Dollar Bloc may Outperform

(Greetings from Tokyo)

Last week we saw a decidedly mixed dollar tone. The picture has become clearer, the technical tools we use suggest that the dollar-bloc currencies are better positioned than the other majors, like the euro, yen, and sterling.

The macro backdrop is benign.  That is to say, there is strong enough growth to absorb slack in most of the major economies and without generating the price pressures that central banks would see as requiring a stronger response.  A few weeks ago, the market ostensibly bought euros and yen on ideas that central banks are exiting there extraordinary easing More recently there has been speculation that the Fed will suggest four rate hikes instead of three this year when it meets on March 21. 

On the trade front, the US bark is proving worse than the bite.  Exemptions will be given, as was the case with Bush's 30% steel tariffs.  While the risk of a trade war has increased, it's not the most likely scenario.   Even with China, the US rhetoric is more bombastic than supported by US actions.  The US has asked China to reduce its bilateral trade surplus with the US by a billion dollars, according to a presidential tweet, which is hardly even a rounding error on the more than $370 bln imbalance.  Despite the haranguing during the campaign, the Administration has not cited China as a currency manipulator.    

Rather than the dollar being the key mover, the technicals suggest the dollar could move back into the role of a fulcrum on the seesaw.  The dollar bloc is on one side.  In the near-Goldilocks global macro, the dollar-bloc currencies may do well, and this supported by our reading of the technical signals.  On the other hand, the technicals for the euro are mixed as it enters the second month of the range-trade affair.  Immediate support is seen neat $1.2265, but the key for the medium-term outlook is $1.2155.   We detect a potential change in behavior, and many short-term participants seem more eager to selling into upticks than buy dips.  Initial resistance is seen in the $1.2340-$1.2380 band.  

The euro began year by extending last year's advancing streak to eight weeks through the start of February.  However, since then, it has been alternating between up and down weeks since  It slipped less than 0.1% last week.  

The dollar appears poised to move higher against the yen.  The BOJ has made it clear that it remains committed to its aggressive stance, and the rising US rates and rallies in equities, provide fundamental conditions that traditionally associated with a weaker yen.   The dollar closed above its 20-day moving average against the yen for the first time since January 8.  The JPY107.00-JPY107.20 needs to be overcome for the greenback to challenge the upper end of the range near JPY108.  

Sterling's technical outlook is more constructive than the euro or yen.  The RSI and Slow Stochastics point higher and the MACD is about to turn as well.  Support is seen near $1.3770, and the upside may be capped initially around $1.3930.  The operative pattern may be the down trendline from the January 25 high ((~$1.4345), the February 2, 16, and 26 highs (~$1.4280, $1.4145 and $1.4070 respectively.  It comes in near $1.39 at the end of the week ahead.  

The market tried three times to push the US dollar above CAD1.30, and the failure leave the market vulnerable.  The exemption granted Canada from the newest US tariffs, as well as the strength of its biggest export market, helped the Canadian dollar recover ahead of the weekend.  The greenback closed on its lows a little ahead of CAD1.28, which corresponds to the 38.2% retracement of the last leg up that began in the middle of last month.  Below there is the 50% retracement and the 20-day moving average around CAD1.2725.  The technical indicators line up well and are the clearest among the currencies that the Canadian dollar will likely appreciate in the near-term against the US dollar. 

After forging a shelf in the $0.7760-$0.7770 area, the Australian dollar broke higher ahead of the weekend. It finished above its 20-day moving average (~$0.7840) for the first time in over a month.  There are a number of technical levels found between $0.7850 and $0.7900.  Technical indicators suggest a robust challenge of the resistance should be expected.  

April WTI has a base at $60 now and is poised to test the $63-$64 a barrel area.  The RSI and MACD are more supportive than the Slow Stochastic. The close was strong just above $62 and above the five and 20-day moving averages (~$61.50 and $61.70).  

It is hard to get excited about the 10-year Treasury yield.  It is moving sideways after rising earlier.  The yield has a base near 2.80% and mostly has stayed below 2.90%, but has briefly poked above 2.95%.  This translates into a range of about 119-16 to 120-24 in the futures market.  This sideways movement mutes the technical signals.  This seems to favor continued range trading.  

Equities have absorbed the rising rates and flare up of rivalries between the leading industrial economies on trade.  The NASDAQ gapped higher to register new record highs before the weekend.  It will begin the new week with a six-session advancing streak in tow.  The S&P 500 also gapped higher before the weekend after the strong (except for wages) jobs report.  

That gap is important.  It is found between last Thursday's high (~2740.45) and the low before the weekend (2751.55). If this is not filled in the next day or two, it is likely because the index is filling an earlier gap from the start of February.  It is found between 2808.90 and 2812.70. The technical indicators are favorably positioned.  The S&P 500 may match the NASDAQ move to record highs in the coming weeks. 

The Russell 1000 Growth Index gained 3.8% last week and has advanced for a sixth straight session ahead of the weekend.   It was the second strongest weekly advance since October 2014; second only to the 4.7% rise in the middle of February that marked the end of the brief but intense correction. It is up 7.25% for the year (S&P 500 4.2% and NASDAQ 9.5% YTD).  The Russell 1000 Value Index rose a little more than 3% on the week.  This puts it higher on the year again, but just shy of 1%.  

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