Some Thoughts about the Recent Price Action

<br /> Some Thoughts about the Recent Price Action – Marc to Market<br />


(greetings from Tokyo.  Speaking at the CFA Society of Japan tonight)

The gains the US dollar scored last month have been largely unwound against the major
dollar’s losses against the yen are a bit greater,
and it returned to levels not seen late last November. 
The down draft
in the dollar appears part of a larger development in the capital markets that
has also seen the US 10-year yield slide 25 bp in less than two weeks. 
  The two-year yield is off 17 bp.  The yield of
1.25% is 25 bp on top of the upper end of the Fed funds target range.  
A few forces
are at work.
  First, is the reaction to the less
aggressive stance at recent FOMC meeting.  Second, the Dutch election
outcome and poll still pointing to a defeat of Le Pen in the second round of
the French presidential election has seen some unwind of safe haven demand.  Third, oil prices have
fallen.  Consider that as recently as March 7, light sweet crude was near
$54 a barrel. On March 22, it reached almost $47, the lowest level since the
end of November.  Fourth, President’s Trump draft budget for the remainder
of the fiscal year and the drawn out process over
his temporary travel ban and the replacement of the Affordable Care Act
(Obamacare) warn that tax reform and infrastructure efforts will also be delayed.
There is much
focus on the scheduled Thursday vote in the House of Representatives on the
replacement for the Affordable Care Act. 
 We suspect that if it does not
appear to have the votes, the vote will be
delayed.  In some ways, there
is much riding on it.  A defeat would be
seen as jeopardizing President Trump’s agenda.   It would be a
defeat for Speaker Ryan by the same forces that brought down his predecessor
(the Freedom Caucus).  
In other ways, there is less riding on the particulars of the bill at this juncture.   The Senate has opposed
views, and it will likely pass its own version.  Then the two differences are
hammered out in the reconciliation process.   It is there that the bill ultimately is shaped into law.
  Trump and Ryan can compromise on much to get any bill passed, which can be heralded as a success.  We suspect this
will be the case before the weekend, and this could help support the dollar and
stocks, while interest rates may also rise in response. 
In addition,
Yellen, and the Fed’s leadership may not be satisfied with the market’s
response to its statement and forecasts. 
 If she or NY Fed President Dudley
want to correct a misunderstanding or misperception,
speeches on Thursday and Friday could offer such an opportunity.  
 we had anticipated a pullback in oil prices after failing at $50 last
 However, we suggested that losses
would not be sustained.  This still seems like a reasonable assessment.
 Confirmation of a large build in US oil inventories by the Department of
Energy saw the low recorded, but then prices recovered.  A hammer
candlestick appears to have been formed.
 There looks to be a bullish divergence in the RSI and the Slow
Stochastics are turning higher.  Higher oil prices may remove one source
of pressure on US yields.  
The technical
indicators have yet to turn for the dollar.  
  We suspect that a break of
$1.0740-$1.0750 would be an early sign that a top may be being formed.  The euro spent the better
part of the last two sessions between $1.0780 and $1.0820, so this allows for
some range extension.  
upside momentum that has seen it rally four cents since the day before the FOMC
statement is stalling in the $1.2480-$1.2500 resistance area.  
A move above here could see a quick move
toward $1.2565-$1.2585.  On the downside, it probably requires a push
through $1.2420 to be of note.  Retail sales on March 23 are expected to
increase after a three-month slide.  After the upside surprise on
inflation and the downward surprise on average weekly earnings, and the recent
rally in sterling, the market may be more vulnerable to disappointing report
than a better one.  
The dollar’s
performance against the yen seems to be driven more by US yields and equities
than the news stream from Japan, which has been light. 
  If US Treasuring can stabilize
as we expect, then the dollar can begin recovering against the yen.
 On the upside, the greenback needs to resurface above the
JPY111.75-JPY112.00 area to begin repairing the technical damage.  The
technical indicators have not turned higher for the dollar, and if US yields
cannot stabilize, the technical potential extends toward JPY110.00.

We note that
the Australian and Canadian dollars have underperformed in the first half of
the week. 
Large speculators in the futures market
had already shifted to a net long position while remaining net short euro, yen, and sterling.  The Aussie continues
to wrestle with an offer in the $0.7700
area.  It is choppy in the upper end
of its trading range.  The US dollar reversed lower against the Canadian
dollar after testing CAD1.34. We anticipate consolidation after the large price
swings ahead of Friday’s February CPI.  


Some Thoughts about the Recent Price Action
Some Thoughts about the Recent Price Action

Reviewed by Marc Chandler

March 22, 2017

Rating: 5

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