexican Peso:  Like the other high-vol currencies, the peso has been strengthening.  Its three-week rally has seen it appreciate by roughly 3% and is carrying an eight-day streak into next week.  The dollar has been sold below the 200-day moving average (~MXN19.26) for the first time since early August.  The next important level of support is seen near MXN19.00.  It finished last week a little inside its lower Bollinger Band (~MXN19.08).  Even though it is not as stretched as some other currencies, the MACDs are extreme, and the Slow Stochastics may turn without taking out last month’s low.  A technical correction could see the dollar test its 200-day moving average from below.  

Chinese Yuan.  After moving above CNY7.0 in early August, the dollar has carved out a new range, despite fears that China was engineering a large devaluation of offset the tariffs or, as the US accused it, currency manipulation.  The yuan has fallen less than 3%. The weakening of its economy and the decline in exports to the US shows that contrary to conventional wisdom, the depreciation has not neutralized the impact of the tariffs.  The new range, whose edges are a bit blurry, seems to be roughly CNY7.06 to roughly CNY7.14.  That puts the dollar’s range in the offshore yuan (CNH) roughly, CNH7.0-CNH7.20.  The technical indicators suggest risk-reward considerations favor dollar gains against CNH in the near-term. 

Crude Oil:   December light sweet crude oil prices fell around 1.65% last week.  The losses came in the first part of the week seemed like profit-taking after the previous week’s surge.  The market did not respond negatively to news that inventories jumped by 9.2 mln barrels, the largest build since April, extending the accumulation phase for the sixth week. The price of Dec crude is lower than before the attack on Saudi facilities last month.  The technical indicators suggest upside potential can extend toward $55 or so.  Our fundamental analysis warns of medium- and long-term weakness.  

US Rates:  Disappointing US economic data was unable to reignite the bond market rally, and the US 10-year yield rose about 2.5 basis points last week to almost 1.80% before closing near 1.75%.  The technical indicators for the 10-year note future contract seem supportive with a base around 129-16 to 130-00.  This would imply that the yields may be near a top.  The 2-10 year yield curve had steadily steepened since late August when it spent a few days inverse.  Before the weekend it reached almost 18 bp, the highest since late July.  The entire curve, 3-months to 30-years, has also been steepening, and it is at seven-month highs of almost 60 bp.  

S&P 500:  The benchmark rose by a little more than 0.5% last week but is losing momentum as it approaches 3000.  The technical tone seems soft, and the gap created by the sharply higher opening on October 13 (~2948.5-2963.10) may attract prices.  In the bigger picture, the S&P 500 may be carving out a large ascending triangle pattern, which is often seen as a continuation pattern, i.e., bullish.  


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