Dollar Correction to Continue

Sterling was the only major currency to have a worse week than the US dollar.  Prime Minister May may have secured the wording for an agreement in principle with the EC and managed to get a majority of the cabinet to support it, but seems increasingly unlikely to pass the last hurdle, Parliament.  US President Trump dangled the possibility of easing trade tensions with China in front of investors who were primed to take the bait.  Expectations of the trajectory of Fed policy next year are in flux.  The implied yield of the December 2019 fed funds futures fell 15 bp last week to 2.75%, the lowest close in ten weeks.  

Australian Dollar:  The US dollar finished the week on a soft note, and once again, the Australian and New Zealand dollar's led the move.  Their pullbacks at the end of the previous week did not mark the end of their upside corrections as we had thought.  Instead, both extended their rallies.  The Aussie reached three-month highs before the weekend (~$0.7335), while the Kiwi was at levels not seen since June (~$0.6880).  The 200-day moving average will begin the new week near $0.6890, and the New Zealand dollar has not closed above in seven months.  The Aussie's push above the $0.7280 area faces little chart resistance until the $0.7400-50 area, where is 200-day moving average and retracement objectives of this year's decline can be found.  While the MACDs and RSI are constructive, the Slow Stochastics have turned down.  The other technical note of caution comes from the Bollinger Band, where the upper band (+ 2 standard deviations from the 20-day moving average) is nearby, a little above $0.7340. 

Dollar Index:  Since the end of September, the Dollar Index has had three distinct legs up of around 200-220 points.  Each has been followed by a pullback (correction) of 130-160 points.  It fell about 0.5% last week to end a four-week advance.  The trendline of the correction lows begins next week near 96.15, where the initial retracement of the larger advance from late September can also be found (~96.20).  Below there is the low for the month around 95.65.  The RSI and MACDs did not confirm the last high and have turned down, leaving a bearish divergence in the wake.   

Euro: The single currency began the week testing the $1.12 area, the lowest level since the middle of last year.  It finished the week above $1.14 for the first time since November 7.  Flows from sterling likely helped, as did the easing in Fed expectations, and the firmer oil prices.  Short-term momentum players and trend followers got caught leaning the wrong way.  The technical indicators suggest the upside correction has room to run.  The next targets are in the $1.1450-70 band, while a break above $1.1500-20 would lead to talk of an important bottom being in place. 

Sterling: When everything was said and done, sterling lost a modest 1.1% last week amidst the Brexit drama.  It is up a little more than 0.5%  since the end of October.  The technical tone is weak and additional losses look likely.  The low for the year was set in mid-Agust near $1.2660.  Last month's dip below $1.27 was bought.  Last week's low was about $1.2725.  If it weren't for the Brexit uncertainties, it would look as if sterling was trying to carve out of a bottom. Three-month implied volatility spiked to 13.2%, the highest since the aftermath of the referendum in 2016. The 100-day moving average of implied volatility is near 9.1%.  It was below 7% at the end of last year.   

Yen:  In the first half of last week, the dollar continued to absorb offers above JPY114.00.  In the second half of the week, the bids were pulled, and the dollar fell to almost JPY112.60 before the weekend.  It held a little above the lows for the month and a retracement objective (~JPY112.45-55). The technical indicators are rolling over, warning of the risk of additional near-term dollar losses.  A break of JPY112.00 signals a test on last month's low around JPY111.40.  The 200-day moving average is a little above JPY110.  

Canadian Dollar:   The US dollar was knocking on four-month highs against the Canadian dollar (~CAD1.3270) in the first part of last week, threatening to extend its advance for a seventh consecutive week.  However, a heavier tone prevailed in the last few sessions, and ahead of the weekend, the greenback tested the trendline drawn off the lows beginning at the start of last month, coming in by CAD1.3130. The dollar closed in the upper half the session's range and the technical indicators are mixed.  

US 10-Year:  The US 10-year yield has gone six sessions without closing higher.  It fell 11 bp over the past week, easing below 3.08% ahead of the weekend.  It is at its lowest level since October 26.  The 100- and 200-day moving averages are found between 2.95% and 3.00%.  The December note futures tested last month's high near 119-06, which also corresponds to the 100-day moving average.  A double bottom may have been forged and a move above 119-13 could spur a move toward 120-16. The technical indicators suggest this is likely. 

Crude Oil:  After a  three-day, 2.1% rally to finish the week, the January light sweet crude oil futures contract still finished around 5.4% lower, for the sixth consecutive weekly spill.  However, the significance of the rally in the second half of last week is that it broke the sharp momentum.  Still, the bounce has been uninspiring.  The technical indicators suggest more may be coming, but a move above $60 is needed to suggest anything of note.  

S&P 500:  A five-day losing streak ended with two advances to close last week. The gains pared the weekly loss to about 1.5%.   The loss, however, helped solidify the technical condition by closing two gaps on the daily bar charts.  One went back to the end of October, and the other was from last week. It fell through the 200-day moving average to start the week and finished the week just shy of resurfacing it (~2760).  The RSI and MACDs are constructive, but the Slow Stochastic appears to be rolling over.   While a recovery back toward 2800 seems likely given the momentum, investors may be reluctant to take it above the upper end of the recent range near 2820 with some clarification on trade and/or earnings.   

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