Dollar Benefits from being Less Ugly

The US dollar rose against all the major and most of the emerging market currencies last week.  The Dollar Index made a new marginal high for the year.  Although US jobs growth disappointed in November and the flash Markit PMI and manufacturing output was weaker than expected, poor data abroad helped underpin the dollar by default.  UK Prime Minister survived a challenge from within her party, but the way forward is not clear and is a source of pressure on sterling.  Despite the decline in US yields and increased equity volatility, the dollar has been resilient against the yen.  Last week's 0.6% gain is the third increase in the past four weeks. 

Dollar Index:  The disappointing EMU flash PMI and the 0.9% rise in the components of US retail sales that feed into GDP helped lifted the Dollar Index briefly above 97.70 to a new high for the year.   It recorded an outside up week, meaning it traded on both sides of the previous week's range and closed above the previous week's high.  The 97.85 area corresponds to a key (61.8%) retracement of last year's decline.  A convincing move above it lends credence to our argument that the 2017 decline was corrective in nature.  Since September 21, the Dollar Index has fallen in only three weeks-one week a month in October, November, and thus far in December.  Support is seen in the 95.80-96.00 range.   If the anticipation of a dovish FOMC is misplaced as we expect, dollar pullbacks at the start of the week will likely be reversed by the end. 

Euro: Draghi's acknowledged that the risks were moving to the downside sparked some euro losses, as has been the case every time the ECB has met this year but once (September).  However, it took the disappointing flash PMI that saw France's measures fall below the 50 boom/bust level and Germany weaken to send the euro below $1.1300.  It fell to $1.1270, holding just above the late November low, but closed back above $1.13.  Resistance is seen in the $1.1340-60 area, where the five and 20-day moving averages converge with the pre-weekend high and a 50% retracement of the recent decline.  The $1.1185 area corresponds to a key (61.8%) retracement of last year's rally.

Yen:   Since the week ending September 7, the dollar has fallen against the yen in only four weeks (rising in the other 10). The dollar just missed staging an outside up day to start last week but the momentum stalled after the rally and all the closes were within about a 15 tick range on either side of JPY113.45.  Initial support is seen in the JPY112.80-JPY113.00 area. Nearby resistance is pegged in the JPY113.70 area and JPY114.00.

Sterling:  The Brexit drama drove sterling to an outside down day on December 11 and then a marginal new low the next day, just below $1.2480 before rebounding almost $1.2690. The $1.2730-40 may contain upticks until the Brexit picture clarifies.  The risks of the UK leaving the EU without an agreement has risen, there is nothing like approaching the brink to spur the urgent quest for alternatives.  There is more talk of a second referendum, partly on ideas that there is no majority in Parliament for any one solution so it should revert back to the people.  The UK could revoke Article 50, which is within its rights, also appears to be a growing possibility.   The euro approached but help below the August high near GBP0.9100 at the start of last week.  The euro fell to about GBP0.8950 on sterling's recovery and the less optimistic ECB. We peg initial resistance now near GBP0.9040.

Canadian Dollar:  The US dollar extended its advance to a fourth consecutive week against the Canadian dollar.  In fact, here in Q4, the Canadian dollar has fallen even week but one (week ending November 16).  After recording the high for the year on December 6 near CAD1.3445, the US dollar consolidated its gains and, with one brief exception, held above CAD1.3300 where the 20-day moving average begins the new week.  Despite several intraday violations, the greenback has not closed above CAD1.34.

Australian Dollar:  Soft Chinese and Australian data sent the Aussie down 0.5% on the week and the lowest close since the end of October (a little above $0.7170).   The low for the week was near $.07150, where the lower Bollinger Band is found.  Initial resistance is the previous support around $0.7200.  The strong downside momentum faces little chart based obstacles until closer to $0.7000. 

Oil: January WTI fell 2.7% last week.  It has risen in three weeks here in Q4.  The gradual, and one might suspect, reluctant Russian cuts, fanned doubts about the recent agreement.  Weaker economic data warned of demand-side risks.  For seven consecutive sessions, the January contract has traded below $51 a barrel but has been unable to break through $50.  The sideways movement for the past three weeks appears to have alleviated the overextended technical condition.  

US Rates:  The five-week and roughly 37 bp decline in 10-year Treasury yields snapped last week.  The yield rose four basis points to 2.89%. The 2.82%-2.92% marks the range.  The March futures contract is consolidating in a 120-00 to 121-00 range.  The MACDs and Slow Stochastics suggest the next big move is to the downside, but the RSI warns another push higher could happen first.  The April 2019 Fed funds futures contract implies a yield of 2.47%.  The current effective rate is about 2.20%.  Assuming the Fed hikes 25 bp this week but only increases the interest on reserves by 20 bp, or 2.40%.  The seven basis points difference is the linger residual probability of a March move (~35%).  This is a little higher chance that the Bloomberg (~27%) or the CME (~31%) models suggest.  The difference could be in the assumption that the Fed continues to raise the interest on reserves by a little less than the target range. 

S&P 500:   The S&P 500 recovered from the break below 2600 at the start of the week, but the buying fizzled in the middle of the week near 2685. It gapped lower on before the weekend and settled on its lows just below 2600.   The gap (~2635.1-2637.25) offers important nearby resistance. Given year-end considerations, sellers may have the upper hand.  The April low is a little below 2554 and the low for the year is near 2532.7.  

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