Dollar Struggles and Key Levels Approached

A combination of softer US inflation readings and some optimism that the Brexit may not be as disruptive as it had seemed and that the prospects of another tariff truce between the US and China, weighed the dollar and encouraged risk-on plays.  Of the major currencies, the yen and Swiss franc were the only ones unable to gain against the greenback.  Amid progress to avert a disruptive Brexit, sterling shot up, gaining a little more than 2.7% against the dollar, the most in two years.    Most of the liquid accessible emerging market currencies also gained against the dollar.  The Turkish lira was a notable exception, falling over 3% against the dollar as its invasion of Syria is likely to have political and economic consequences.  China returned from the long national holiday at the start of the month and appreciated by about 0.85% against the dollar to reach its best level since September 17.

Dollar Index:  The 0.5% decline last week after the 0.3% loss the week before saw the Dollar Index retrace (38.2%) of the rally since the late June low near 95.85 found near 98.20.    The technical indicators are moving lower, but the 97.75-98.10 band may offer formidable support.  Another retracement target (50%) marks the lower end of the range, while the lower Bollinger Band and the lows from the second half of September mark the upper end.  Initial resistance is expected near 98.80.

Euro:  The euro closed above a four-month-old downtrend line that connects the June, August, and September highs.  It moved above it on October 10 and closed above it (~$1.1010) before the weekend.  The euro reached almost $1.1065 and the Upper Bollinger Band was a little above $1.1070.  The (38.2%) retracement of the down move is near $1.1085.  Last month’s high (~$1.1110) needs to be overcome to confirm the break of the downtrend.  The 50% retracement of the decline is a little below $1.1150.  The technical indicators reflect the upside momentum.  

Japanese yen: The dollar has risen against the yen in five of the past six sessions and surpassed the potential double top that from late September and earlier this month near JPY108.50. It also corresponded to the 50% retracement of the decline from the year’s high set in April at about JPY112.40.  The JPY109.00-JPY109.40 area is important.  It houses the 200-day moving average, the early August high (three-month high), and the (61.8%) retracement objective.  The upper Bollinger Band begins the new week near JPY108.60.  A break of JPY107.65 would undermine the technical tone.  

Sterling:  Optimism over a less disruptive Brexit triggered a powerful short squeeze that lifted sterling about 3.75% in the last two sessions.  From the shelf created in the first part of the week near $1.22, sterling surged through $1.27 before the weekend.  The high was near the 200-day moving average (~$1.2715) and the (61.8%) retracement of that slide that began in early May from $1.32.  The technical indicators trending higher, and the near technical area of importance is around $1.2800-$1.2840. However, the fact that sterling closed above its upper Bollinger Band (~$1.2610) should encourage some caution.  Initial support may be seen near $1.2660.  

Canadian Dollar:  The US dollar stalled near around CAD1.3350 and staged a downside reversal in the form of an outside down day on October 10.  With the help of a weaker US dollar environment and a stronger than expected jobs growth (albeit some less impressive details), the Canadian dollar rose around 1% over the past two sessions.   The greenback pushed through $1.3200 on an intraday basis, which is also where the lower Bollinger Band is found.  It closed just above it ahead of the weekend.  The technical indicators have turned down, The next target is near CAD1.3130, last month’s lows.  

Australian Dollar:  A head and shoulders bottom may have been forged.  It closed above the neckline (~$0.6750) on October 10, and follow-through buying ahead of the weekend lifted the Aussie to around $0.6810.   The measuring objective of the pattern about $0.6850.  The September high was a little above $0.6900.  The MACDs and Slow Stochastics have turned up.  

Mexican Peso: The dollar fell almost 1% against the Mexican peso for the second consecutive week.  It approached its 200-day moving average near MXN19.25 before the weekend on rising risk appetites and below last month’s lows (~MXN19.32).  A three-year uptrend line is a little below MXN19.10.    Resistance is seen in the MXN19.40MXN19.45 range.  

Chinese Yuan:  The dollar fell against the Chinese yuan for the fourth consecutive session, its longest losing streak in seven months.  It dipped below CNY7.10 for the first time since September 20.  We would peg support near CNY7.06-CNY7.07. 

Oil:  The attack on an Iranian oil tanker in the Red Sea and the weaker dollar helped oil prices hold the lower end of this year’s range around $50 a barrel.  The November WTI futures contract has a potential double bottom in place, and the move above $54 bln confirms it.  The measuring objective is in the $57-$58 area.   The contract needs to overcome the 20-day moving average and a (38.2%) retracement of the drop since the spike high triggered by the attack on a major Saudi facility last month, found around $56.50-$57.00.  

US Interest Rates: Despite softer than expected PPI at nd CPI and a record-low in the long-term inflation expectations in the preliminary University of Michigan consumer confidence, US rates rose last week.  Around 18-20 bp increase in the 2 and 10-year Treasury note yields respectively can be accounted for by a shift in expectations for Fed policy.  The implied yield of the January fed funds futures contract rose 9.5 bp last week.   The size of the Fed’s T-bill purchase program ($60 bln a month at least through Q2 20 is bigger than many expected, but the markets’ direct reaction suggests investors accept the official distinction between these operations and QE.  The technical indicators for the 10-year note futures warn of the risk lower prices (higher yields).  Last week’s losses returned the contract to the lows seen at the start of the month (~129-20).

S&P 500:  It took the gap higher opening and a 1.1% gain ahead of the weekend for the S&P 500 to move higher on the week.  It completely recouped the 2% loss suffered in the first two sessions of the week and closed about 0.60% higher on for the week.  The string of three weekly drops came to an end.   The gap created by the sharply higher opening on October 11 (2948.5-2963.1) should offer support.  The top of the gap  (October 11 lows) also corresponds to the down trendline drawn off the mid-September highs.  Alcoa formally kicks off the earnings season on October 16.  


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