Leaving aside
the larger and longer-term views, market participants are split over the dollar’s near-term outlook.
The steady beat of favorable US economic news will slow next week, just given
the calendar.
The focus shifts to the ECB meeting, where
participants are wary of a hawkish ease. This would mean that even if the central bank extends its
purchases, as widely expected, it may signal that it is not an open-ended
commitment.
We suggest the near-term price action should
be respected, which is to say that the consolidation of the dollar’s gains that
we anticipated could evolve or morph into an outright correction.
What we propose to do is identify levels that could signal a genuine dollar
correction drawing from technical analysis.
The Dollar Index snapped a three-week
advance. A convincing break of the 100.65, would likely signal a deeper
setback that pushes the basket to 99.70
and possibly 99.00. The technical indicators that we noted were mixed last week have all turned lower. After the US jobs data, the Dollar
Index tested a downtrend line on the hourly bar charts to set the session
high. A move above there (~101.10) would likely help blunt some of the
technical negativity.
The euro rose to ten-day highs before the US
jobs data just shy of $1.07. Here too the technical indicators point
to downside risk for the dollar. However, ahead of the political
events on December 4 and the ECB meeting on December 8, participants have been
reluctant to buy euros, preferring sterling or the Swiss franc to play for a
near-term bounce. It is not as clean of a bottoming pattern as the
potential topping pattern in the Dollar Index, but a move above $1.0710-20
would likely point to a stronger euro recovery that could see
$1.0800-$1.0850. A move below $1.06 may confirm this relatively flat
consolidation.
The dollar stalled in front of JPY115, having
reached JPY114.80 on December 1. It retraced more than 38.2% of the
week’s gains (from November 28 low near JPY111.35), which was found near JPY113.50. The 50%
retracement is found at JPY113.10, and the 61.8% is near JPY112.70. The RSI
did not confirm the new high, leaving a bearish divergence in its wake.
The Slow Stochastics have been moving
lower, and also did not confirm the new high recorded. The MACDs have not turned down but are set to do so early next
week.
Sterling is near two-month highs.
It is flirting with the 50% retracement of the down move since early September
(~$1.3445) which is found near
$1.2645. There is little between there and the 61.8% retracement
($1.2830). The RSI and MACDs allow for additional near-term gains, but the technicals are getting stretched, and sterling
finished the week above the upper Bollinger Band (~$1.2320) There is
more talk/hope of a soft Brexit, and this
is understood to be sterling positive. Supreme Court hears the
government’s appeal, though no decision is
expected for several weeks.
The Canadian dollar was the best performing
major currency last week (+1.7%) after the Norwegian krone (1.8%). Two
fundamental considerations were at work. First is the 11.6% rally in oil
price following OPEC’s announcement. Second is the seven basis point
narrowing of the Canadian discount to the US on the two-year money. The US
dollar fell to CAD1.3255 before the weekend, a two-month low. The five
and 20-day moving averages crossed for the first time since late October.
Technical factors warn of the risk of
additional near-term US dollar losses, though it closed near its lower
Bollinger Band (~CAD1.3290). A break of CAD1.3200-CAD1.3230 could spur a
move toward CAD1.30. The Bank of Canada meets next week, but policy is on steadfastly on hold.
The Reserve Bank of Australia meets in the
week ahead. Policy is also on hold.
The Australian dollar looks constructive. Look for a move through the
20-day moving average (a little below $0.7500, and area that capped the Aussie
in recent sessions), which also corresponds to a 38.2% retracement of the drop
since the election. The 50% retracement is
found at $0.7545 and the 61.8% at $0.7600.
Leaving aside whether one thinks that OPEC
members will really deliver the output
cuts they have promised, or whether non-OPEC oil producers participate in cuts,
the technical indicators in the light sweet crude oil futures warn that further
price rises. The next target is the double high from October near
$52.75. The June high was another dollar higher. Initial support is pegged near $50.
The US 10-year yield rose to almost 2.50% on
December 1, but this could have very well completed the move that began from
around 1.80% before the election. The market will have to fish for a
bottom in yields. The first place to look may be near 2.30%. The December
10-year note futures fell to 124-11 on December 1 and finished the week nearly
a big figure higher. Technically, there is near-term scope toward 126-00.
Above there is the 20-day moving average near 126-19 and then
126-28.
The S&P 500 snapped a three-week 6%
advance. The Slow Stochastics have rolled over, and the MACDs are about to turn. The RSI is flat in the
high 50s. A push back to
2177-2180, the 20-day moving average and the 38.2% retracement of the
post-election rally is the first downside target
below the 2187 low on December 1. Below there is 2170.