Dollar Correction may Continue

The US dollar fell against all the major currencies except the Japanese yen in the week following the disappointing job growth in February.  The Norwegian krone was the strongest of the majors, appreciating 2.8% against the dollar and nearly 2% against the euro amid speculation the central bank will be the first, and maybe only major central bank to hike rates this year. 

The Norges Bank is expected to hike its deposit rate to 1.00% from 0.75% due to the rise in price pressures.  Underlying CPI, which excludes energy and adjusts for tax changes, rose 2.6% in February from 2.1% in January.  As recently as the middle of 2018, it stood at 1.1%.  Yet the case for a rate hike is not unequivocal.  Consider than January industrial output fell 2.2% in the month, the third consecutive monthly decline.  Norweign industrial production fell in two months ever quarter beginning Q4 17.  Monthly GDP rose for the first time in three in January. 

One of the considerations behind our expectation that the US dollar was not going to break higher quite yet is that we anticipate data to confirm that the economy slowed sharply in Q1.  We expect it to be largely a function of the government shutdown, bitter cold weather, and the tightening of financial conditions at the end of 2018.  We anticipated the soft patch ending before the end of Q1 and see growth picking up in Q2 and Q3.  Nevertheless, the weakness in February's manufacturing output, reported before the weekend, was unexpected.  The decline in the Empire State manufacturing survey may also be worrisome.  Economists, unlike what has been discounted by the market, still expect a Fed hike this year.   A recent Reuters poll shows anticipated move has been pushed into Q3 from Q2.

Dollar Index: Despite falling in five of the past six sessions, the Dollar Index still looks heavy from a technical perspective and losses toward late January low near 95.75 is reasonable.  The MACDs and Slow Stochastics have turned lower.  The flagging price action of the past two sessions is often associated with a continuation pattern.  The five-day moving average is set to fall below the 20-day moving average in the coming days.  Initial support is seen in the 96.15-96.30 area.   Note that the high recorded in response to the ECB's dovishness matched last year's high in mid-December near 97.70.  If it is a double top, it would not be confirmed until the neckline is violated and it is not seen until closer to 95.00.

Euro: The ECB drove the euro to its lowest level since the middle of 2017 near $1.1175 on March 7.  Disappointing US data and a greater risk appetite encouraged by Chinese stimulus measures helped lift the euro in four of last week's five sessions.  The 0.8% gain is the largest weekly advance in almost six months.  We look for the euro to return to the middle of the old $1.13-$1.15 trading range, and a trend line drawn off the September and January highs comes in near there as well.   The $1.1375 area corresponds to the middle of the Q1 range, while the $1.1420 area is not only the late February high but also marks the 61.8% Fibonacci retracement. A convincing break of $1.1280 would call the near-term constructive view into question. 

Yen: The US dollar turned back before the weekend after approaching JPY112.00.  The Q1 high was set on March 5 near JPY112.15. After the high was recorded, the greenback was sold to about JPY110.80 in response to the disappointing US job creation.  Initial support may be seen near the 20-day moving average (~JPY111.20).  The dollar has not closed be the 20-day moving average since the end of January.  The correlation of the percentage change of the 10-year interest rate differential and the exchange rate is a little below 0.70 and is the upper end of its range over the past couple of years.  The correlation between the percentage change in the S&P 500 and the exchange rate is around 0.54, which is also at the upper end of its multi-year range.

Sterling: In the middle of last week, after leaving the EU without an agreement was rejected by an overwhelming major in the House of Commons, sterling rose to $1.3380, its best level since June 2018.  It spent the last two sessions consolidating and pulling back no lower than $1.3200.  It closed firmly ahead of the weekend. Brexit and the EU summit overshadow the UK economic data (employment/earnings, CPI, retail sales) and the Bank of England meeting.  The technical indicators remain favorable, suggesting sterling has yet to peak.  We expect it to enter $1.34-$1.36 band. 

Canadian Dollar:  The Canadian dollar strikes us as particularly vulnerable.  The string of recent economic data, leaving aside the employment data, has been worrisome.  It includes the unexpected contraction in December, a trade deficit nearly twice as large as expected, and IVEY survey falling toward 50, and a collapse in February existing home sales (-9.1%).  Increasing the Bank of Canada's neutral stance will be questioned.  The market is discounting about a one-in-five chance of a cut in Q2 compared with a one-in-five chance of a hike at the end of last year. A trendline, drawn from February and October 2018 lows and last month's low comes in near CAD1.3165 at the end of next week, and only a convincing violation of it would undermine the technical outlook.  Initial support is seen around CAD1.3280, last week's lows and the 20-day moving average.  The first hurdle on the upside the band between CAD1.3375 and CAD1.34.

Australian Dollar: With the help of the disappointing US jobs report, the Australian dollar held support and $0.7000 and traded higher last week to reach almost $0.7100.  It stalled there, where the 20-day moving average is found, but the technical indicators are favorable.  A push through it will spur expectations for another run at $0.7200.  Interest rate differentials remain wide.  Australia's discount on two-year money is around 85 bp the most in four months.  The 10-year discount is about 60 bp, for a country that has offered a premium since the mid-1980s. 

Mexican Peso:  The dollar fell 1.5% against the peso last week when it fell against most emerging market currencies.   The greenback peaked against the peso the day before the employment data, a little above MXN19.62.  It closed before the weekend at the lows for the month a little below MXN19.21.  The technical indicators warn of the risk of additional dollar losses in the coming days, and the five-day moving average is poised to fall below the 20-day moving average shortly.  Initial support is seen around MXN19.12 and then at MXN19.00.  

Oil:  Light sweet crude for May delivery jumped 4.5% last week on a larger than expected drawdown of US inventories, the disruption in Venezuela, and speculation of an extension in OPEC+ cuts.  It traded above $59 ahead of the weekend for the first time since mid-November.  The $59.60 area corresponds to the 50% retracement of the sell-off in Q4 18.  The 61.8% retracement is almost $63.50.  The possible head and shoulders bottom pattern we have been tracking projects toward $67.

US Rates:  The disappointing industrial/manufacturing output data weighed on the US 10-year yield and allowing it to close below 2.60% for only the second time this year (other being January3). The low for the year is near 2.54%.  The 2.50% area corresponds to a 38.2% retracement of the rise in yields from the July 2016 low near 1.32%.  The 50% retracement a little below 2.30%.  The June note contract finished a tick below 123-00.  The year's high was 123-17.  Initial support is pegged by 122-16.  Between the jobs data, softer than expected CPI and PPI, and the disappointing factory news, the implied yield of the January 2020 fed funds futures contract has shed 10 bp. At an implied yield of 2.305% compares with the current effective yield of 2.40%.  

S&P 500:  The benchmark snapped a five-day losing streak with an exclamation point.  It rallied 2.9%, recouping in full the previous week's drop and closing at a new four-month high.  It is up 12.6% year-to-date.  Low-interest rates and projections of nearly $1 trillion of share buybacks this year leave the bulls in the driver's seat despite the forecasts for a poor earnings season.  Share buybacks that go beyond offsetting executive option grants boost earnings per share by lowing the denominator.  The next important psychological target is 2900, but the record high from last September near 2940 is the real draw.  The VIX eased to new six-month lows of 12.5%.  Initial support is likely to be found at the previous resistance of 2800.  

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