Dollar Bulls Bend, but Will They Break?

The unexpectedly poor September US jobs data weakened the greenback's technical tone, as questions about the underlying strength of the world's largest economy, and the implications for the Fed's take-off, intensify. The economic data the US is scheduled to release in the week ahead are not of sufficient heft to alter the pessimism that was spurred, but not caused, by the jobs data. Recall that earlier in the week, the US reported it new flash reading on merchandise trade. The unexpectedly large deficit caused the Atlanta Fed's GDPNow to halve its estimate for Q3 growth to 0.9%.

No fewer than five Fed officials will speak next week and the FOMC minutes from its September meeting will be released. The former will give an opportunity to both hawks and doves to provide their economic assessments in light of the recent economic developments. The latter will provide some color on 1) how close the decision was to defer lift-off; 2) how confident they were that rates could still go up this year; and 3) which particular global developments are especially worrisome for the conduct of monetary policy.

The dollar's recovery after initially selling off on the data surprise mitigated some the technical damage that had been inflicted earlier. The Dollar Index held above the 61.8% retracement objective of the rally from the September 18 lows, which is found near 95.10. The trend line connecting the August 24 and September 18 low came in near 94.75 (corresponds to the lower Bollinger Band) before the weekend (and almost 95.20 at the end of next week). A break of that trendline could spur a move toward the critical 94.00 area. The RSI is pointing lower, and the MACDs are poised to turn lower. On the upside, a move back above 96.00 would lift the tone while the 96.50-96.70 area has to be retaken to put the bulls back in control.

The euro was rose from the lower end of its range to the upper end by the US jobs data. It stalled at the upper end of its two-week range near $1.1330. This area corresponds to the downtrend line drawn off the August 24 spike high (~$1.1715) and the September 18 high (~$1.1460). A break of this trendline would likely signal a move toward $1.1400 initially. The $1.1475 area, however, key. A convincing break could spur a move to the August 24 high, if not a bit higher. The RSI has turned higher, and the MACDs are poised to do the same. On the downside, a loss of the $1.1180 neutralizes the technical condition.

Since late-August the dollar has been tracing out a large symmetrical triangle pattern against the yen. About three-quarters of the time, this pattern is a continuation pattern. In the current context, this means a downside break for the dollar. The other point that needs to be made is that this pattern is subject to false breaks. And that is precisely what has happened on the past two Friday's. On September 25, the dollar broke to the upside on an intraday basis only to close back within the triangle pattern. This past Friday, the employment shock saw the dollar break to the downside only to recovery back within it. The parameters of the pattern begin the new week around JPY120.75 and JPY119.40. At the end of next week, they are close to JPY120.60 and JPY119.60.

The sideways trading has neutralized the technical indicators we use. We do recognize that the triangle pattern can be resolved by neither breaking higher or lower, but continuing to move sideways through the apex of the pattern. We often experience the yen as a rangebound currency, and when it looks like it is trending, it is moving from one range to another. In this scenario, the price after the US jobs data reaffirmed the importance of the JPY118.60 support area.

Sterling closed September with its second nine-session losing streak since August 24. The miniscule gain on October 1 was extended the next day, spurred by the US jobs report. It stalled in front of the week's highs in the $1.5240-$1.5260 area. The RSI and MACDs favor additional gains, but sterling's inability to sustain a move above $1.52 casts doubts on the bullish technical case. The key to the upside is the $1.5320-$1.5330 area, which corresponds to a retracement objective and the 20-day moving average. The Bank of England meets next week; McCafferty was probably unsuccessful in getting others to join his call for an immediate hike.

The Australian dollar gained about 0.25% against the US dollar last week. It failed to capitalize on a relatively favorable string of domestic data including an uptick in the manufacturing PMI, home sales, and retail sales. The technical indicators are not generating strong signals presently. The break of the $0.6980-$0.7085 range signals the direction of the next cent or so. The Reserve Bank of Australia meets. There is no urgency for it to act.

