Dollar Whipsaws Confuse Technical Picture

The US dollar was whipsawed ahead of the weekend.  The greenback had been pulling
back following the soft core PCE deflator the day before, and losses
accelerated after the disappointing US August employment report. However, a report citing unnamed European officials warned
that the ECB might not be ready to decide on its asset purchase program as many
expected at the meeting on September 7.  This spurred a reversal
of the euro and helped lift the dollar more broadly. 
One currency the was resilient
in the face of the greenback’s recovery was the Canadian dollar.
  It was the strongest major
currency before the weekend and for the week.  The strong Q2 GDP report
(4.5% annualized, 4.3% year-over-year) encouraged speculation that rather than
wait for October, like many, including ourselves,
expected, the Bank of Canada could hike rates again next week.   
We expect September to be a
challenging month for the dollar, which on a real broad trade weighted basis
has fallen for the first eight months of the year, the longest losing streak
since 2009. 
 
However, once past the debt ceiling (and spending authorization), we expected a
better Q4 performance.   
The dollar sell-off that
began before Yellen and Draghi spoke at Jackson Hole accelerated at the start
of the past week.
  The
Dollar Index fell to nearly 91.60 on August 29, a new low for the year.  
It staged a dramatic rebound.  Of technical importance is the fact that
the 50% retracement of the big rally since mid-2014 remained intact.  It
recovered to almost 93.35 in two sessions before meeting new sales.  The
whipsaw with the jobs/commentary double whammy
took the Dollar Index from 92.60 to 92.10 and then 92.90.  The technical
indicators are mixed on the daily bar
charts.  The weeklies, the MACDs, and Slow Stochastics are poised to turn
higher later this month, consistent with our expectation of a better Q4 for the
greenback.  
The euro has risen for the
past six months.
  Last
week was only the third weekly loss here in Q3.  Trend followers and
momentum traders became cautious after the euro broke through the $1.20 level.
 Profit-taking took the euro toward an initial retracement target near
$1.1820   It bounced to $1.1980 on the disappointing US jobs report, which
is the 61.8% retracement of its pullback.  The
technical indicators are mixed, but on
balance, given market positioning and the heightened risk of a disappointing
ECB, we suspect the risk lies on the downside. The $1.1820 area offers initial
support.  It is also where the 20-day moving average can be found.  A break could spur a move back
into the $1.1650-$1.1700 area.  
The dollar fell to
four-month lows against the yen on August 29 near JPY108.25.
 It rebounded over a net couple of sessions to JPY110.65, a
retracement level. While the dollar sold off in response to the jobs data, it
held the JPY109.50 area that is itself a 50% retracement of its recovery.
 The MACDs and Slow Stochastics suggest the greenback can retest the
JPY110.65-JPY111.00 area.   The key may be US Treasuries, where the
10-year, which we will discuss shortly.  Note though the JGB yield finished last week below zero for
the first time since last November.  
Last week, we thought sterling was in a particularly good technical
position.  It gained about 0.35% last week, and, among the majors, trailing behind the Canadian and Australian
dollars.
  While
there is a risk with the service sector PMI next week, and we are not
particularly confident in the UK being able to negotiate a better economic deal
with the EU than it already has, the technical indicators are supportive of
additional sterling gains.   Initial resistance is likely in the
$1.3000-$1.3020 band, and then $1.3080.  

Sterling is also looking a
bit better on the cross (against the euro), though the euro bulls are still
targeting parity.
  The
euro was pulled back after peaking a little above GBP0.9300 on August 29.
 Before the weekend the euro tested the 20-day moving average at GBP0.9150 and met the 38.2% retracement
(GBP0.9160) of the move that began with the key reversal on August 3
(~GBP0.8920).   The technical indicators favor additional euro losses.

The Canadian dollar rallied
to new two-year highs against the US dollar before the weekend, as
follow-through buying emerged following strong gains the day before that was fueled by the strong GDP report.
  The MACDs favor additional
Canadian dollar gains, while the Slow Stochastics have turned down.  Our
concern is that if the Bank of Canada hikes on September 6 like many now
expected, the Canadian dollar may sell-off when the fact is sold after the rumor bought.  Alternatively, it may sell-off on
disappointment the Bank does not hike.  The US dollar did record an
outside down week, and the break of CAD1.24 is technically important.  If
sustained, the next significant target may be closer to CAD1.2160.   
The Australian dollar is
back knocking on the $0.8000 door, which if opens can see $0.8065, the two-year high set in July. 
 A cent beyond that is the May 2015
high.    The Reserve Bank of Australia meets.  It is firmly on
hold.   It may protest the
currency’s strength, which may also be a reflection of the losses the New
Zealand dollar is suffering ahead of the election later this month (and the
government is slipping behind in the latest polls).  
The US 10-year yields
briefly dipped to a new low for the year below the 2.10% floor seen in April.
  However, its recovery
reinforced the sense the 2.10%-2.40%
yield range since the end of Q1 remains intact.  Near-term, it may
struggle to get above 2.20%, which is where the 20-day average is found.  The economic impact of the devastation in Texas is going to
complicate the growth and price picture.  Treasury Secretary Mnuchin
seemed confident of a tax reform bill by the end of the month. The September
note futures set contract highs last week before consolidating.  The
technical indicators are stretched but
have not turned.  A close below the
126-22 could be an early signal of a topping pattern. 
The Oct light sweet futures
oil contract may have staged a potentially important upside reversal on the
last day of August, but there was no
follow-through buying ahead of the weekend.
  A move above $47.60 would violate the downtrend
since downside reversal three weeks ago after it was bid through $50 a barrel.  Still, resistance in the
$48.00-$48.50 may be difficult to overcome initially.  
The S&P 500 had one of
its best week’s of the year, rising almost 1.4%.  
It had
risen every month beginning last November except for March when it lost less
than 0.1%.  It gapped higher in the last session of August and saw follow through buying, reaching a
three-week high before the weekend (2480.4). The gap is found between 2460.3 and
2462.6.  The technical indicators are
supported suggesting another run at the record (almost 2491).   The
Russell 1000 Growth Index extended its streak to six sessions and finished last week with a little more than a 2% gain.
 It rose 1.65% in August.  The only month it has fallen this year
June (-0.4%). The Russell 1000 Value Index gained 0.8% last week, after falling
1.4% in August.  It will begin next week with a three-day advance on the
line.    

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