Is the Trend Your Friend or Fade the Break?

A basic but essential judgment short-term participants must make is whether a particular market is trending or rangebound.  It informs the technical tools one uses and the tactics one employs. Often one’s timeframe shapes one’s answer.  The dollar has either approached or gone through what previously seemed like the lower end of a range.  Recognizing that there is no substitute for disciplined risk management, on balance, we are more inclined to see the dollar ranges hold and for it to return within them where the ranges have broken. 

Dollar Index:   The high for 2018 was set in the middle of December near 97.70, and it was sold to almost 95.00 on January 10.  It has fallen in seven of the nine weeks since the end of November.  The Dollar Index retested the lows after the FOMC meeting and recovered to close above 95.50 ahead of the weekend.   The Dollar Index has not traded below 95.00 since mid-October.  The technical indicators are mixed but not inspiring.  A convincing break of 95.00 would target 94.00-94.20.  

Euro:  The dovishness of the ECB briefly drove the euro through the bottom of its range at $1.13.  The Fed’s dovishness a week later briefly lifted the euro through the top of its ranges at $1.15.  To make money in a range requires buying low and selling high and leaves one ill-prepared to profit from a break.  Alternatively, playing for a break has been frustrating for several months.   From May through September last year, the euro finished each month with a $1.16 handle.  It closed with a $1.13 handle in October in November, and  $1.14 in December and January. It is virtually unchanged since the end of the year.  The technical indicators are constructive, as they often are at the upper end of the range.  

Yen:  Since recovering from the flash crash at the start of the year, the dollar has traded between JPY108.00 and JPY110.00.  The Fed’s dovishness pushed it away from its highs, in an outside session to a two-week low near JPY108.50.  It recovered back to JPY109.50 ahead of the weekend, after the strong jobs and ISM data. The dollar closed 2018 near JPY109.70.  The technical indicators are not encouraging, but a move above JPY110 would target a band of resistance from JPY110.85-JPY111.35.

Sterling: The six-week advance was snapped as the UK tactics–seek to re-open the agreement struck after 18-months of negotiations–and the EC rejection, reduced the probability of a deal.  Sterling rallied 7.8 cents from the flash-crash low by $1.2440 to peak near $1.3220.  The MACDs and Slow Stochastics are rolling over.  At the very least consolidation seems likely.  Initial support is seen around $1.30 and then $1.2940.  

Canadian Dollar:  The US dollar appreciated against the Canadian dollar every week in Q4 18 but one.  Last week, it fell almost 0.9% to extend its losing streak for a fifth consecutive week.  The Canadian dollar’s 4.1% appreciation this year leads the majors.  It had fallen by almost 5.4% in Q4 18.  The technical indicators are not signaling a US dollar bottom, but we are concerned about the deteriorating macro backdrop (November GDP contracted, and the Leading Economic Indicator fell for the third month, the longest decline since 2009) and growing US rate differential.  The US dollar needs to regain a foothold above CAD1.32 to help stabilize the technical tone.  

Australian Dollar: The Australian dollar rose 1% last week to lead the major currencies.  It reached almost $0.7300 after the Federal Reserve’s pivot, its best level since early December.   It was near $0.7075 before the ECB’s dovish pivot the week before.  Easier rhetoric by the Fed and ECB, the anticipation of action by the ECB, and ongoing measures by Chinese officials to strengthen the economy and the markets appear to be offsetting domestic headwinds.  It has rallied 5.6 cents from the flash crash low (~$0.6740). The Aussie peaked in January 2018 around $0.8140. Outside of the flash crash, it may be carving out a bottom around $0.7000.  However, it too seems to be running ahead of the macroeconomic developments, leaving momentum traders vulnerable to less than ideal news. 

Mexican Peso:  The dollar rose 0.65% against the peso last week.  Nothing to write home about, but still enough to unceremoniously mark the end of a nine-week slide.  The five-day moving average is poised to cross above the 20-day moving average for the first time since December 10.  The MACDs and Slow Stochastics are trending higher suggesting that a correction is underway.  The first target is near MXN193.30 and then MXN19.50-MXN19.55.  

Oil: Over the past two-and-a-half months, the price of WTI for March delivery has traced out a head and shoulders pattern and closed above the neckline ($55) before the weekend.  The measuring objective is $67.  The next immediate target is the mid-November high near $58.50.  

US Rates: When everything is said and done, the US 10-yield is still ten basis point lower than two weeks ago.  It posted the first weekly close below 2.70 since the last jobs report on January 4. The soft yields would have seemed to allay concerns that the Fed’s balance sheet reduction would force rates higher.  The Fed’s patience will encourage investors to look past Q1 data–distorted as it will be by the government shutdown, the unusually cold weather, and statistical quirk of weakness in Q1–. The two-year yield rose four basis points after the jobs figures but still fell 10 bp on the week to 2.50%.  If the US is recession-bound, as many observers argue, evidence is not to be found in the January employment data nor ISM report, but the unexpectedly soft auto sales figures hint at some softer reports ahead.  The 2-10 year curve steepened last week, though around 18 bp it is in the upper end of a two-month range.   

S&P 500:  The S&P 500 finished last week above 2700 for the first time since the end of November.  With last week’s nearly 1.6% rise, the benchmark has met the 61.8% retracement objective of the decline from the record high (~2941 last September) to the late December low (~2346.5).  This s as far as we had anticipated. A move above 2720 may lift expectations toward 2800, but technical indicators are stretched, and retracement objectives have been met.  The air may get thinner.  


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