Dollar Bulls may Turn Cautious

While we expect that the broad economic and monetary divergence will allow the dollar's uptrend to resume, more immediately we have been expecting the recent ranges to remain intact.  The ranges may have frayed, but the pre-weekend price action may reinforce them. With a slow start to the week ahead (US holiday and light economic calendar), it may be difficult to rebuild the greenback's upside momentum.  It had tested the lower end of its ranges in late January and recovered in the first half of February.  Being range-bound means that it will likely soften in the days ahead.  

Dollar Index:  The Dollar Index made a new high for the year before the weekend, a little below 97.40, and then reversed lower and closed below the previous session's low.  Chartists call it a key reversal.  The technical indicators we use are confirming the risk of a pullback.  The RSI did not confirm the new highs (bearish divergence).  The MACDs and Slow Stochastics are set to turn lower in the coming session or two.  The Dollar Index closed below its five-day moving average for the first time in two weeks.  Initial support is seen near 96.50, but we suspect the risk may extend toward 96.00.  

Euro:  The euro posted a reversal pattern before the weekend.  After making a three-month low (~$1.1235), it staged a recovery that carried it to new session highs.  In the Japanese candlesticks, it looks like a hammer. The RSI has a bullish divergence, and the MACDs and Slow Stochastics are poised to cross higher. The $1.1300 level has been transgressed so many times now that may have lost its technical significance, and there is scope toward $1.1350 and then $1.1400. 

Yen:  The dollar reversed lower against the yen the day before the euro.  It briefly poked through JPY111.10 for the first time since December 27 before being sold back a little below JPY110.50.  There was a little follow through dollar selling ahead of the weekend (~JPY110.25).  The dollar surpassed the retracement target near JPY110.85 but held 200-day moving average (~JPY111.30). The RSI is neutralized.  The MACDs are stretched but have not turned.  The Slow Stochastics are rolling over and have not confirmed the new high (bearish divergence).  The technical takeaway may be that the yen underperforms the euro in the days ahead.  The euro recovered after approaching JPY124 before the weekend.  The upper end of the range is around JPY126.  

Sterling: The British pound has been unusually streaky lately.  It just concluded its third weekly decline, which followed a six-week advance that had ended a five-week downdraft.  Sterling's recovery ahead of the weekend, helped perhaps by the strong retail sales report, may not have a specific name, but we note that it closed above the previous day's high for the first time in three weeks. The technical indicators are constructive.  The RSI has a bullish divergence, and the MACDs and Slow Stochastics are set to turn higher. There may be a little hurdle in the $1.2920-$1.2940 area and a more formidable obstacle around $1.30. 

Canadian Dollar: The Canadian dollar gained about 0.25% against its US counterpart over the past week and remains the best performing major currency in the first half of Q1 19 with a nearly 3% gain.  That follows, one will recall, a losing streak in Q4 18 that saw it rise in only one week.  The US dollar has been largely confined to a CAD1.3080-CAD1.3375 range this year, and there is no technical reason that this cannot continue.  Since the greenback made saw a three-week high on February 14, the rule of alternation favors a push lower.  Initial support is seen near CAD1.3200.  

Australian Dollar:   The Australian dollar bottomed early last week around $0.7055 and finished just shy of the 20-day moving average a cent higher and is the best level in seven sessions.   There is immediate potential back into the well-worn $0.7175-$0.7200 area, but the MACDs and Slow Stochastics are turning, and the potential could be higher.  A push above $0.7250 may offer a new low-risk selling opportunity.  

Mexican Peso:  The dollar broke higher against the Mexican peso.  After having been capped near MXN19.25, the greenback jumped to almost MXN19.50 as a reflection of its broad strength but also due to domestic developments in Mexico where investors focused on PEMEX.  The combination of AMLO's stance toward the energy sector coupled with the poor financial and economic condition of PEMEX was understood as a likely flashpoint for investors.  The dollar reversed lower on February 14 and consolidated ahead of the weekend.  The technical indicators are have not turned down yet, but could, if the consolidation continues a little longer. 

Oil:  The April Brent and WTI oil futures contracts appear to be breaking higher at the end of last week.  Brent rose almost 7%, and WTI rose closer to 5.5%.  The rally comes as OPEC+ cuts begin having a material impact.  The exemptions to the US embargo against Iran have about six weeks left.  If it is a head and shoulders bottom, the measuring objective is near $67. The $59.50 area marks the 50% retracement of Q4 18's drop.  The 61.8% retracement is a little below $63.50.  The RSI and MACDs are looking stretched, but the Slow Stochastics has only recently turned higher from their pullback. 

US Yields:  Despite as poor of retail sales and industrial production figures imaginable, the yield on the 10-year Treasury note rose nearly three basis points to 2.66% and end a three-week decline.  The yield looks comfortable between 2.60% and 2.75%.  This is roughly a 121-00 to 122-16 range basis the March futures contract.  The two-year yield is mostly also range-bound 2.45%-2.55%.   The January 2020 Fed funds futures contract implies a 2.38% effective Fed funds rates, which is about a 10% chance a cut.  

S&P 500: Every day last week, the S&P 500 opened outside of the previous day's range.  The gap created by Monday's higher opening was quickly filled.  Tuesday's gap remains open.  It is found between roughly 2718 and 2722.6.  The S&P 500 gapped higher on Wednesday too.  It narrowed the gap, but a small one between about 2748.2 and 2768.6 remains open.  Thursday, the S&P 500 gapped lower but moved higher to close the gap.  Before the weekend, it gapped higher again.  The gap is approximately 2757.9 and 2760.2.  It opened on its lows on Friday and closed on its highs (2775).  The gaps seem to require some back and filling.  The proximity of the next big target (2800) may change risk-reward calculations.  The technical indicators are warning of downside risks.  The Slow Stochastics peaked in the middle of January.   The MACDs are at their highest level since January 2018.  The RSI is rising but above 85.  

Disclaimer