Dollar’s Downside Correction may Not be Over, but Macro Story Still Favorable

The US dollar weakened against all the major currencies last week.  We had anticipated that the greenback would start this past week on a firm note, but we thought that without much new data, and the stretched daily technical readings, the risk favored a pullback.  
In our understanding, the widening interest rate differentials and the divergence of central bank policy continue to be the main driver of our constructive outlook.  This is consistent with our reading of the weekly technical indicators.  However, the daily technical indicators and the focus on the confusing and mixed signals emanating from the US Congress about tax reform warn that the dollar’s heavy tone can continue into at least the early part of the week ahead.  
The Dollar Index fell a little more than 0.5% last week, ending a three-weekly.  It was only the second weekly decline since the year’s low was recorded on September 8.  A two-week low was recorded before the weekend, but important support in the 94.00-94.25.  This area corresponds to the 20-day moving average, which the Dollar Index has not closed below in more than six weeks, and a trend line drawn off that September and October lows.  A small double top may be in place near 95.15.  The neckline is about 94.40. A convincing break would points to 93.75. 
On November 7, the euro fell to almost $1.1550, its lowest level since July 21.  It snapped back to nearly $1.1680 ahead of the weekend, which is the middle of a band of resistance seen between $1.1660 and $1.1700.  The MACD and Slow Stochastics are turning higher, warning that the upside correction could persist.  The near-term risk extends toward $1.1760.  That said, the US two-year premium (over Germany) widened to 240 bp, the most since 1999.  The 10-year differential is consolidating around 200 bp.  We expect the interest rate differentials will limit the scope for a euro recovery.  
The dollar reversed lower after trading at its best level against the yen since late Q1 (~JPY114.70) at the start of last week.  It found a new bid at the lower end of its three-week trading range near JPY113.00.  The rise in US 10-year yield almost 10 bp in the second half of last week helped steady the greenback.  The daily technical readings warn against expecting another run higher immediately.  On balance, continued range trading seems like the best bet.
Sterling rose nearly 1% last week.  It wrestled with the Swedish krona as the strongest of the majors.  Sterling may have been helped by the backing up of short-term rates.  The implied yield of the December 2018 short-sterling futures contract edged about five basis points higher after falling 15 bp after the BOE hiked rates on November 2.  However, sterling remains well within its $1.30-$1.3340 trading range.  The daily technical readings are mixed, which we suppose lends itself to continued near-term range trading. 
The US dollar peaked against the Canadian dollar near CAD1.2920 at the end of October, and before the weekend it had fallen to about CAD1.2665.  The two-month uptrend line is found near CAD1.2655.  Additional support is seen near CAD1.2630.  The two-year rate differential continues to consolidate around 20 bp, the upper end of where it has been for almost four months.  The five-day moving average is poised to fall through the 20-day average for the first time since September 22.  This coupled with the daily technical studies warns that greenback downside correction may not be over.  
The Australian dollar’s upside correction was stymied at $0.7700, and the cut in the central bank’s inflation forecasts helped reinforce the cap.  It was the weakest of the major currencies last week, gaining 0.1% against the US dollar.  Support is seen in the $0.7625-$0.7640 band.  A trendline drawn off the January, May and June lows is found just below $0.7600 at the end of the week ahead.  That said the daily technical indicators are more constructive and warn that near-term Aussie weakness may not be sustained.  
Light sweet crude oil for December delivery reached its best level since the start of the year, but the momentum faltered.  Technically, a pullback is looking increasingly likely.  Prices have risen for five consecutive weeks, and 10 of past 11 weeks.  This means that there has been only one week in which oil prices fell since the end of August.  We peg initial support near $55.50.  A convincing break could signal a move toward $53.50.  
The US 10-year yield slipped to 2.30% at the start of last week.  Without fresh economic data of much importance, the yield finished the week knocking on 2.40% door.  Meanwhile, the US two-year yield continued to climb.  At 1.65%, the yield is the highest since 2008.  The yield curve steepened slightly last week.  The main driver was the implications of the tax reform bills and the apparent recognition that serious fiscal reform will remain elusive.   The sell-off in the December 10-year note futures completed a 61.8% retracement of the bounce since the double low was recorded in late October.  A break of 124-20 would signal a test on that double bottom low at 124-06.  The low for the year was set in March on the generic futures near 123-10.  The daily technical studies underscore the downside risk (higher yields).  
The S&P 500 snapped an eight-week advance.  It lost 0.2% last week, a minor pullback, which does not appear to require a large fundamental explanation, though the Senate proposal to delay the corporate tax cut by a year may not have been helpful.  The S&P 500 briefly traded below the 20-day moving average for only the third time since the end of August but has not closed below it once.  The firm closes suggest there may be another push higher in the coming days.  However, the MACDs and Slow Stochastics continue to show a bearish divergence from prices.  We remain cautious.  
Meanwhile, the Russell 1000 Growth Index managed to eke out a minor gain, but it was sufficient to extend the advance for a seventh consecutive week.  The Russell 1000 Value Index fell all last week except for Monday.  Its losing streak extended for the third week.  As a consequence, the spread between the two continued to widen.  


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