The recent equity volatility, declining yields, and a softer dollar may be over or nearly so. The 25% rally in February WTI appears to have stabilized market measures of inflation expectations. The S&P 500 has retraced 38.2% of its decline since the record high in September. The market is begun pricing in a small chance of a Fed hike in Q2. Although the dollar was looking to be in the grips of a bear hug, it appears poised to begin recovering in the days ahead.
Dollar Index: The rally from April 2018 low(~93.80) to the December 14 high (97.70) has been retraced in recent weeks. Last week, it overshot the 61.8% retracement that is found near 95.50. It held 95.00. The MACDs and Slow Stochastics have not turned, but appear to be poised to do so shortly. The recovery ahead of the weekend brought it to the 95.75 area, which is the lower end of a band that extends to 96.00 that offers the near-term obstacle. A move above would be a blow to the bears.
Euro: The upper end of a couple month trading range was violated last week, to reach $1.1575, its best level since late September. The market rejected the advance, and the single currency finished the week back in the $1.13-$1.15 trading range. The euro closed last week below the five-day moving average for the first time since January 4. The MACDs are turning down, though the Slow Stochastics have not. Initial support is seen near $1.1440 and then $1.1410-20. The 100-day moving average is found near $1.1475, and if last week’s upside break was false, then we suspect that gains toward this area may offer stale longs an opportunity to reduce exposure.
Yen: The market continues to recover from the flash crash of the yen crosses on January 3. The dollar has been in a JPY107.75-JPY109.10 trading range since then. The RSI and MACDs look constructive. The firmer yields, stabilizing equities, and rekindled risk-taking sentiment may help the dollar break out of the range to the upside. However, the upside will likely be challenged near JPY109.80-JPY110.
Sterling: Sterling posted an outside day before the weekend and closed above the previous day’s high in a bullish technical development. Many market participants seem to be looking beyond this week’s House of Commons vote, which be all reckoning is going to mark a dramatic defeat for the Withdrawal Bill. The most likely scenario is a delay beyond the end of March of the UK’s exit from the EU. As this is seen reducing the chances of leaving without an agreement, investors reward sterling. Sterling can buck the rebound in the dollar we envision and can strengthen against the euro. Initial resistance is seen near $1.2870, but a move above there would target $1.30. The euro recorded an outside down day and week against sterling. A break of GBP0.8880-GBP.0.8900 area could signal a drop toward GBP 0.8700.
Canadian Dollar: The US dollar staged a potential key reversal against the Canadian dollar ahead of the weekend by make a new low for the move before rallying to close above the previous session’s high. Since January 2, the US dollar had shed about 3.5%. The RSI has turned up, and the Slow Stochastics are about to cross higher. The MACDs are lagging. A move above CAD1.3280 improve the greenback’s technical tone and point to the next target, which we suspect is near CAD1.3350. If the US dollar has turned, support ahead of CAD1.3220 should hold.
Australian Dollar: From the flash crash low of almost $0.6740 to the pre-weekend high near $0.7235, the Australian dollar rallied roughly 7.3%. The RSI looks toppish and the Slow Stochastics and turn lower in the coming days. The MACDs still point up. A move above last week’s high would target $0.7400, but we are less sanguine. The domestic macro backdrop is deteriorating, and the market has begun pricing in a rate cut later in the year. We peg support near $0.7170, and a break would encourage our less constructive view.
Oil: February light sweet crude oil reversed lower against of the weekend. It follows a 26% rally since late December. Importance resistance is seen near $55 a barrel, though the pre-weekend high was nearer $53.30. Initial support is seen near 51.00, the five-day moving average, which has lent support since December 27, though some may not be convinced of a top until $49-$50 a barrel yields. The rally in oil appeared to have helped boost the Mexican peso, Canadian dollar, and Norweigan krona, and a reversal could remove a prop. On the other hand, the Indian rupee has been dragged down by the dramatic rally in crude in recent weeks, and this may reduce the headwind.
US 10-year Yield: The generic 10-year yield needs to rise above 2.75% to solidify the recovery off the low near 2.55% seen January 3-4. A retreat in oil prices may not help, and the government shutdown limits new economic reports. The auction schedule is light next week. The only coupon being sold are 10-year TIPS. The March futures contract has begun carving a shelf near 121-16, where the 20-day moving average is found. A break is needed to confirm a yield low is in place, though some may not be convinced until 121-00 is paid. The RSI has turned up, but the Slow Stochastics and MACD are still moving lower.
S&P 500: The five-day rally ended ahead of the weekend with a minor 0.1% loss. It still managed to close on its highs, just below 2600. Assuming 2600 can be surmounted, the next target is a gap from mid-December that is found in the 2635-2637 area. The problem from a technical point of view is that the S&P 500 has already rallied strongly after trading below 2340 on the day after Christmas, and the technical indicators look stretched. Initial support is seen near 2560.