Near-term Dollar Outlook is Nuanced

The US dollar fell against all the major and most of the emerging market currencies last week. Risk appetites have been rekindled, and the yen has gone from the best performer in recent weeks to the worst over the past week.

Major equity markets advanced for the third week. The MSCI Emerging Market equity index has rallied more than 15% since the January 21 low, and nearly 12% since the February 11 low. The index finished the week at its best level since January 4.

Oil prices are up 35% since the February 11 low to approached $35 a barrel. While still low, has taken some sting off deflationary fears, and helped ease some concern about financial exposures to the energy sector. The 10-year US breakeven has risen for nine consecutive sessions through March 3 to 1.55% from nearly 1.11% on February 11. It was below 1.50% when the Fed hiked in mid-December 2015.

One of the noteworthy exceptions to this risk-on phase in gold's rally. It was up 4.2% last week to its best level since February 2015. It broke out of the a triangle pattern, which now targets the $1300-$1320 area. In January and the first half of February, gold was moving in the opposite direction of stocks, and now it is rising alongside equities.

The euro peaked on February 11 near $1.1375. It fell to $1.0825 on March 2. It bounced in the second half of last week to nearly $1.1045. This completed a 38.2% of the euro's decline (~$1.1035). The 50% retraces are found near $1.11, and the 20-day moving average is near $1.1080. The RSI is constructive, and the MACDs are about to turn higher. We think the euro has scope for additional near-term corrective upticks ahead of the ECB meeting on March 10. Initial support is seen in the $1.0940-$1.0960 area.

The dollar appears to be carving out a low against the Japanese yen. The dollar has a double low near JPY111.00. The neckline is near JPY114.50. The measuring objective is around JPY117.50, which corresponds to a 61.8% retracement of the dollar's sell-off since the January 29 peak of about JPY121.70. The technical tone is constructive, with the five-day moving average crossing above the 20-day average before the weekend, and the MACDs and RSI trending higher. Initial support is seen near JPY113.00.

Sterling advanced in every session last week. The technical indicators are favorable, leaving sterling poised to continue its recovery. We anticipate it can move into the $1.4350-$1.4400 area. That corresponds to a retracement level and a trendline. It is also the measuring objective of a potential head and shoulder bottom that has been forged. The initial move to seek insurance in case Brexit materializes appears to have run its course. The referendum is not until the end of June. It is unreasonable to expect that sterling will fall throughout the interim. Remember, Brexit is not the odds on favorite scenario. A low probability but high impact event requires vigilance by investors. A break below $1.4040 would negate this favorable near-term outlook for sterling.

The Canadian dollar rose 1.5% over the past week to reach its best level since early December. The US dollar approached our CAD1.33 target before the weekend. The rise in oil prices and the stronger appetite for risk offset the gradual increase in the US premium over Canada (on two-year money). A break of CAD1.3270 would target the CAD1.3130 area and possibly CAD1.30.

The Australian dollar appreciated by nearly 4.3% last week to reach its highest level since the middle of last year. It is the biggest weekly advance since late-2011. Favorable economic data, a central bank that is in no hurry to cut rates again, and a recovery in commodity prices, including iron ore, copper, and gold underpinned the Australian dollar. Speculators in the CME futures market went net long the Aussie three weeks ago. Although the momentum story may be compelling, there may be too much of a good thing. Technically, the Aussie finished above its upper Bollinger Band (which is near $0.7360) and was near three standard deviations from its 20-day moving average ($0.7450). There have been two consecutive closes above the Bollinger Band. The last time this happened, it marked a multi-week high. Moreover, as the currency appreciates, the central bank is likely to express its disapproval. An appreciating Aussie may boost the chances that the rate cycle is not complete.

The nearly 9% rally in the April light sweet crude oil futures was the biggest of the year. Prices closed near the highs, which is among the best here in 2016. The technical indicators suggest there is more room to advance. The next important technical area is in the $36-$37.50 area. Although the $35 was important resistance, we are not convinced it will now be supported. Technically, support may be more formidable in the $33.50-$34.00 band.

The 10-year Treasury yield bottomed on February 24 near 1.65%. It reached 1.90% after the US employment data on March 4. It has not been above 2.0% since late-January, and that is the next psychological target. The March 10-year note futures retraced almost to the tick 50% of the rally from the end of last year through February 11. That retracement target was 129-08. The 61.8% retracement is near 128.11. A break of 128-00 would be significant. A note of caution is that the futures contract finished just below its lower Bollinger Band. This warns of the risk of consolidation at the start of the new week Initial resistance is seen in the 130-00 to 130-12 area.

The "W" bottom in the S&P 500 we have been tracking was finally confirmed over the past week with the convincing close above 1945. The measuring objective of the pattern is near 2100. The S&P 500 poked through 2000 briefly ahead of the weekend. The S&P 50 has retraced three-quarters of this year's decline, leaving it off about 2.4% for the year. Although the technical indicators remain constructive, we are less confident. We will pay close attention to how the S&P 50 trades as it approached the gap created on the lower opening of the first session of the year. That gap is found between about 2038.20 and roughly 2043.60.