A Look at the Charts

The US dollar was mixed against the major currencies last week.  The dollar-bloc currencies and the Japanese yen fell,  while the other major currencies rose, led by sterling (1.1%) on ideas that the risk of a no-deal Brexit was diminished, and the Swedish krona (0.9%) that was bolstered by 1.2% growth in Q4, quarter-over-quarter (around twice what economists expected).

Dollar Index:  The Dollar Index rose in February by nearly what it lost in January, leaving it little changed net-net on the year.  It closed last week on a firm note, having posted its last decline on Tuesday.  It had fallen to a three-week low (~95.80) on Thursday before reversing higher and closed the week at the 20-day moving average and at its best level since February 21 (~96.50).  The drop signaled by the key reversal on February 15 appears to have been completed last week.  The 96.60 area represents the halfway point of the decline.  The Fibonacci 61.8% retracement is closer to 96.80.  Despite the strong close at the end of the week, the MACDs and Slow Stochastics have not turned higher.  There are two implications.  First, there is scope for a pullback in the first part of the week.  Second, the indicators may turn higher from elevated levels warning of the risk of only a modest leg up on what we expect to be favorable developments at the end of the week for the dollar. 

Euro: Starting on last Tuesday, the euro traded above $1.14 for the first time since February 5, and although it did so for the following three sessions, it never was able to close above it.  In fact, judging from the price action, participants took advantage of the single currency resurfacing the middle of the $1.13-$1.15 range to sell it, and the closes were consistently near the lows in the last three sessions.  The trendline connecting the early and late January highs comes in a little above $1.1420 at the end of next week.  That would seem to denote the risk for euro bears.  With the pullback, the euro has retraced 38.2% of the recovery off the year's low set on February 15 (~$1.1235).  The 50% retracement and the 20-day moving average are found in the $1.1325-$1.1340 area.  The technical indicators have been muted by the broad sideways activity that is illustrated by the low volatility and the convergence of the 50 and 100-day moving averages (just below $1.1390).  The euro ended 2018 near $1.1465.  It slipped roughly 0.15% in January and 0.65% in February.

Yen:  The dollar poked above JPY112.00 before the weekend for the first time since the week before Christmas.  The usual culprits were likely at work--rising US yields and rising equities (though MSCI Emerging Markets equity index fell ~0.65% last week).  Disappointing data and BOJ Kuroda's assurances that the BOJ could do more if necessary may have also weighed on the yen. Although we are bullish the dollar over the medium-term, thinking it can return toward JPY115, technical considerations suggest some near-term caution.  The dollar finished last week above its upper Bollinger Band (~JPY111.65).  The bottom of the previous range (~JPY112.30) should now offer resistance.  The technical indicators are stretched, suggesting scope for marginal new highs at best.

Sterling: The pound rose 1.15% last week for a 3.5% gain year-to-date.  It was easily the best performing currency last week, and it was the only major currency to appreciate against the dollar in February.  It reached $1.3350 in the middle of last week, its best level since last July.  It closed above its upper Bollinger Band but spent the last two sessions consolidating at lower levels.  It is largely about Brexit and with the vote a week away, technically there is scope for a further pullback.  If the MACDs do turn down as they appear poised to, it will set up a bearish divergence, and the Slow Stochastics are already crossing closer.   Look for support in the $1.3060-$1.3100 area to be tested.  Sterling rose in February (~1.2%).  It was the third month of gains and the longest advancing streak since early 2012. 

Canadian Dollar: The disappointing GDP figures before the weekend sent the Canadian dollar down nearly 1%, ensuring a loss for the week (~1.2%).  The US dollar closed just below CAD1.33, its highest close in two months.   The US dollar traded on both sides of the previous day's range ahead of the weekend and closed well above Thursday's high, recording a bullish outside up day.  February's highs were in the CAD1.3330-CAD1.3340 area and represent initial resistance.  We often see three main drivers of the exchange rate: short-term rate differentials, oil prices, and risk (proxy: S&P 500).  The two-year interest rate differential jumped to a new post-crisis high of 80 bp (in the US favor).  The technical outlook for oil and the S&P 500 are discussed below.   The US dollar posted an outside up week as well. A move above the last January high closer to CAD1.3370 could open the door toward CAD1.3500.

Australian Dollar:   Our strategy called for selling in a bounce we expected early in the week for the Australian dollar.  That bounce went a little more than we expected but stopped a hair's breadth from the key $0.7200 and posted an outside down day reversal in the middle of the week.  It finished the week a touch below $0.7080. We look for a test on $0.7000-$0.7020, which is important psychologically and holds the 50% retracement of the rally from the flash crash.  That said, in the medium-term, we will not be surprised to see the Aussie return to the flash crash low near $0.6740.  Of note, on a monthly basis, the Australian dollar has been alternating between gains and losses since last April.  It finished last March near $0.7680. 

Mexican Peso:  The dollar fell from near MXN20.50 in mid-December to MXN18.88 in the middle of January and has been consolidating over for the past several weeks.  The key issue is whether this broad sideways trend is a base or a resting place before the next leg lower.  We suspect it will prove to be a base.  Even if a breakout does not look imminent, S&P decision to cut its outlook for Mexico's creditworthiness to negative from stable before the weekend is likely to weigh on the peso.  The rating agency cited economic slowdown, uncertainty over the government's policies, and rising contingent liabilities.  The dollar held MXN19.00 on a test last week and set higher highs and higher lows each day.  Initial resistance is seen in the MXN19.40-MXN19.50 area. It has to push through MXN19.55-MXN19.60 to denote anything potentially significant. 

Oil: News of further cuts in OPEC output, an acceleration in Russian cuts, and a larger than expected drawdown of US inventories failed to sustain the rally in crude oil prices.  Last week, light sweet crude for Apirl delivery was booked with sharp losses.  On Monday the contract fell by 3.1% and on Friday 2.5%.  It was only the third losing week of the year (-2.55%).  The price action is particularly concerning because the outside down day before the weekend constituted a key reversal insofar as it made new highs for the move before reversing lower.  The trendline drawn off the end of last year's lows and the mid-February low is found near $55.40, just above the 20-day moving average (~$50.25).  A break of $55 could signal a double top is in place, which would project toward $52.20, which is the 38.2% retracement objective of this year's rally.  

US Yields:  The US 10-year yield rose for the third consecutive week, over which time it has increased by 12 bp.  Last week's close above 2.75% was the highest since late January.  In February, it repeatedly probed near 2.62%.  The key on the upside is 2.80%, which it has not seen since a couple days after Christmas.  The two-year yield also has risen for three weeks for a little more than seven basis points.  This is an example of a bearish (price fell, yields rose) steepening.  The 10-year note March futures closed below its lower Bollinger Band, which should inject a note of caution.  Support is seen in the 120-30 to 121-00, and a convincing break sends it toward 120-00.  

S&P 500:  The S&P 500 gapped higher last Monday and worked on filling the gap Tuesday and Wednesday.  It consolidated on Thursday before turning in a strong showing on Friday to finally closing above 2800, for the first time since early November. The 0.7% pre-weekend rally ensured a higher close on the week to extend the advancing streak to the fifth week.  For the record, the NASDAQ has rallied for ten consecutive weeks.  It has not fallen this year on a weekly basis.  Neither the S&P 500 nor the NASDAQ are above their Bollinger Bands.  We continue to be cautious here and in the face of continued cuts in earning expectations.  According to Bloomberg, the VIX ticked up last week, breaking it inverse movement with the S&P 500.  A move below last week's low near 2775 could be an early warning sign of the loss of the upside momentum.   

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