If the Market has Discounted Dec Fed Rate Hike, Will the Focus Shift to Back to ECB?

The US dollar turned in a good week.  It appreciated against nearly all the
major and emerging market currencies. The fundamental drivers
are well known.  The market now recognizes that strong likelihood (near
certitude) that the Fed will hike rates one more time this year.  
The rise in US 10-year Treasury yields to 2.40%, after having neared 2.0% a month ago, helped
lift the dollar against the yen. 
Political developments in Europe, especially Spain and the UK, as
investors wait to see the composition of the next German government.  
In Spain, the confrontation
between Catalonia and Madrid has not been
resolved, but the political and economic elite in Spain have united in
defending the state. 
declaration of independence by Catalonia would escalate the situation and
likely force Madrid to invoke the part of the Constitution that allows it to
revoke Catalonia’s regional authority. 
In the UK, a backbench
rebellion against May is in the works. 
 Reports suggest that 30 MPs are endorsing a
leadership challenge, while 48 are needed. May claims to have the cabinet’s
support, but given the repeated efforts of Boris Johnson to push a different
line, it is not clear what that support really
means.  Moreover, the backbench rebellion makes the cabinet support less
The potential head and
shoulders bottom in the Dollar Index we have been tracking met
the minimal objective (94.20) after the US jobs data (~94.27) before reversing
 It left
a potential bearish shooting star candlestick pattern in its wake.  
Initial support now is found near the
93.20-93.40 area.  
The magnitude and shape of
the dollar’s pullback will impact our confidence in the larger technical view
we outlined last week.
month’s rally spilled over into October
and had left the daily technical
indicators extended.  However, technical indicators on the weekly charts
leave plenty of scope for the dollar to enjoy a strong Q4 performance.
That said, we question the
simple studies that suggest some sort of
seasonal pattern favors the dollar. 
We think such reports are
based on a small sample, and if one includes the longer history, no such
seasonal pattern is evident. Over the past 35 years, the Dollar Index has risen
in 21 of the fourth quarters and fallen
in 24.   It is true that in the last three years, the Dollar Index rose in
Q4, but perhaps it is because the dollar has been in an uptrend.  
The euro approached the
mid-August low (~$1.1660) after the US jobs report.  It subsequently
recovered above $1.17. 
 There did not appear to be new news behind its reversal, which left a potential bullish hammer
candlestick pattern in its wake.  We suspect consolidation is the most
likely near-term scenario.  The top of the downtrend channel that has been formed recently is found near $1.1760 at the start of next week.  That has to
be convincingly violated to be anything significant, and even then, the $1.1800
area is likely to prove formidable.  
It may sound too simple,
but the dollar’s movement against the yen is nearly in lockstep with the 10-year US Treasury yield. 
 The US yield rose to 2.40% for the
first time since July after the distorted US jobs data and so did the dollar
against the yen.  As the US 10-year yield pullback, the greenback reversed
lower against the yen, creating a potential shooting star candlestick pattern.
Initial support is seen in the
JPY112.00-JPY112.20 area.  Additional support is seen near JPY111.50. 
Sterling suffered its biggest
weekly decline since the flash crash a year ago.
 The 2.5% drop brought sterling to
almost $1.3025, its lowest level since early September, and below levels that
prevailed before the BOE gave a hawkish twist at its September 14 meeting.
  Sterling has also surpassed the 61.8% retracement of its advance since
late August (~$1.3110).  
The next important chart
point is seen as the trendline drawn off
the April, June and August lows. 
 It is found a little below $1.2900 at the start of the new
week and rises toward a couple of ticks a
day, That said the $1.30 level might be of some psychological importance.
 The $1.30 area also corresponds to a 50% retracement sterling’s gains
since April’s lows.  Initial resistance is
seen in the $1.3130-$1.3160.  
The US dollar also may have
put in a near-term high against the Canadian dollar near CAD1.26, which would
cap an advance that began in early September from nearly CAD1.2060.
  After making a new high for
the move after the jobs report, the US dollar slipped toward CAD1.2530.  A
further pullback can see CAD1.2450-CAD1.2570.  
Investors recognize that a
rate hike later this month is unlikely, but it is not given up on a December
from the OIS, Bloomberg calculates that the odds of a hike this month have
fallen to around 27% from 44% a month ago.  The odds of a December hike
has hardly fallen.  It stands at 65%, down from a peak a little over 68%.
Disappointing retail sales
and dovish comments from a member of the central bank’s board helped the
Australian dollar extend its losing streak for a fourth consecutive week. 
 The Aussie finished the week with
two consecutive losses below $0.7800 for the first time since the first half of
July.  Its recovery ahead of the weekend was minimal. Resistance is seen in the $0.7780-$0.7800 area.
Light sweet crude oil for
November delivered slumped 4.6% over the past week, the largest fall in five
approaching storm (Nate) was already spurring the closure of platforms and
refiners.  In addition, it appears
OPEC output increased last month.  Also, some reports indicated that there
had been increased producer hedge-related
selling.  The price action of the November futures contract appears to have traced out a possible head and
shoulders topping pattern that project to $47.  The technical tone is
soft, with the five-day average crossing below the 20-day average for the first
time in a month. The technical indicators are also trending lower.
 The $48.70 area may offer initial support.  It corresponds to a
61.8% retracement of the rally since the end of August.  
The US 10-year yield rose to
2.40% following the jobs report and then backed off five basis points. 
is the upper end of the range that has prevailed for the past six months.
 We suspect something more than skewed economic data and a December Fed
hike is needed to lift yields further.  The beginning of the shrinking of
the Fed’s balance sheet through not recycling the
full amount of maturing proceeds does not appear sufficient either to
push yields substantially higher.  
Although there does seem to
be legislative progress towards a 2018 budget, which is needed if the
Republicans are going to try to do tax reform through reconciliation. 
is the same strategy that was tried with
health care reform. Many observers doubt that final version will look anything
like what the framework offered by the
White House.   
The December 10-year note
futures spiked to 124-22 after the jobs report.
  It is the lowest level since
July and may mark the end of the drop that began a month ago from almost
 128-00.  The 125-20 area offers initial resistance.  Then there
is a band of resistance found between 125-29 and 126-10.  
The S&P 500 consolidated
its new record highs before the weekend. 
 The minor loss was sufficient to
snap an eight-session advance.  Still, the 1% gain on the week extended
the winning streak to a fourth week.  The momentum has been strong, and
the benchmark has not closed below the five-day moving average since September
26.  It is found now just below 2540.  A break may be an early
warning sign of a consolidative phase.  

The Russell 1000 Growth
Index gained 1.2% in September and was up a little more than that last week.
  The Russell 1000 Value Index
rose almost 0.9%, its fourth weekly advance and the sixth gain in the past
seven weeks.   The Value Index is up nearly 7% this year, while the Growth
Index is up nearly 21%. To put these figures in perspective, consider that the
MSCI Emerging Market equity index is up nearly 28% this year, the MSCI World
Equity Index of the developed countries is up almost 15%.   


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