Are the Dollar Bulls Retaking the Initiative?

As systemic anxiety eased, the US dollar got better traction. The dollar-bloc currencies managed to hold their own as cross positions were unwound.   

Major bourses posted gains for the second consecutive week.  With the recent advance, several markets, including the S&P 500, FTSE and Sweden, China, Korea, and Taiwan are now positive on the month.   

The April light sweet oil futures had its highest weekly close this month.  More broadly, the CRB Index is nearly 7% off its February 11 low and posted its highest close of the month before the weekend.  In addition, the global capital markets appear to be less sensitive to the vagaries of the Chinese equities or the yuan as seemed to be the case a few weeks ago.  

Technical considerations favor further US dollar gains in the week ahead.  The RSI and MACDs for the Dollar Index are trending higher, and the five-day average crossed above the 20-day moving average.  The Dollar Index is testing an important resistance near 98.00.  A convincing break would immediately target the 98.75-99.00 area.   

Support is seen a little ahead of 97.00.   Encouraged by favorable economic data (upward revision to Q4 GDP, a larger than expected rise in the January core PCE deflator to three-year highs, and an uptick in consumer confidence), before the weekend, the Dollar Index recorded an outside up day by trading on both sides of the previous day's range and closed above the high.  

Similarly, the euro finished poorly, posting an outside down day ahead of the weekend, and closing below the uptrend line drawn off the early December lows.  Recall that low was set near $1.0525 before Draghi disappointed and/or sell the rumor, buy the fact type of activity.  The weekly close below $1.0950 and the technical indicators suggest immediate potential for another cent lower. Although it had been penetrated before, the $1.0800 level still has technical significance.  On the upside, the $1.10 area likely becomes resistance again.  

The backing up in US yields and the lower volatility impulses from the equity market have helped the dollar carve out a potential double bottom near JPY111.00.  However, it will not be confirmed unless the dollar moves through the neckline a little below JPY115.00.  

The measuring objective is near JPY119.00, which corresponds to the 61.8% retracement of the dollar's slide since last November.   The 100-day moving average is near JPY119.50.  The RSI bottomed earlier this month while the MACDs are only crossing now.  

Sterling lost nearly 3.7% over the course of the week, and the selling does not appear to have exhausted itself.  It recorded an outside down day before the weekend to record new multi-year lows and negate the two-day consolidation that had spurred some talk that market had gone too far.  Even if it has gone too far, it surely does not mean that it can't go further.  And that seems to be the most likely near-term technical scenario.  

Since the end of Q1 1986, sterling has experienced only 3-4 periods below $1.40.  However, this time is likely to be extended as the significance of the June referendum overwhelms whatever other supportive fundamentals may emerge.  And if anything, the economic data is expected to show some moderation in economic activity.  

It is difficult to talk about where chart-based support is if it is to denote where demand may be spurred, but the next set old lows were seen in the $1.3660-$1.3680 area.  Below there is $1.35, which may be more psychological than real.  The $1.4000-$1.4050 band may block counter-trend bounces.  

The Aussie surrendered most of the gains for the week with Friday's dramatic reversal.  The impulsive nature of the drop, the first close below the 20-day moving average in a month, coupled with the turn in the RSI and MACDs, suggests the upside correction begun last month is over.  Initial support is seen near $0.7090, which corresponds to a 38.2% retracement of the correction and a trendline (drawn off the January 20 low).   A break of $0.7000 is needed to confirm the significance of the price action.  

The Canadian dollar defied our expectation and continued to recover against the greenback. Before the weekend, it was at its best level since early-December.    We see three drivers:  higher oil prices, backing up of Canadian rates and better risk appetites illustrated by higher equities.  

Of the three, we suspect the least appreciated is the rise in short-term Canadian interest rates.  The implied yield on June BA futures has risen nearly 35 bp since January 20.  During the same time, the implied yield of the June Eurodollar futures contract has risen by less than two basis points. 

News next week that the economy stagnated in Q4, and the tightening of financial conditions since the start of the year, may see interest rate market soften.  That seems to be the key to the Canadian dollar.  The technicals are stretched with the US dollar closing two session to end the week below the lower Bollinger Band (~CAD1.3535). However, the momentum indicators have not turned.  The next target is seen near CAD1.3300. 

The US dollar bounced along the trough near MXN18.00 over the past week and a half.  The failure to move below there is seeing the downside momentum fade.  On the upside, the MXN18.35-MXN18.40 marks the near-term cap.  

The price of the April light sweet crude oil futures has moving broadly sideways since the mid-January.  The $30-$35 range has confined most of the price action.  A $1.25 expansion of each side of that range captures the action of the past five weeks.   We have not been persuaded that a freeze by Saudi Arabia and Russia (and a few other countries) is very significant.   The sideways trend is not necessarily a reversal pattern.  

US 10-year Treasury yields rose one bp on the week to 1.76%.   It may not sound like much, but it is 12 bp off the week's lows.  The yield has not been above its 20-day moving average (~1.78%) since early January.  The 1.78%-1.85% range is important.  On the other hand, the March bond futures contract settled 1/32 its 20-day moving average (~130-23).  It has not closed below it since January 5.  A move below 130-00 would spur a move to 129-00, and maybe 128-16.  

The S&P 500 finished poorly after extending the February 25 recovery to reach its best level since January 7.   The index rallied from about 1890 in the middle of the week to 1963 before the buying dried up ahead of the weekend.  If that leg is retraced, the 1918-1935 band is important determine the underlying strength of the market.    

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