Does the Dollar have Legs?

The US dollar rose against the major currencies except the Japanese yen last week.  It also appreciated against most of the emerging market currencies, with the South African rand, the Brazil real, and the Chinese yuan the notable exceptions. 

Consistent with the recent pattern, the dollar closed the week on a firm note.  The dollar has appreciated against the euro and yen each Friday for the past five weeks. In addition, on each Friday over this period, the US interest rate premium rose against Germany and Japan, on two-year and 10-year money.

What happens on Monday's, you ask.  The euro has fallen in three of the four Monday's.  Last Monday broke the streak.  There was not "turn-around Tuesday" for the euro during this period.  The euro finished the North American session lower on three of the the past four Tuesday's.  

The euro broke out of the narrow range that had dominated the week in response to the slightly firmer than expected US CPI, where, as we have warned, is being driven higher by rents and medical services.  The technical tone is poor.  It broke the up trendline we have been monitoring (drawn off the late-July, late-August, and early-September lows), coming in a little below $1.1190 before the weekend.  The five-day moving average has slipped below the 20-day.  The RSI and MACDs have turned down.  

The 50% retracement of the advance from late July is found near $1.1160, and the euro closed below it.  The 61.8% retracement is at $1.1110.  Before the euro gets there, it has to overcome the shelf created in early-September in the $1.1120-$1.1145 band.  The lower Bollinger Band intersects at the lower end of that shelf.  Lastly, we note euro nearly fell to the 200-day moving average (~$1.1145) before the weekend.  This average caught the lows in late-August and early-September.  

After advancing against the yen for the past five Friday's, the dollar's has advanced in two of the past four Monday's.  The same is true for Tuesdays.   Initial support is near JPY101.70.  Below there,the JPY101.20-JPY101.40 is more significant.  On the upside, the down trendline drawn off the late-May, late-July and early-September highs comes in near JPY 103.20 at the start of next week and JPY102.85 at the end.    

We have cautioned that the market seems to be an inflection point that is changing intermarket relationship and seems to be impacting the reaction function of market participants. One of these is evident with the yen.  Typically, percent changes in the dollar-yen exchange rate and the stocks (S&P 500) are strongly correlated.  This has changed. 

Over the past 60 days, the correlation stands near 0.36 as it trends lower from the late-July 0.62.  The low for the year is 0.34.  Over the past 30 days, the correlation (of the percentage change) is negative 0.2.  It is the first negative reading since June 2015.  

Sterling had been holding a gradual uptrend over the past month.  We had thought that the covering of stale shorts would allow it to continue to post modest upticks.  There was scope toward the upper end of its post-referendum range closer to $1.35.  Yet the pre-weekend sell-off that saw sterling at $1.30 instead showed the fragility of sentiment.   It was the largest drop in two months.  

Sterling's technical tone is poor.  The RSI and MACDs have turned down, a bearish divergence is evident in the Slow Stochastics.  The five-day average is easing below the 20-day average.  A break of $1.30 would target last month's low near $1.2865.   The only note of caution comes from the close below the lower Bollinger Band (~$1.3020).  

The euro reached highest level against sterling since August 23 and completed a 61.8% retracement of the drop from mid-August (~GBP0.8725) to early-September (~GBP0.8330) at GBP0.8575.  Technically, the euro looks poised to retest that mid-August high.

The Australian dollar has fallen in six of the past seven Friday's. This past Friday was not the exception.  It lost about a 0.33% to snap a two day advance in which it gained 0.66%.   There is not typically much follow through on Monday's.  Of the six Monday's during this period, the Australian dollar has risen on five of them.  

To close lower before the weekend, the market had to reject the three-day high (~$0.7525) that it had reached.    The recent lows in the $0.7440 area is the immediate target.  More significant support is seen at $0.7400.   

The US dollar traded above our CAD1.32 target in the last three sessions and finally managed to close above it before the weekend.  This is the upper end of a four-month trading range.  To convincingly indicate a breakout, a close above CAD1.3250 is needed.   The CAD1.3310 is a 38.2% retracement of the greenback's drop from nearly CAD1.47 on January 20 to CAD1.2460 on May 3. The 50% retracement is CAD1.3575.    

The Mexican peso lost 3.6% last week to new record lows against the US dollar.  It was the poorest performer of among emerging market currencies.  In the first half of September is has fallen 4.2%.  Year-to-date, it is off 12.25%, the most except for the Argentine peso, which has fallen 14.6%.. With the US Presidential contest tightening, many link Trump's rise to the peso's weakness   

We recognize that speculators continue to build a substantial short peso position in the futures market. Mexican stocks and bonds have done poorly, especially, recently, but not out of line of other emerging market, and especially Latin American markets.  The kernel of truth may be that the peso has become more of a risk asset, by that we mean it tends to sell-off along side the S&P 500.  In fact, the current correlation (percent change over the past 60-days) of 0.73 is near the highest in four years. 

How quickly the price of oil has fallen.  On September 8, the November light sweet crude contract was near $48.40.  Before the weekend it reached almost $43.35.  The technical condition is poor. Support is seen in the band between $42.50 and $43.00, though last month's low set by $40.75. 

The US 10-year note yield continues to trade in a new and higher range.  The low last week, around 1.635% was still above the top of the previous range (1.60%).  The top of a new range appears to be near 1.75%. The market yield has closed above the 1.70% level only once, and it needs to do this convincingly to boost confidence of an advance into the 1.80%-1.90% band.   

While the 10-year yield has risen for five Friday's, there has not been an increase on any of the four Monday's of the streak.  The December note futures faltered at 130-26 before the weekend, as a bounce was held in check by the 20-day moving average.  A break of last week's low (~129-26) could signal a move toward 129-00 initially.  

The S&P 500 fell in three of last week's five sessions, and managed to eke out a 0.25% gain.  The wider ranges seen last week suggests an intense battle is being waged between the bulls and bears. The activity of the last four sessions took place within last Monday's range.   Our reading of the technical conditions still suggest caution.  

The gap created on the sharply lower opening on September 9 remains open (2169-2177.50) and this cast a negative pall over the chart.  The RSI is neutral.  The MACD's allow for additional losses, but are stretched.   Both the Slow and Fast Stochastics also warn of downside risks.  Last week we suggested an initial target of 2116-2120.  The lows were into this range, but buying appears to be defending the 38.2% retracement of the rally since late-June and the 100-day moving average. A break of this area is needed to open the door to the downside.   

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