Near-Term Dollar Outlook

Contrary to our expectations, there was very little follow-through dollar buying after the jump in hourly earnings reported on September 7.  In fact, the dollar lost ground against all the major currencies last week but the Japanese yen.  With the help of rising rates and some stability in emerging markets (MSCI Emerging Markets Index finished the week with a three-day advance), the dollar rose above JPY112.00 for the first time in six weeks.  

Despite softer than expected consumer inflation (headline and core) and retail sales, the greenback's losses were pared ahead of the weekend.  This snapped a four-day slide against the euro, sterling, Australian dollar, and Norwegian krona.

The technical signals are not clear, but we can identify levels that may help sharpen the picture.  The Dollar Index fell to (94.35) its lowest level since the end of July before the weekend.  The 94.00-94.20 area is important support, and a convincing break would target 93.00.  On the upside, a one-month trendline begins the new week near 95.20.  Alternatively,  if the pre-weekend lows hold, which are just a little below the late August lows, it is possible a double bottom is in place.  The neckline is near the early September highs around 95.70 (which is also a 50% retracement of the decline since mid-August's peak).  If confirmed, the measuring objective is a little above 97.00.

The euro's gains stalled ahead of the weekend (~$1.1720) in front of last month's high (~$1.1735).  It closed above its 100-day moving average on September 13 for the first time since late April, but this did not signal a breakout.   A convincing break of the $1.1640 area, which houses trendline off the June 14, July 9, and July 31 highs, and retracement objectives, would increase the likelihood that the counter-trend bounce has run its course.  A move below $1.16 offers confirmation.  

  

The technical indicators are less ambivalent for the dollar against the yen than the Dollar Index and the euro.  The close above JPY111.85 is important as it marks the 61.8% retracement of the decline from the July high near JPY113.15.  The JPY112.45 area represents a 50% retracement of the dollar's decline from the June 2015 high near JPY125.85.  We see potential toward JPY115.00-JPY!15.60.  Separately, but not totally unrelated, the Nikkei gapped higher on September 11, leaving a bullish two-day island behind.  The Nikkei again gapped higher before the weekend and lept above the key 23000 level that has been frustrating the investors for several months.  The high for the year is still some ways near 24130.  

Sterling rose to six-week highs ahead of the weekend, encouraged by indications that the EU and UK are moving toward a Brexit agreement and firm services and GDP data. It poked through $1.3140 briefly before it succumbed to the dollar's recovery and a signal from Labour's Shadow Foreign Secretary that May cannot count its support to approve her Chequers plan.  Sterling can pull back toward $1.30 doing much technical damage.  The euro has been tracing out a possible triangle pattern against sterling over the past week.  It is often seen as a continuation pattern, but the technical indicators are stretched and warns of the risk of it is a reversal formation.  

For four sessions, the Australian dollar was pushed below $0.7100 only to recover and finish the 24-hour session above it.  The stronger than expected jobs data spurred and indications that the US was seeking another round of trade talks before levying the new set of tariffs on Chinese goods helped spur a two-advance that the Aussie to $0.7230.  It consolidated ahead of the weekend and retracement a little more than 38.2% of its bounce (~$0.7175).  A break of $0.7140 would renew the focus on the downside.  Traditionally Australia has offered a premium over the US to borrow for two years.  It now is at a 75 bp discount, the most in 20-years.  It may tempt some debt managers to issue Kangaroo bonds, but as the proceeds converted, it could also be a weight on the currency.  

The US dollar began the week testing the CAD1.32 area and fell to nearly CAD1.2980 amid on the back of the broad corrective forces and speculation that progress toward a new NAFTA agreement.  However, the downside momentum faltered and the greenback return to the CAD1.3050 area ahead of the weekend.  This is an interesting area as the five, 20 and 100-day moving averages converge near there.  The two-year interest rate differential has been trending back in the US favor.  The premium the US pays rose to 65 bp before the weekend, up from 48 bp three weeks ago.  It is the largest premium in two months. A move above the CAD1.3070-CAD1.3080 would lift the technical tone.  

For three and a half months, the US 10-year yield has been confined to a 2.80%-3.00% range.  In June and August, the yield briefly rose above the top of the range only to be pushed back. The rise in hourly earnings and demand and supply dynamics offset the somewhat softer than expected inflation reports.  While the tax cuts and spending increases are generating a larger deficit and more supply, demand faces some near-term headwinds that may be overcome with higher rates.  First, the period for which businesses could top up pension contributions using last year's tax rate for the deduction rather than this year's low rate is over.  This was linked to some corporate demand for Treasuries this year.   Second, starting next month, the Fed increases the pace it is reducing the balance sheet to $50 bln a month.  The December 10-year note futures contract closed below a trendline that began in the middle of May and drawn through the July lows and last week's lows, until right before the weekend.  It came in near 119-16.  The early August low almost 119-00, and this represents the next important technical area. Some of the technical indicators, like the Slow Stochastics, are stretched, suggesting that while there may be some fraying, the 119-00 will hold.

October WTI gained 2% last week on a continued fall in US inventories and a terrible storm in the Southeast.  The rally fizzled near $71.25, unable to take out the month's high of about $71.40.  On the setback, demand re-emerged around $68.  The technical indicators are mixed but seem on balance to favor the upside.  

The S&P 500 gapped higher on Thursday, and initially advanced further on Friday before reversing lower.  It entered the gap but did not close it before new buying emerged. It managed to hold on to a 1% gain for the week, finishing just above 2900. The NASDAQ also gapped higher on Thursday, and it too entered the gap before the weekend without closing it. US equities rose while yields were easing earlier and it is rising alongside interest rates two of the past three weeks.   As we noted before, the US equities are near record highs, while major benchmarks, like the MSCI Asia Pacific Index, MSCI Emerging Markets Index, the Dow Jones Stoxx 600, the DAX, CAC, FTSE 250, the Topix and the Shanghai and Shenzhen composites are below their 50- and 200-day moving averages.  

    

Disclaimer