Without More Interest Rate Support, the Dollar may Falter

The US dollar rose against most of the major currencies last week but has yet to break above key levels that
would signal a new leg higher. 
 At least part of the problem is that interest rates are not
fully cooperating.  The US 10-year yield peaked on October 27 near 2.48%
and hit 2.32% after the mixed jobs report.  
The dollar closed above
JPY114.00 for the third consecutive session ahead of the weekend, but there is
no momentum.
 The
greenback has spent the past two weeks chopping JPY113.00 to about JPY114.50. 
 The daily technical indicators are not generating strong signals, though
the Slow Stochastics have turned lower.  
There is a downtrend line
that connects the June and August 2015 highs, catching the November and
December 2015 highs, and late 2016 and early 2017 highs come in a little above
JPY115.00. 
 Without
more interest rate support, and given the surge in gross speculative short yen
positions in the futures market (near 10-year highs), the dollar’s gains look
vulnerable.  
The euro finished unchanged
last week. 
 It
posted on outside down day ahead of the weekend, trading on both sides of the
previous day’s range and closing below the previous day’s low.   The
euro probed above $1.1660, an important resistance area we identified but did not manage to close above it
even once last week.   

We had been concerned that the euro’s sell-off was
overdone in the near-term and the sideways movement has pushed it back within the Bollinger Bands
.  However, the daily
technical indicators have not cycled higher.  This seems to warn of the risk that a new leg down in the euro may
not be sustained.  Speculators in the futures
market continue to pare the record gross long position, which peaked in three months
ago a little over 200k contracts and now is 173.7k. 

The two-year interest rate
differential continues to trend in the dollar’s favor.
  It is at the widest level since
mid-1999.  In contrast, the 10-year
spread has trended gently lower since peaking near 204 bp in late October and
has narrowed in five of the past six sessions.  
Sterling lost about 0.4%
last week. 
 It
lost 1.4%, the most in five months in response to the widely expected rate
hike.  Not only did there appear to be a “buy the rumor, sell the
fact” type of activity, but also the comments around the hike seemed particularly dovish.  To wit, the
implied yield on the December 2018
short-sterling futures contract fell 15 bp from the rate hike announcement to
the low the following day. 
For the better part of the
past six weeks, sterling has chopped between roughly $1.3000 and $1.3340. 
 It tested the lower end of the
range.  At trendline connecting the
June and August lows comes is just below $1.30 at the end of the week ahead. The
technical indicators are mixed but do not
seem aligned to favor a breakout.  That said, the UK two-year premium over
the US appears turned lower after widening by 30 bp from mid-September through
BOE rate hike last week.  
The Canadian dollar was flat
on the week before the employment data.
  Canada created twice the number of
jobs expected, and over the September-October period, reported the creation of
200k full-time jobs.  In
proportionate terms, it is as if the US created two million (instead of the
289k).  The markets focused on this to lift the Canadian dollar about
0.35%.  Investors seemed to shrug off the fact that exports fell for the
fourth consecutive month, and that 7.9% decline in Q3 exports was the sharpest
fall in eight years.  Non-energy exports, fell 1.8%, due mostly to a drop
in auto shipments.    
The US dollar had recovered
from near CAD1.2060 on September 8 to test a key retracement target near
CAD1.2930.
  It
stalled there at the same time the two-year rate differential, which had swung
from 25 bp in Canada’s favor to 20 bp in the US favor, stalled.  The US
dollar frayed initial support near CAD1.2740 but finished the week above
it.  The RSI and Slow Stochastics have turned lower,  while the MACDs
look set to do so over the next couple of sessions.    Although there
is some intermittent support, a convincing break of CAD1.26 would weaken the technical outlook.  
The Australian dollar’s
attempt to move higher was snuffed out by the disappointing retail sales
report. 
 The
weaker than expected report encouraged a rejection of the $0.7700 level that
the Aussie had poked through, and sent it back down under for a new low on the
week near a key chart point (~$0.7640).  A break of $0.7625 could signal
another cent decline.  Nevertheless, the daily technical indicators
suggest a near-term bottom has been approached. 
A push to new lows may not be sustained.  
Light sweet crude oil for
December delivery rose 3.25% last week after a 4.7% advance the previous week.
  Oil prices have risen in eight of
the past nine weeks to trade at its best
level since July 2015 near $55.75.  The decline in US inventories and rig
count, as well as signs that OPEC and Russia are likely to extend the output
restraint for another nine months, (until the end of 2018) at the meeting at
the end of November, are the main factors driving up the price.  The
technical indicators are stretched, and
the December contract closed above its upper Bollinger Band. 
 Although there may be potential toward $60 a barrel, we anticipate either
consolidation or a correction first.  We peg initial support near
$53.90.  
The market is wary that the
push in US 10-year yields through the 2.40% level was simply a test on the
upper end of the seven-month range and not a breakout.
  A break of 2.30% now would be seen
as confirmation.  Recall that 2.27% was the low yield print in
October.  The December note futures contract met the technical objective
of the double bottom formed at the end of October.  A move now above 125-16
to 125-19 would signal a deeper correction to the sell-off that began in early
September from almost 128-00.  The Slow Stochastics and MACDs warn of this
upside risk in price.  
Doubts that the initial tax
reform proposals were not as friendly toward business as expected did not deter
the S&P 500 from setting new record highs before the weekend.
  The minor 0.25% advance on the week
extended the streak to eight weeks.  The S&P 500 has fallen only one week since late
August.  We are cautious and note that the RSI and MACDs have not
confirmed the new highs.  During this run in stocks, the 20-day moving
average of the S&P 500, which will start the new week near 2565, has offered
support.   
The Russell 1000 Growth
Index and the Russell 1000 Value Index continue to diverge.
  The former rose 0.65% to extend its
streak for a sixth weekly advance.  The latter slipped lower (-0.15%) for
the second consecutive week.  The gap between the two widened further and
is at levels not seen in 17 years. 

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