The technical tone of the Canadian dollar is superior to the Australian dollar. It held on to its post-US jobs data gains to post a 1.0% advance against the US dollar over the past week. The US dollar's pre-weekend losses carried it to the CAD1.3185 area, which corresponds to the 61.8% retracement of the last leg up for the greenback that began on September 18 and ended with new 11-year highs on September 29.

A trendline connecting the June 18 low (~CAD1.2130) and the September 18 low (~CAD1.3015) comes in near CAD1.3140 at the start of next week. It rises toward CAD1.3205 by the end of the week. A break this trendline suggests a move toward CAD1.3000. On the upside, a move back above CAD1.3250-CAD1.3270 points to the end of the Canadian dollar recovery.

The November light sweet crude oil futures contract continues to carve out a descending triangle pattern. The top is formed by connecting the highs from August 31 (~$50.05) and September 17 (~$48.05). The bottom of the triangle is flat in the $43.60-70 area. It broke to the top side on an intraday basis on October 1. It was sustained on a closing basis, and the contract returned to the low end after the poor US jobs data that raised concerns about demand. The strong close before the weekend, amid news of an additional decline in rigs, suggests a retest on the top of the triangle is likely in the days ahead. The $46.50 area may draw prices.

The US 10-year yield fell to 1.90% after the employment data disappointment. This matches the low from August 24. The technical indicators warn of the risk of lower yields still but we suspect the data in the week ahead will not provide the justification for a new leg lower. Initially, we see potential back into the 2.05%-2.08% area. A test on the more important 2.15% area may require more important data, and/or stronger gains in equities.

The S&P 500 posted an outside up day before the weekend. It traded on both sides of the previous day's range and closed above the high (~1927). It strengthens the technical significance of the 1871 low seen earlier last week. We warned last week that a break of 1900 would yield 1870. This objective was met, seemingly exhausting the immediate selling pressure. The next targets on the upside are in the 1963 area. Overcoming them would lift the tone and begin healing some of the technical damage inflicted in recent weeks.

Observations based on speculative positioning in the futures market:

1. There were three significant gross position adjustments by speculators in the CFTC reporting week ending September 29. Another 10.2k short yen contracts were covering, leaving 61.8k contracts, the lowest since May. Speculative positioning in the Mexican peso accounts for the other two significant adjustments. Essentially the longs switched to shorts. The gross long position was cut by a third of 16.4k contracts (leaving 31.3k), and the gross short position rose by 15.7k contracts (to 75.7k).

2. To the extent there was an overall pattern, it was the trimming of gross long positions. There were two exceptions. The gross long sterling position increased by 4.8k contracts to 49.8k. The gross long Australian dollar position rose by 1.9k contracts to 44.6k. The gross short position adjustment was evenly mixed among the eight currency futures we track.

3. The rise in the gross long sterling position was overwhelmed by the 8.1k contract increase in the gross short position. This was sufficient to turn the net position back to the short side (-2k contracts) after one week net long.

4. The net 10-year US Treasury futures position (among speculators) switched to the long side for the first time since late-August. It now stands at 22.5k contracts after having been short a net 8.5k the previous reporting week. It is a function of 458.6k gross long contracts, which rose 10% of 44.7k contracts in the latest period. The gross short position rose by 13.7k contracts to 436.1k.

5. Speculators took liquidated 7.7k contracts of oil futures, leaving the bulls with 481.5k contracts. The bears left their position unchanged with 229.8k short contracts. The net position then reflects the gross long adjustment, falling 7.7k contracts to 251.7k.

29-Sep		Commitment of Traders
		(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-87.7	-81.0	61.9	-1.6	149.6	5.0
Yen	-22.1	-23.7	39.8	-8.5	61.8	-10.2
Sterling	-2.0	1.3	49.8	4.8	51.9	8.1
Swiss Franc	-2.7	-1.9	13.3	-0.5	16.0	0.4
C$	-42.2	-38.4	36.2	-4.7	78.4	-0.8
A$	-48.9	-52.8	44.6	1.9	93.4	-2.1
NZ$	-3.1	-3.5	21.0	-2.0	24.1	-2.5
Mexican Peso	-44.5	-12.4	31.3	-16.4	75.7	15.7