The Dollar's Outlook at the End of 2014

The US dollar closed higher against all the major currencies during the holiday shortened week. The lack of liquidity may have exaggerated the weakness of Swedish krona and Norwegian krone, the poorest performing major currencies.  Both lost about 1.5% against the greenback. 

The least weak currencies were in the dollar-bloc. The Canadian and New Zealand dollars were practically flat, and the Australian dollar slipped 0.2%.   The euro and sterling slipped about 0.5%, while the yen shed 0.7% of its recent gains. 

The lack of participation will continue into the last week of the year.  The general technical condition will not change.   The dollar's bull advance is not over.  Leaving aside the housing market, which has been one of the few US economic disappointments of 2014, the 5% Q3 GDP, coupled with continued improvement in the labor market keeps the Fed poised to raise rates in around the middle of 2015. The prospects of a more aggressive ECB, buying a wider range of assets, including sovereign bonds, will keep the euro on the defensive.   

The euro recorded a marginal new low on December 23 near $1.2165.  This is just above the 50% retracement of the euro's trading range since its launch in 1999 (~$1.2135). The bottom of the Bollinger Band (set 2 standard deviations below the 20-day moving average) is near there as well (~$1.2125).  Further out is the July 2013 low near $1.2045 and the $1.20 psychological level.  On the upside, offers in the $1.2250-75 band may contain upticks. 

Despite unprecedented expansion of the central bank's balance sheet, Japanese inflation fell to its slowest pace in six months (headline and core).   When adjusted for the sales tax increase, Japan's core CPI rose 0.7% year-over-year in November.  The 2% inflation target looks nearly as elusive as the ECB's.   The dollar's recent 5.5% slide in six sessions to almost JPY115.50 shook out many of the recent dollar longs.  As many of these positions are re-established, the dollar's ascent has resumed.  Initial resistance is seen in the JPY120.85-JPY121.00 area.  Above there is the high from December 8 near JPY121.85.  On the other hand, a break now of JPY119.40 will warn of a more complicated correction.  

Sterling was mostly confined to a $1.56-$1.58 trading range from the middle of November through the middle of December.  It has slipped from this box to a lower trading range, and spiked to $1.5485 on December 23.  It has not recovered above $1.5580 since, but this is probably more a consequence of the lack of participation than a genuine technical cap.  Stronger offers are likely in the $1.5600-35 area.  

The Canadian dollar is moving sideways.  The US dollar has been within the range set on December 15 (CAD1.1550-CAD1.1675) for the past nine sessions.  This renders many trend following technical tools less useful.   Over the medium term, we continue to favor a weaker Canadian dollar.    

The Australian dollar recorded new multi-year lows on December 23 when it slipped a little below $0.8090.  Expectations have built for not one but two rate cuts by the RBA in H115.  Many want to sell into an Aussie bounce, but in thin market conditions, the $0.8140-50 area is capping upticks.  Stronger selling interest is seen near $0.8200.  

The February crude oil (light-sweet) futures contract will likely spend the last week in the year in the $54-$59 a barrel that has contained prices since the middle of the month.  Barring a significant reversal, December will be the sixth consecutive monthly decline for crude prices.  The 7.27 mln barrel unexpected build of crude stocks according to the EIA in the latest week (consensus was for a 2.5 mln barrel decline) warns of the risk of additional price declines.  That said, we see many forecasts for the price to bottom in early 2015.  We are less sanguine.  Inventories are still rising, and the pace of rig shutdowns will have to accelerate.  

US 10-year yields have been hovering around 2.25% since that surprisingly strong Q3 GDP revision to 5.0%.  It would have to rise above 2.35% to be anything of note.  On the downside, the 2.15% area may tempt Treasury sellers.  

Technically, price gaps are often important.  We identified the significance of two S&P gaps in Q4.  The first was the sharply higher opening on October 21.  It boosted our confidence that the correction that had seen the S&P 500 lose nearly 10% between September 19 and October 15 was over.  The S&P 500 gapped higher again on December 18.    It confirmed our suspicions that the S&P 500 5.5% week-long downdraft ended on December 15 and that the index was on its way to new highs.  While the gains scored in the extremely light volume may be tested, technically there is little reason not to expect more life in the bull.  


Due to the holiday, the Commitment of Traders report was delayed.