Near-Term Dollar Outlook

The US dollar finished September in a  weak technical position.  However, the fundamental news, including
mostly upside surprises from the economic data, and even some doves on the
Federal Reserve, like Chicago President Evans seemed to warm to a year-end
hike and lifted the dollar. The less than spectacular jobs report saw the dollar give back some of this week’s gains.  It still managed to close higher against all of them, though with the momentum stalling ahead of the weekend.  
We have consistently argued against the
speculation of a November move.
  There is no precedent for a change in policy so close to a
national election.  That is one way the Fed has shown its independence
from politics.  It will not overshadow the political process.  Also, the November meeting does not have a
press conference; nor is there a scheduled press conference or updated
forecasts.  These are not insurmountable hurdles, but it would seem to
require a greater sense of urgency than is current expressed or embedded in the
data.  
The US jobs data was solid even if disappointing.    The private sector gained 167k jobs, more than
August’s 144k increase, and a little more than the 153k average jobs creation
over the past six months.  The 11k government jobs lost was the most in
the year, while the participation rate rose to 62.9%, matching the highest
level since February 2014.  
Before the jobs report, the Dollar Index
rose to almost 97.20, the highest since late-July.
  Note that the top of the Bollinger
Band was near 96.55.  The jobs data sent the Dollar Index to 96.40. 
That met the 38.2% retracement objective (~96.50) of the rally from the
September 30 low near 95.35.  The 50% retracement is at 96.25 (which
corresponds to the five-day moving average).  The 61.8% retracement is
96.05.   
The euro had fallen to two-month lows near
$1.11 prior to the US jobs report.
  It recovered smartly and finished the week just above $1.12.   The downtrend line drawn off the
May, August, and September highs comes
near $1.1250 at the start of next week, coming down about two ticks a
day.  Those extremes, $1.11 on the downside and $1.1250 may denote the
range for period ahead.    We expect policy for the ECB and the Federal Reserve are on hold until December.  
The dollar’s eight-session advance against the yen ended
before the weekend.
 
The dollar’s advance stalled in front of the September high near
JPY104.30.  After the jobs data, the dollar approached the 38.2%
retracement of the gains registered during the streak (~JPY102.60).  The
50% retracement is near JPY102.15.
Sterling collapsed before the weekend but managed to recover toward $1.25.  After losing 1.25% in the month of September, sterling depreciated by 4% last week,  The risks of a hard exit from the EU, which has come to
mean the lack of free access to the single market in exchange for more controls
over immigration, have risen, but that does not explain what was as much as a
10% move in few minutes.  The drop was not as large as the one that took place in the immediate response to the
referendum, but there are few precedents of such a large move without a clear
precipitating factor.     Our usual technical tools may be of little help, but we suspect
consolidation is the most likely near-term scenario.   The new range
may be $1.23-$1.26 for next week.  
The Canadian jobs report was better than
the US, but the rate differential story still is operative, and that, arguably, helped keep the US dollar well
supported. 
 The US dollar closed the week recording
four consecutive sessions of higher lows and higher highs. The greenback is testing the CAD1.33 level.  It marks a 38.2%
retracement of the dollar’s sell-off since approaching CAD1.47 at the end of
January.  It has not been above there since early-March.   A
move above there would bring the next objective (~CAD1.3575) into view.  A
shelf appears carved near CAD1.30.  
The Australian dollar’s technical tone has
softened, with the RSI and MACDs moving lower.
  The five-day moving average could
slip below the 20-day average next week.  The $0.7700 area has proved to
be a formidable cap.   The third test in three months failed to break
the ceiling.  A retracement objective near $0.7570 has been frayed but not
convincingly violated.  Even then, a break of $0.7540 may be needed to
signal a retest on the early-September lows a cent lower.  
Our fundamental
work has shown that the foreign exchange market appears to have become more
sensitive to interest rate developments. 
 US interest rates had risen ahead of the
jobs report, and whatever disappointment there was with the data, interest
rates did not pullback.  The US 10-year yield is near a four-month high
1.75%, having risen for six consecutive sessions.  The 2-year yield has a
similar streak at and 85 bp is near a four-month high.   We expect a
consolidative period.  

The bullish oil story is predicated on an
OPEC agreement to curb output and a dramatic decline in the US oil stocks.
  We are skeptical.   There
remains such a fundamental disagreement between Saudi Arabia and Iran that they
don’t even agree on the current output.  The details of last month’s
agreement will not be decided until next
month.  The drawdown in US inventories may be related to a pending storm. Nevertheless, the November contract
closed above $50 a barrel for the first time since early July.   The rally
over the past week or so has climbed the five-day moving average, which
finished the week near $49.60.  That may offer nearby support, and below
there is $48.  On the upside, $52 is the next target for the bulls.  

The S&P 50 posted an outside down day
ahead of the weekend, creating a vulnerable tone to start the new week, which
features the formal start of the earnings season.
   US companies suspend stock
buyback programs around their earnings
reports.    Technical indicators underscore the vulnerability of
the S&P 500. Initial support is seen ahead of 2140.  A break warns of a test on last month’s low, set
near 2119.  

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