Technical Condition of the Greenback on the Eve of Lift-Off

The US dollar turned in a mixed performance in the week following the ECB's surprise and the healthy US jobs report. In some ways, the greenback was like a fulcrum, not the driver.

The dollar-bloc currencies and the Norwegian krona were on one side, and the euro, Swiss franc, yen, and sterling were on the other. The continued, and sharp drop in energy prices and commodity prices more generally, coupled with risk-off impulses spurred by equity market declines, and year-end position adjustment were the main considerations.

The US dollar's last leg up began in the middle of October and ran into early December. If there were pent-up corrective pressures, then given the direction and magnitude of recent moves, the pressures are less intense now, and by extension, after the likely FOMC rate hike. However, it is not clear from a technical perspective that the correction is over.

The recent losses carried the Dollar Index to the 50% retracement of the rally since mid-October. It held the level (97.15) almost to the tick. The 61.8% retracement is found near 96.35. The technical indicators (MACD, RSI, Stochastics) are consistent with this view. The note of caution comes from the lower Bollinger Band, which is found near 97.30. However, with the 20-day moving average turning down, the lower band will also decline.

We had anticipated a $1.08-$1.10 range for the euro over the past week. However, the price action suggests the correction may not be complete. A move above the roughly $1.1045 high seen last (and the 200-day moving average ~$1.1035) opens the door to $1.1100-25, and possibly $1.1200. Be attentive to divergences and/or a daily reversal pattern to boost confidence that the counter-trend move is over.

The dollar fell about two percent against the yen in the second half of last week. Falling equity markets and US yields, c and unwinding of carry-type trades, like against some emerging markets currencies or the dollar-bloc, spurred demand for the yen. The dollar posted a big outside down day (trading on both sides of the previous day's range and a close below the previous day's low). Although the technical indicators do not suggest a dollar low is in place, the greenback finished below the lower Bollinger Band (~JPY121.35).

A trend line drawn off the August low (~JPY116.20) and the mid-October low (~JPY118.10) is near JPY120 and rises about five pips a day. The 61.8% retracement of the dollar's rally from that mid-October low is found near JPY120.25. A break of the JPY120 area would inflict serious technical damage, signaling a move at least back into the JPY116-JPY118 range, if not something more. At the same time, it is important to respect market conditions, especially the lack of liquidity in the money markets, including in forwards and swaps, which may amplify price movements.

Sterling closed the week well. It reached its best level since November 20. To meet the 50% retracement objective of the decline since mid-October (~$1.5200), sterling had also to push through the potential neckline of a head and shoulder bottom pattern (~$1.5130) The neckline corresponds to a 38.2% retracement objective. If valid, the pattern suggests potential toward $1.5500. Ahead of that there is a downtrend line off the late-August (~$1.5820) and the early-November high (~$1.55), which came in just below $1.5310 before the weekend and $1.5275 at the end of next week.

The Canadian dollar fell like bricks. It lost 2.75% against the US dollar on the week. It is the biggest move since the January rate cut, which itself was the largest weekly advance since 2011. The Canadian dollar is the weakest of the majors this year, having lost about 15.4%.

Nothing went the Canadian dollar's way last week. Oil prices fell sharply. The US premium over Canada rose. Equity markets fell. By noting other measures that could be taken, if necessary, the Bank of Canada may have (unintentionally?) encouraged ideas that the drop in oil prices may encourage a further easing of monetary policy.

The US dollar is trading at levels that have not been seen in more than a decade. If resistance is to denote a potential inflection point of demand for Canadian dollars, it is difficult to see any meaningful level before CAD1.40, If trying to anticipate when Canadian businesses may interest, we note that the $0.7250 level corresponds to CAD1.38, while the $0.7000 level is almost CAD1.43. The sharp dollar advance has pushed it through the top Bollinger band (~CAD1.3655). Support is seen in the CAD1.3550-CAD1.3600 band.

The Australian dollar had been trending gently higher since late-August when it briefly slipped below $0.6900. It has been blocked in front of $.7400 twice, once in October and then again here in December. The trend line connecting the early- and late-September lows and the November low is found near $0.7080 now and a little above $0.7090 at the end of next week. It finished last week just above $0.7170 support and the 61.8% retracement of the last leg up that began in early-November (~$0.7160).

The February 2016 light sweet oil futures contract finished at new lows, The 10.6% decline last week was the largest weekly decline of the year. OPEC reported that the cartel's output increased in November, lifting its supply to 900k barrels a day more than it projects demand for its oil next year. An increase in Iranian production is nearly a foregone conclusion, and Libyan output may recover as well. Bearish sentiment is palpable. There is increased talk of a fall below $30 a barrel. A break of $35 immediately targets the $32.50-$33.50 area.

The US 10-year Treasury yield fell almost 10 bp last week, all recorded in the final session of the week as oil prices continued to fall and US equity losses accelerated. The 2.35% yield seen after the jobs data seems like a distant memory as yields slipped below 2.15% before the weekend. A move below 2.08%-2.10% could signal a test on the 2.00% level again. The technical indicators for the March 16 note futures contract is consistent with this yield outlook.

The S&P 500 had a tough week, surrendering 3.3%. It fell through the mid-November lows to reach the lowest level since mid-October. Technical indicators warn of the risk of additional near-term losses. The weight of the energy sector, prospects of Fed hiking, and year-end tax-related sales are taking a toll. The next downside target is near 1994 and then 1965. A move above 2050-2060 would negate this negativity.