The US dollar remains strong against most currencies. The exceptions are the Japanese yen,
Swiss franc and euro though the franc and
euro pulled back in the US afternoon before the weekend. The greenback is
still appreciating on a trade-weighted basis, which is the metric that counts in assessing its impact on the overall economy.
The euro, yen
and franc strength is not as is
often portrayed as some kind of safe haven that is flocked to in turbulent
times. Rather
those currencies have been used to fund the purchases of other assets. When those other assets are liquidated
the funding currency has to be bought back. In
addition, assets in Europe and Japan were often purchased over the past
year or so on a hedged basis.
When the underlying asset is sold, the hedge, which is a short currency position, is covered. It is true that in the futures market, speculators are net long the yen for the first time in a few years, but this seems to be an expression of momentum and trend following rather than a safe haven play.
When the underlying asset is sold, the hedge, which is a short currency position, is covered. It is true that in the futures market, speculators are net long the yen for the first time in a few years, but this seems to be an expression of momentum and trend following rather than a safe haven play.
It is not about
the dollar at the moment. It may be more helpful to think of
the dollar at the fulcrum, or the center of the see-saw. On one side of
are the funding currencies and on the other side
are the assets. The technical indicators are not encouraging traders or
investors to resist the current forces. The failure of the recovery in
the US stock market on Thursday to lift Asia (and Europe) seems to be a strong
hint that the reversal in the market has to come from somewhere else.
The euro remain
in a $1.08-$1.10 trading range. There have been several false
breaks. Last week the ranges held.
The low was $1.0805, and the high
was $1.0985. Given the technical readings, and the fact that the US
two-year premium over German has fallen by 20 bp since late last year, and is
trending lower, the immediate risk is on the euro's upside.
The
$1.1010-$1.1015 area is important, housing a previous Fibonacci retracement
objective (50% of decline since October 15) and the upper Bollinger Band.
Above there is $1.1060, the high from December 15. A break of this
would target the $1.1120-40 area.
The dollar fell
to JPY116.50 before the weekend. This
is lowest it has been since late-August when it dipped briefly below
JPY116.20. In addition to the equity market drop that weighed on dollar,
the US-Japan 10-year interest rate spread is at its narrowest since
late-October, having fallen by 25 bp since late last year. A break of
the JPY116.00 targets JPY115.60-JPY115.85. Below there is JPY113.70.
It seems
reasonable to expect Japanese officials to caution against too strong of a yen
and reminding market participants that currencies should reflect fundamentals. However, in the current
environment, we do think actual material intervention is likely. A
stronger yen, coupled with the drop in oil prices and disappointing economic
data could change the dynamics. If it were to persist, the risk of
extending QQE would likely increase.
Sterling has
fallen in eight of the ten sessions here in 2016. It has fallen nearly five cents over
this period. It closed below its lower Bollinger Band in three of last
week's five sessions, including the Friday, when it fell to $1.4260.
During the down draft, the five-day moving average has been catching the
highs. It is found near $1.4415.
It is difficult to find meaningful
support for sterling, but the next target is the 2010 low near $1.4230.
The big target that is looming nearer is $1.40.
The US dollar
pushed above CAD1.45 for the first time since April 2003. If resistance is supposed to denote
where supply comes in, the charts are not particularly helpful now.
However, perhaps, appreciating that the $0.68 round psychological level
for Canadians is equivalent to CAD1.47 may be suggestive of the next target, on
the way to CAD1.50, which is a much more important
level.
The speed of
the greenback's recent ascent leaves support at a distance. The upper Bollinger Band is comes in near CAD1.4450, and additional support is likely near
CAD1.4400. The five-day moving average, which the greenback has not
closed below since trading resumed on January 2, is found near CAD1.4340.
The Australian
dollar posted a big outside down day before the weekend that carried it to its
lowest level since March 2009. The long-term trend, drawn off the
2001 and 2008 lows, comes in now near $0.7140 though the $0.7000 area is the
first important hurdle. There may
be some interesting chart points near $0.6780, but $0.6500 is the next
significant target.
Volume and open
interest is shifting the to June light sweet crude oil futures contract. The five-day moving average has also
acted as resistance on upticks. The contract
has not closed above this average since December 29. It is found near
$31.65 now. It finished just inside the Bollinger Band. The next
psychological level is $25.
The generic
10-year US Treasury note briefly yielded less than 2.0% before the weekend for
the first since mid-October. The March note futures rose to almost
129-00. The highs from last October were 129-09 and 129-18. That
is the obvious target while the
continuation contract points to potential 130-00. Still, the March
contract closed a little above its upper Bollinger Band (129-12).
Sentiment is poor given the head
fake last Thursday where a strong
recovery was seen but did not lift global
markets, and the sharp sell-off before the weekend that gave it
all back plus some. The 1900 level offers initial resistance while a move back above 1950 would begin repairing the technical damage.
Disclaimer
Outlook for the Dollar: Dissecting the Bull
Reviewed by Marc Chandler
on
January 16, 2016
Rating:
Reviewed by Marc Chandler
on
January 16, 2016
Rating:
