Summer Lull Ends with a Bang

<br /> Summer Lull Ends with a Bang – Marc to Market<br />


The US dollar had spent the last full week
of August mostly confined to narrow trading ranges against the major currencies until the Yellen spoke as at the end
of the week.   
She confirmed the constructive assessment
of the economy already offered by both Fischer and Dudley in recent days. While
acknowledging that the case of a rate hike was strengthening, she shed no light
on the timeframe. 
The tone of her remarks suggested scope only one hike this year, not
the two that the Fed dot plots pointed to in June.  However, Fischer
quickly and explicitly noted that nothing Yellen said ruled out a September
move of two moves this year for that matter.  
he was simply explaining that Yellen was
not revealing a change in the Fed’s stance.  After whipsawing, the dollar rallied, and the odds of a September rate hike
finished near 40% compared with 32% the previous day and 22% at the end of last
As we get into September, the summer lull
will surely end.
    The US employment data and UK
PMIs are the highlights for next week, but the BOJ and ECB are in play this
month.  OPEC and non-OPEC nations will meet and the prospects of a freeze
appear to have increased (though we are still skeptical).   In Spain, after
two elections and another two months of negotiations, Rajoy will seek a
confidence vote next week.  Italy’s tragic earthquake may allow greater
fiscal flexibility for Renzi just in time for the 2016 draft budget and the
constitutional referendum (November).  Germany will hold two state
elections in September that some will see as a litmus test of public support
for Merkel. Without the UK playing obstructionist, the European Summit may lead
to greater defense and security integration.  The G20 meeting is unlikely
to resolve much, but it will be a
showcase for China.  
Polls for the US election traditionally
become more relevant after Labor Day. 
 The polls in the swing states still
make it unlikely that Trump can secure sufficient electoral college votes to
win. Indeed, as we suggested a month ago, it may be more helpful to think about
the implications of the Democrat Party winning a majority of the Senate and,
possibly the House, than about a portfolio for a Trump presidency. 
For eight sessions, the Dollar Index has
bounced between 94.00 and a little 95.00, where the 100-day moving average is found. 
Our bias is for an eventual upside break.  The RSI is soft but
sideways, while the MACDs appear poised to turn higher.  The slow
Stochastics also are turning from over-sold territory.  The Dollar Index
closed above the 95.30 area, which houses a retracement objective and the
20-day moving average.  The Dollar Index has not closed above this average
since July 28.  A break of 94.00 undermines the bullish case.
The euro recorded outside day down day before the
weekend though the previous day’s range was exceptionally narrow (4/10 of a
technical condition is broadly similar to the Dollar Index in reverse.
 The RSI is firm but neutral.  The MACDs are set to cross lower, and
the slow Stochastics have turned lower.   The euro closed below the
trendline off the late-July and August lows (~$1.1240) and the 100-day moving
average (~$1.1225).  It needs to be sold through $1.1180-$1.12 to boost
confidence that a high is in place.  
Although key
support near JPY100 was frayed, the dollar managed to hold above it for the
last three sessions. 
 The technical signals are improving.
 The RSI is slowly moving higher,
and the MACDs have turned up, as have the slow
Stochastics.  The dollar closed above the JPY101 area where a retracement
objective and the 20-day moving average converge.  The next barrier is in
the JPY102.00-JPY102.60 band.   A campaign through JPY103 would negate the
potential head and shoulders potential continuation pattern we previously
Sterling advanced last week but was
stymied by a trendline which marks the top of a consolidation pattern
sterling has been in since the referendum. 
 The trendline can be drawn off June 27, mid-July and early-August
highs.  It was found near $1.3280 before the weekend, corresponding to the
50-day moving average.  The trendline is around $1.3245 at the end of next
week.  Some technicians also are drawing a trendline off the July 6 low
(~$1.28) and the mid-August low(~$1.2865), to form a potential triangle or
pennant pattern.  Both are traditionally continuation patterns.  The
RSI is rolling over, but the MACDs have not turned.  The fast Stochastics
have turned down, but the slower Stochastics have not quite made the turn yet.
Sterling looks better against the euro.  The euro snapped a five-week advance
against sterling, falling about 1.5%.  The losses were sufficient to push
the five-day moving average below the 20-day average for the first time since
the start of the month.  Although the euro had made new cyclical highs
against sterling this month, the RSI and MACDs failed to confirm it; thus
leaving a bearish divergence in the wake.   Key support is seen near GBP0.8480.  
The US dollar finished at two-week highs
against the Canadian dollar to kiss the 20- and 50-day moving averages
(~CAD1.2985 and ~CAD1.2995). 
  Oil snapped a three-week advance
and the probability of a Fed hike increased.  The US two-year premium over
Canada stands is the largest since the middle of June.   A move above
CAD1.3030 could spur a move to CAD1.3100 trendline off the late-July and
early-August highs, on the way toward CAD1.3200. 
The Australian dollar posted an outside
down day. 
 It transversed
the six-day range in about six hours before the weekend.  It also took out
the shelf near $0.7580.  The five-day moving average has pushed through
the 20-day moving average for the first time since the start of the month.
 The RSI, MACDs, and Stochastics are
grinding lower.  A break of the shelf would spur a test on the trendline
off the late-May and late-July lows. It is found near $0.7560 at the start of
the week and rises about five ticks a day.    A loss of the trendline
would be suggestive that a top of some import is in place.  A move toward
$0.7380-$0.7450 would still be the realm of a correction.  
Ideas that OPEC and (some) non-OPEC
countries can reach an output agreement next month lifted black gold, crude oil
from around $40 a barrel at the beginning of the month to a little more than
$49 a barrel recently, basis the October light sweet futures contract. 
 News that Iran’s minister will attend the meetings
also helped capture the imaginations.   The first weekly loss in four
weeks seemed to be a function of profit-taking, the build in US inventories,
and the firmer greenback.  Initial support is seen by $46.40.  A
break could $45.80 and, perhaps, even $44.50.  The proximate cap is seen near $48.25.  
The US 10-year yield spent the better part
of August churning between 1.50% and 1.60%.
  It set its highest close since the
day after the UK voted in late-June.  The 1.63%-1.64% is the next immediate
hurdle, but yields fell so quickly there is little to hang one’s hat on until
1.70%-1.75%.   We had identified the 131-19 area basis the September
futures contract as important support.
 The contract fell within a tick of
it before the weekend.  A break gives 131-00, which is corresponds to a
50% retracement of the gains since the end of March, and possibly 130-22,
 the post-referendum low. 

Friday was cruel to the S&P 500.  It posted an outside down day to close at its lowest
level in three weeks.  The five-day moving average slipped below the
20-day moving average for the first time since early-July.  The technical tone, as we have noted, has been
deteriorating.  The MACDs, for example, have been trending lower for over
a month.  The slow Stochastics are also trending lower. The resilience of
the S&P 500 may be, at least in part, explained by the expectations of
lower for longer in terms of interest
rates.   The next level of support is seen
in the 2147-2150 area.  If it goes, it would signal a correction to the
rally since mid-June.  The 38.2% retracement is near 2116, which is near
the 100-day moving average (~2110).  The 50% retracement is near 2093.  


Summer Lull Ends with a Bang
Summer Lull Ends with a Bang

Reviewed by Marc Chandler

August 27, 2016

Rating: 5

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