Has a USD Correction Begun?

The MSCI benchmark for developed and emerging market equities has fallen for the past five weeks.  The dollar has done well over this period.  Although it lost some momentum ahead of the weekend, the Dollar Index reached a two-month high at the end week, reflecting the two-month lows of the euro and sterling. The Australian dollar recorded news lows for the year near $0.70 before rebounding before the weekend.  The Swiss franc is often seen as a safe-haven, but the dollar outshined it and rose to three-month highs as equities tumbled.  The yen is the main exception.  It is was the only major currency to rise against the dollar last week (~0.5%).  We retain a medium-term bullish dollar outlook but cautious near-term due to some signs that it remains technically stretched after approached important chart points.  

Dollar Index:  The advance in four of the past five weeks brought the Dollar Index through the 96.00-cap and approached the year’s high set in mid-August just shy of 97.00.  The reversal lower before the weekend left a bearish shooting star candlestick in its wake.  Previous resistance (96.00) should offer support, while a break of the 95.70 area warn a top of some import could be in place.  The technical indicators are mixed, and the upper Bollinger Band on the daily and weekly charts converge in the 96.50-96.65 area.   

Euro:  The euro rallied a nickel from the August 15 low of the year (~$1.13) to late September, when it briefly poked through $1.18. While the new Vice Chair of the Federal Reserve’s first public speech showed the independence of the central bank is preserved by endorsing additional gradual rate hikes over the stepped-up pressure by the President and some of his economic advisors, Draghi and the ECB emphasized the need for the accommodative monetary policy after the asset purchases conclude at the end of the year.  The renewed divergence helped drive the euro to $1.1330 before the pre-weekend reversal (possible hammer candlestick pattern).   The technical indicators did not turn higher.  Still, we suspect the euro can move back into the $1.1440-70 range.  Over the slightly longer-term, we continue to look for a break of the $1.12 area, which is the last major (61.8%) retracement of the 2017 rally.  

Sterling:  Nursing a 1.9% loss on the week even after stabilizing ahead of the weekend, gave sterling the dubious honor of being the weakest of the major currencies.  It did not, however, draw as close as the euro did to the mid-August low (~$1.2660).  Between risks of a Brexit with no agreement and rekindled interest in divergence saw sterling take out the September low (~$1.2920).  That and  $1.2950 retracement objective offers a band of resistance now to what looks like a potential short-squeeze marked a hammer candlestick pattern before the weekend.   

Yen: Falling global stocks and yields helped the yen resist the tug of a stronger greenback.  In fact, for only the third time (once in August and once in September) since the end of May, the dollar traded below its 100-day moving average against the yen (~JPY111.55).  It did manage to close back above it as unwinding of cross positions seemed to weigh on the yen, as the dollar pulled back against the other majors in the waning hours of last week’s activity.  Initially, resistance may be encountered near the trendline since March that was violated in the second half of last week and is found in the middle of the JPY112.00-20 area, but a stronger cap may be seen near JPY112.50.  

Canadian Dollar:  Net-net, the Canadian dollar was little changed last week, making it the second strongest major currency after the yen.  The Canadian dollar got a lift from the Bank of Canada rate hike and hawkish spin, but the weakness of equities and the underlying strength of the US proved too much.  The US dollar rose to six-week highs near CAD1.3160,  well above the downtrend line off the high for the year set in June,, before the pre-weekend reversal, which saw it return to CAD1.3070.  This month’s uptrend line is found near CAD1.3060 at the end of next week when both Canada and the US report employment data.   

Australian Dollar:  The Australian dollar fell to new two-year lows ahead of the weekend (~$0.7020) before reversing higher.  Although it rose above the previous session high, which is required for a bullish technical key reversal, it did not manage to close above it (~$0.7100). Bullish divergences are evident in the MACDs and RSI.  It has not been above $0.7150 since October 2.  The Aussie has dropped nearly 11 cents since peaking in January.  The weekly technical are stretched but have not yet turned.  The double top pattern from Q4 17 and Q1 18 (near $0.8100) projected toward $0.6900, has been our target but the price action may force a reassessment.

Mexican Peso:  The dollar climbed against the Mexican peso for the fourth consecutive week.  The high was set in the middle of the week near MXN19.63.  It stalled there, shy of last month’s high near MXN19.68 and eased back a little through MXN19.35 ahead of the weekend, closing on the session’s lows. The MACD and Slow Stochastics have not turned lower, like the RSI, both are stretched.  The next level of support is seen near MXN19.28 and then MXN19.20.  Political considerations, like the referendum on another airport for Mexico City, and comments by the incoming President risk volatility.  

Oil:   The price of WTI for December delivery fell 2.6% last week, matching the previous week’s decline.   However, from a technical perspective, it may be important that the downside momentum faded and in the second half of the week, a shelf was carved near $66 and contract closed the week at a four-day high.  The 100-day moving average is found a little above $68, and $68.50 corresponds to the previous shelf, but only a move back through $70 is technically important.  

US Rates: Falling stocks and the drop in the oil pressured US 10-yields to three-week lows near 3.05%.  Market-based inflation expectations did not match the 10 basis point fall in the 10-year Treasury, the largest drop in five months, and some argue that this reflects the market beginning to price in a policy-mistake from the Federal Reserve.  We are less sanguine and note that in the University of Michigan’s survey, the 5-10 year outlook for inflation ticked up to 2.4% from 2.3%.  We suspect liquidity considerations and the drop in equities can explain the bulk of the adjustment outside of inflations expectations per se.  Another way of saying this is that the pre-weekend decline in yields, for example, seemed more a function of the pressure on stocks than the softer GDP deflators.  The two-year yield declined by nine basis points.  The January 2019 fed funds futures contract implies an effective fed funds rate of 2.37% vs.2.18% presently and 2.405% at its peak. It rose three basis points last week.  The December 2019 contract implies 2.89% yield, which is down from a peak of 2.935% in early October.   

S&P 500:  For three consecutive weeks now, the S&P 500 managed to rise in only one session a week.  It fell a little more than 3.6% over the course of the past week to bring the decline since the high at the start of the month to a little more than 10%.   The technical readings are stretched, but a turn may no e imminent.  Moreover, the weekly technical indicators warn against picking a bottom now.  A move above 2700 would help stabilize the technical tone, but the 200-day moving average is at a distance–2767 area. 

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