This Week Will Test Your Mettle

Anticipating a yawning divergence of monetary policy between your world's largest central banks, market participants continued to drive the dollar higher in the last week.  In fact, the greenback appreciated against all the major as well as emerging market currencies other than the Malaysian ringgit and South Japanese won.   

Next week is one of the most eventful weeks of the year, and the risky community has amassed a very large long dollar position.  It begs the question associated with whether the ECB cannot help however disappoint market expectations and spur a serious correction to the dollar's rally, whose most recent leg higher began in the middle of October. 

Depending on one's danger tolerance and ability to use types, there are various strategies one can deploy, that can minimize the impact of a dollar correction.  The cost is actually full participation of any additional dollar advance.  In any event, disciplined money management skills require improving the price action, even if not anticipating it. 

The Dollar Catalog closed above 100 for just the second time since 2003 (the first time was March Thirteen). It has held a clear uptrend this month, which has been examined five times, including yesterday.  It is near 100.40 at the end of next week.  The euro hasn’t traded below its 20-day moving average since October 22.  It is now near 99.Double zero. The technical indicators are mainly constructive.  However, the MACDs are rolling over and have not verified the latest extension of the move. 

The euro is holding beneath its own trendline, which is near $1.0650 right now and $1.0550 at the end of next week.  The technical indicators are similar to the Buck Index, with only the MACDs recommending a correction could be impending. A short squeeze that lifts the euro through the $1.0660 region could carry it up toward $1.0750-$1.0800.  In some ways, the downside speaks for itself.  Although we recognized the $1.0525-$1.0550 area as the downside focus on ahead of the March low near $1.0460, we do not think that area is especially significant.  Parity beckons. 

The dollar tested the lower end of its new trading range from the yen in recent times.  A trading range between roughly JPY122 and JPY124 has been carved out over the past two and a half weeks.  This sideways movement was enough to push the five-week moving average below the 20-day average.  The guideline of alternation says that after a test on the lower end of a range, the next move is a test on the upper end.  The close above the short-term trendline drawn off the November 18 highs (~JPY122.Seventy) gives some immediate specialized credence to this scenario. 

The euro has depreciated against the pound for seven consecutive days, the longest streak since the late-1990s.  Although it settled firmly before the weekend break, there is no convincing technical sign that a reversal is at hands.  It has been flirting with its lower Bollinger Band all week.  Whenever a short squeeze in the euro does take place, it will likely recover against at the same time.  The initial objective would be near JPY132.40. 

Sterling continued to trade like a dog.  It has lost about 2.5% against the dollar over the past 30 days as the market adjusts its interest rate expectations to the latest signals by the BOE that it is absolutely no hurry to raise rates.  It fell almost 1% last week, the second worst major performer after the Australian dollar. The adjustment does not appear over.  The $1.50 level is obvious mental and technical support.  The specialized indicators warn of the risk of penetration, in which case the next instant target is near $1.4950  

After dropping more than 5 pence against sterling because mid-October, the euro found support GBP0.6985.  It had recovered toward GBP0.7080 before the bears made a stand. The technical indicators look constructive.  The MACD's possess crossed up from oversold, and also the RSI is trending higher.  A detailed above GBP0.7065 may part of a bigger euro short-squeeze. 

The Canadian dollar discovered little traction.  Oil prices are chopping around near the current trough.  The 2-year interest rate differential with the US was little changed.   Weighed down by the resource sector, North america had the only equity marketplace in the G7 that lost floor last week.  

The push to CAD1.Thirty four at the start of last week turned back, but dollar buyers emerged ahead of the previous week's lows (~CAD1.3250).  The Bank of Canada meets next week.  While no alternation in policy is expected, the market will be sensitive to any official nuance recommending that the rate cycle may not be complete.  The multi-year high occur late-September near CAD1.3460 is the next target. 

The Reserve Bank of Australia also meets next week.  There might be a slightly greater chance the RBA would cut rates compared to Bank of Canada, but still the odds cannot be considered high.  The shockingly poor Q3 capex figures (a record 9.2% quarterly decrease, after a 4.4% decline within Q2) prompted the chins to wag, but manufacturing capex rose nearly 7%.  The actual RBA is no mood to be pressured into a rate cut as Governor Steven's warned investors to "cool it" and revisit the problem in Q1 16. 

The capex figures, nevertheless, stopped the Australian dollar'utes rally cold in its monitors after making a new high (~$0.7285) during the recovery from the test upon $0.7000 earlier this month.  There is possibility of the Aussie to slip additional ahead of the RBA meeting.  The $0.7145-$0.7155 region may offer initial support. 

OPEC fulfills at the end of next week.  The market may not make a big move ahead from it.  Given the need to accommodate Indonesia and Iran, there seems to be a greater risk of an increase in the cartels allowance rather than a cut.  Saudi Arabia is gaining market share in the US as well as Europe from non-OPEC producers.  From the long-term view, and contrary to exactly what appears to be the conventional view amongst many traders and reporters, the Saudi strategy is just beginning to pay-off.  Speculation that it would give up its peg seems wide of the mark, as we have argued in the episodic speculative fevers that leave time to time.   

The front-month January 2016 light sweet crude oil futures contract continues to be near the $40 a barrel levels seen in August and the start of this past week.  We look for a break of the $40 to $44 variety to signal the next path.

The December 10-year bond futures agreement has been surfing an upward trend since the start of the month.  It comes in near 126-22 before the weekend as well as 126-30 at the end of next week.  The five-day average crossed above the 20-day average for the first time in a little over a month.  Technically, there is scope toward the 127-12 in order to 127-25 area.  

The 10-year yield peaked close to 2.375% on November Nine.  It fell to 2.20% this week. The move does not appear complete, and the risk reaches 2.15%.  In the coming days, the bigger picture is a repeat from the Greenspan conundrum should not be surprising.  This refers to a period in which the Given was raising short-term interest rates, but long-term interest rates did not rise.  A different way to think about this is that Fed outdoor hikes may produce curve trimming.

The S&P 500 gained about 0.5% last week, which brought it close to the 2100 level.  El born area has proven a formidable barrier for the much-tracked index.  Although it has approached the upper end from the year's range, the record high was set in Might near 2134.75.  The risk-reward seems to favor reducing exposures, especially for short-term traders, though the technical indicators themselves are not offering robust indicators.

How Dangerous are Technical Conditions for Dollar Bulls? is republished along with permission from Marc to Market