The Dollar Recovering Post-ECB Slide

The dollar rose against virtually all of the currencies over the past week.  The actual divergence meme we have emphasized has continued to unfold.  The ECB eased coverage at the start of the month.  Less than 48 hours after the Fed hiked rates, the BOJ tweaked its resource purchase program to sustain it.

Holiday-thin markets make for much more treacherous conditions than usual.  This news stream lightens, and participation will fall off until The month of january 4.   

The key question for many short-term participants is whether the dollar's downside correction of the move that began in mid-October is finished.  Given the extent of market positioning, the prices have yet to persuade us that the adjustment is complete.

The Dollar Index has flirted using the 61.8% retracement of the decline which began with the ECB meeting (~99.25).  There is a small downside space created by the Dollar Index gapped higher the day after the Fed hiked.  That gap is 98.59-98.61.   The technical indicators are mixed, with the MACDs about to cross higher and the RSI soft.   While it is difficult to have much self-confidence in the near-term move, we continue to look for higher levels in the medium and longer-term.  Without obtaining too fancy, we suspect that the June 2014 through March 2015 rally was a third influx of some magnitude.  The April through mid-October was some kind of fourth wave consolidation.  I suspect a fifth wave started mid-October.

The euro lost about 1.3% last week, and it tested impact support near $1.08.  The actual 50% retracement of the post-ECB rally comes in just beneath as does the 20-day moving typical.  A break would target the $1.0730 region (61.8% retracement objective).  We have predicted the persistence of the $1.08-$1.Ten trading range for this remedial phase.  Like the Dollar Catalog, the technical indicators all of us use are mixed.

The dollar recorded a big outside down day against the Japanese yen before the weekend, whipsawed by the unexpected moves by the BOJ.  We see the actual move as largely operational adjustments that will allow the unprecedented large asset purchase plan to continue while minimizing the potential risks of dislocations. Japanese corporates are experiencing report profits, and their balance sheets are flush with money.  We don't see the expansion of the pre-Kuroda corporate lending strategies as significantly boosting CapEx. 

The much softer US bond yields and weaker stocks ahead of the weekend may have prevented more of a dollar recovery.  Support is near JPY21, and a break signals a return to JPY120.  Initial resistance called near JPY121.60, but the most critical hurdle is the JPY122.00-JPY122.33 band.

Sterling sold to its lowest level because April last week.  The third consecutive decline in average every week earnings kept the pound under pressure.  It had quickly traded at four-week highs at the beginning of the week, and with the new multi-year levels seen on December Seventeen, it recorded a bearish outside down week.  The next level of support is near $1.4800.  However, the pre-weekend gain snapped a five-day declining streak.  The inside day time warns of the risk of the short-term pop toward $1.4950-$1.5000 exactly where it may be a lower risk sale.

The US dollar hit the wall of sellers when it printed CAD1.40 after gentle Canadian inflation figures prior to the weekend.  The settlement on the lows warns of additional corrective action in the days ahead.  A break of CAD1.3820 signals moving back toward CAD1.3730-CAD1.3750.    Canada documented poor September data, along with GDP and retail product sales falling 0.5%.  Both expect to have recovered in October.  These reports nest week could also favor some backing as well as filling after the Canadian buck fell more than 4% against the dollar (before reversing).

The Australian buck changed little last week though it did briefly trade below $0.7100 for the first time since mid-November.  It managed to hold above the uptrend collection drawn off the September and November lower.  It comes in somewhat above $0.7100 at the end of the year.  On the upside, the $0.7250-$0.7280 may provide formidable resistance near-term.  

There is little specialized evidence that oil prices are bottoming.  The fundamentals are negative.  The end of the US ban on essential oil exports and the end of Iranian sanctions warns the global glut is bound to get worse.  US producers introduced 17 oilrigs back online, the most since July.  US result has risen in five of the past eight weeks.  Inventories continue to increase.  The next price target is the crisis low near $32.50 (continuation contract).  On the trend basis, a move toward $25 a barrel in H1 Sixteen seems reasonable.

The US 10-year note yield pushed toward Two.32% after the Fed hiked rates.  However, typically the early stage of Fed tightening produces curve flattening. True to form, the 10-year be aware yield reversed lower to complete the week below 2.20%.  The actual 10-year yield has spent almost no time below 2 1/8% since late-October.

The deficits before the weekend negated the lion's share of the S&G 500 gain over the past week.  The follow-through selling that materialized following the downside gap created by final Tuesday's, sharply higher open up was filled casts the bearish pall over the technical outlook.  The first downside target we recommended last week near 1994 matched up last Monday's, low a little above 1993.  A break of this targets 1965.

Near-Term Dollar Outlook: Might the Force be With You is republished with permission from Marc to Market