Dollar’s Downside Beckons in the Week Ahead

The dollar’s push lower that we anticipate until later in the month
gained momentum following the disappointing US retail sales report before the
  The dollar’s technical tone has deteriorated, while the economic
data is unlikely to be sufficient to reverse sentiment. 

The Dollar Index managed to recouped about half of the retail sales induced fall.  A break of the 95.00, the low from the start of the month, would be a bearish sign, signaling a potentially quick move to 94.50, but
there is potential toward 94.00.  A the gap created by the UK referendum
results found around
93.60-93.70 may also attract prices.   Note that the trendline drawn off the May and June
lows comes in near 94.20 by the end of next week.

The euro has been streaky, and this
has frustrated many participants.
  Consider that last week it rose in
four of the five sessions.  The week before it fell in four of five
sessions.  The week before that it rose in four of the five sessions.  
The saw tooth pattern may end next week as the technical considerations suggest
the risk is on the upside. 

The euro finished last week with an outside day, but the close was weak, toward the middle of the range.  The
technical indicators mildly support constructive.  The euro is approaching the
downtrend line drawn from the May and June highs.  It is found near $1.1260 at the start of the new
week, which also corresponds with the 50% retracement of the down move since
early-May.  The 61.8% retracement is near $1.1350.    Initial support is seen near $1.1130.  

The dollar also posted an outside day against the Japanese yen and the close was similarly uninspiring, toward the middle of the session’s range.  It was turned back as it approached
the upper end of its relatively narrow range, (~JPY102.50).  On the
downside, initial support is seen in the
JPY100.65 area, but  JPY100 is more important, especially
psychologically.  Among the technical indicators we look at, the slow
stochastics may be warning of limited downside potential for the

Sterling continues to struggle to sustain the shallowest of
It fell against the dollar for the second consecutive
week.  In the seven weeks since the referendum, it has risen only
twice.  The BOE did not buy as many Gilts as it intended in the reverse
auction on Tuesday kept sterling straddling the $1.30 level the rest of the

Like the euro and yen, sterling also recorded an outside day before the weekend, but unlike the others, it did close below the previous day’s low.  That is traditional downside reversal pattern, but in a downtrend, it may simply illustrate the bearish sentiment   Sterling tested $1.29 and closed below the previous band of support, seen in
the $1.2930-$1.2950 area.  It appears the bears want to retest the $1.2800-$1.2850 lows from early July.     A move above $1.3050 would lift the tone.  

The euro rose against sterling every session last week and finished at new multi-year highs.  It has
risen for four consecutive weeks and all but one week since the
referendum.  The euro is approaching the 2013 highs
(GBP0.8770-GBP0.8815).  A break would bring the longer-term objective near
GBP0.9000 into view.

The Canadian dollar was the second strongest major currency last week,
rising about 1.7% against the greenback. 
The Norwegian krone
outperformed it; rising 3.6% on the week.  Nokkie was helped by unexpectedly strong inflation figures and the
recovery in oil prices.  The rise in oil prices and the recognition that
the diverging US-Canadian July employment figures will not elicit a policy
response buoyed the Canadian dollar.  

A trendline drawn off the early-May
low and late-June low comes in near
CAD1.2885 at the start of next week, and is the immediate target.
US dollar fulfilled the 38.2% retracement of the gains off the early-May that was found near CAD1.2950.   The 50%
retracement is near CAD1.2860.  The five-day moving average has crossed
below the 20-day average, while the
technical indicators point to additional greenback losses in the period

The Australian dollar finished the week with two successive losses. 
It has not done so since July 19-20.  The 0.6% loss before the weekend cut the week’s gains by more than half and ensured that the Aussie would be the weakest major currency after sterling with a 0.4% gain.  It has been in a strong uptrend and technicals appear stretched.  The pre-weekend close was the first below the five-day moving-average since July 25.  The $0.7630 area corresponds to the 38.2% retracement of the last leg up that began in late-July.  A break of that would suggest a move into $0.7550-$0.7575 area.       

Comments by a Saudi official suggesting that next month’s IEA meeting
could be a forum to discuss output cut helped oil prices recover from the
supply-induced losses on August 8-9
.  We are skeptical that an output
freeze, let alone a cut in output, can be agreed to until Iranian output is
closer to what it was before the embargo.  This
take the rest of the year if not a bit longer. 

Open interest in the light sweet oil futures for October has surpassed
September, so turn our analysis to it. 
It posted its largest weekly advance in four months (~6%).  The technical indicators are
constructive; more constructive in our opinion than fundamental factors. The MACD and RSI are trending higher, and the
five-day average has crossed above the 20-day average for the first time since

The October futures contract approached the 38.2% retracement
of the decline from the early-June high
near $53.
  That retracement is found just below $45. The October contract closed above its 200-day moving-average ( $44.55) and stopped shy of its 100-day moving average ($46.50).  A downtrend
line off the June and early-July highs also is near  $46.50 at the end of next week, which also corresponds with the 50%
retracement objective.  Initial support appears around $43.50.   

US 10-year yields began the week at the upper end of the recent range by
  It finished last week below 1.50% after the disappointing
retail sales.   A push below 1.45% would be an ominous technical
development; warning of the risk of a return toward
1.30%.  The September note futures
runs into resistance in the 133-04 area.  A move above here could target
134-00 to 134-07.    Only a break of 131-16 would sour the
technical tone. 

The S&P 500 traded in narrow ranges last week (~2172-2188). 
It managed to reach a new record high (2188.45).  Technical indicators are
not particularly helpful presently but appear
mostly neutral to constructive.  A break of August’s low (~2147.60) would
undermine the technical tone.  Many are looking for a move above


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