Dollar Looks Vulnerable to Start Q4

The US dollar fell against most of the major currencies in Q3.  The Norwegian krone was the best performer, gaining 4.4% against the greenback.  It was helped by higher oil prices and a shift away from an easing bias by the central bank.  The relatively high interest rates offered by Australia and New Zealand underpinned their currencies, which gained 2.7% and 2.0% respectively.  

The dollar rose against three major currencies.  Sterling cannot get out of its own way, even though the economic data has been mostly better than expected.  Sterling lost 2.5% in Q3 after a 7.3% drop in Q2.  The Swedish krona fell 1.5% in Q3 after falling 4.0% in Q2.  The central bank is insisting on an aggressively easy monetary policy despite solid growth and rising price pressures.  The Canadian dollar decoupled from the other dollar-bloc currencies by slipping 1.4% in Q2.  The drag from oil prices and mostly disappointing economic data weighed on the Loonie, which typically underperforms on the crosses in a soft US dollar environment.  

The most important technical consideration in the Dollar Index is the trendline connecting the early-May low, the late-June low, a couple of lows from the second half of August, the early September low.  That trendline is just below 95.00 at the start of next week and is rising about one tick a day.  The initial target on a break is the September low near 94.45.  Resistance is seen around 96.00.  The ceiling has frayed but not on sustained basis.  

Helped by an upside reversal in Deutsche Bank shares before the weekend, the euro rose from the week's low near $1.1155 before the weekend back toward the four-day cap near $1.1250.  The price action is constructive, but the single currency remains in a two-cent range between $1.1100 and $1.1300 that confined the price action with only one exception in September.  Note that the trendline we identified in the Dollar Index can be found in the euro, which is its biggest component.  It is found near $1.1270 at the start of next week and falls about three ticks a day.  

The dollar looks firm against the yen after the JPY100 level was repeatedly tested.  However, the upside may be blocked near JPY102.00.  A trendline connecting the September highs comes in just below there at the start of next week and corresponds to the 50-day moving average.  The trendline is falling about 10 ticks a day.   Of note, the dollar-yen rates appears to have become decoupled from the stock market. The rolling 60-day correlation between dollar-yen and the S&P 500 has fallen to 0.1, the lowest since the middle of 2015. 

Sterling has spent at last part of the nearly every session over the past two weeks below $1.30.  However, the lows in September were marginally above the August low, which itself was marginally above the July low.  If it is not just going to be a sideways affair, sterling needs to overcome a cap in the $1.3100-$1.3120 area.  

The US dollar rose to its highest level against the Canadian dollar since March at the start of last week.  The unexpected, but vague, OPEC deal helped the Canadian dollar recover.  After nearing CAD1.33 in the first half of the week, the US dollar finished near CAD1.3100.  There is potential toward CAD1.30. 

The Australian dollar posted an outside down day on September 29 after briefly poking through the $0.7700 cap.  Follow through selling on September 30 pushed it to $0.7590 before rebounding smartly.   The challenge in the coming sessions is for the Aussie to establish a foothold above the $0.7700 nemesis.   The RBA meeting on October 3, which is the first that Governor Lowe will preside.  While rates are on hold, Lowe might express some frustration with the Aussie's strength.  The failure to do so would likely embolden the bulls.  

The US 10-year yield fell from 1.75% in mid-September to a low near 1.53% before the weekend.  However, the recovery of bank shares helped lift the yield back to 1.60%.   There is scope for the yields to increase next week on the back of data, culminating in what we expected to be a healthy jobs report.  The December note futures made new highs for the move before selling off ahead of the weekend.    Initial support is seen in the 130-25 to 131-00 band.  A break of 130-16 is needs to suggest a more important high in price (low in yield) may be in place.  

The November light sweet crude oil futures finished September near its best levels on the month.  The technical condition is constructive, and a test on $50 should not be surprising.  The fact that the implementation of the tentative OPEC agreement is not for at least two months does not stand in the way of additional near-term gains.  

The technical fragility that we saw in the S&P 500 over the past couple of weeks has been alleviated by the recent price action.   The MACDs and RSI have turned higher.  The record high, set in mid-August neat 2193.8 may be tested.  It is only about 1% away, but with Q3 earnings season about to kickoff (October 11), we are not convinced that a new leg up is the most likely scenario.   Analysts expect a decline of about 2% in Q3 S&P 500 earnings.  It will be the sixth consecutive quarterly decline, a streak that has not been seen since the financial crisis.  

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