The dollar rose against all the major
currencies over the past week. The divergence meme we have emphasized has
continued to unfold. The ECB eased policy at the start of the
month. Less than 48 hours after the Fed hiked rates, the BOJ tweaked its
asset purchase program to sustain
it.
Holiday-thin
markets make for more treacherous conditions than usual. The news stream lightens, and participation will fall
off until January 4.
The key
question for many short-term participants is whether the dollar's downside
correction of the rally that began in mid-October is complete. Given the extent of market positioning, we
have yet to be persuaded by the prices that the adjustment is complete.
The Dollar Index has flirted with the 61.8% retracement of the decline that began with the ECB meeting (~99.25). There is a small downside gap created by the Dollar Index gapped higher the day after the Fed hiked. That gap is found 98.59-98.61. The technical indicators are mixed, with the MACDs about to cross higher and the RSI soft. While it is difficult to have much confidence in the near-term move, we continue to look for higher levels in the medium and longer-term. Without getting too fancy, we suspect that the June 2014 through March 2015 rally was a third wave of some magnitude. The April through mid-October was some sort of fourth wave consolidation. I suspect a fifth wave began mid-October.
The euro lost about 1.3% last week, and it tested impact support near $1.08. The 50% retracment of the post-ECB
rally comes in just below there as does the 20-day moving average. A
break would target the $1.0730 area (61.8% retracement objective).
We have anticipated the persistence of the $1.08-$1.10 trading range for this
corrective phase. Like the Dollar Index, the technical indicators we use
are mixed.
The dollar
recorded a big outside down day against the Japanese yen before the weekend,
whipsawed by the unexpected moves by the BOJ. We see the move
as largely operational adjustments that
will allow the unprecedented large
asset purchase plan to continue while minimizing the risks of dislocations.
Japanese corporates are experiencing record profits,
and their balance sheets are flush with cash. We don't see the extension
of the pre-Kuroda corporate lending schemes as significantly boosting CapEx.
The softer US
bond yields and weaker stocks ahead of the weekend may have prevented more of a
dollar recovery. Support is
seen near JPY21, and a break
signals a return to JPY120. Initial resistance pegged near JPY121.60, but
the most significant hurdle is the JPY122.00-JPY122.33 band.
Sterling was
sold to its lowest level since April last week. The third consecutive decline in average
weekly earnings kept the pound under pressure. It had briefly traded at
four-week highs at the start of the week, and with the new multi-year lows seen
on December 17, a bearish outside down
week was recorded. The next level of support is seen near $1.4800. However, the
pre-weekend gain snapped a five-day declining streak. The inside day
warns of the risk of a short-term pop toward $1.4950-$1.5000 where it may be a
lower risk sale.
The US dollar
hit a wall of sellers when it printed CAD1.40 after soft Canadian inflation
figures before the weekend. The settlement on the lows warns of
further corrective action in the days ahead. A break of CAD1.3820 signals
a move back toward CAD1.3730-CAD1.3750. Canada reported poor September data, with GDP and retail sales
falling 0.5%. Both are expected to have recovered in October.
These reports nest week may also favor some backing and filling after the
Canadian dollar fell more than 4% against the dollar (before reversing).
The Australian
dollar was little changed last week though it did briefly trade below $0.7100
for the first time since mid-November. It managed to hold above the uptrend line
drawn off the September and November lower. It comes in slightly
above $0.7100 at the end of the year. On the upside, the $0.7250-$0.7280
may provide formidable resistance
near-term.
There is little
technical evidence that oil prices are bottoming. The fundamentals are
negative. The end of the US ban on
oil exports and the end of Iranian sanctions warns the global glut is bound to
get worse. US producers brought 17 oil rigs back online, the most since July. US
output has risen in five of the past eight weeks. Inventories continue to
increase. The next price target is
the crisis low near $32.50 (continuation contract). On
a trend basis, a move toward $25 a barrel in H1 16 seems reasonable.
The US 10-year
note yield pushed toward 2.32% after the Fed hiked rates. However, typically the early stage
of Fed tightening produces curve flattening. True to form the 10-year note
yield reversed lower to finish the week below 2.20%. The 10-year yield
has spent very little time below 2 1/8% since
late-October.
Disclaimer
Near-Term Dollar Outlook: May the Force be With You
Reviewed by Marc Chandler
on
December 19, 2015
Rating:
Reviewed by Marc Chandler
on
December 19, 2015
Rating:
