Our analysis had led us to expect a dollar bounce after sliding sharply since the US election. We had linked the technical recovery to our expectations of fundamental news and specifically the December jobs report. The ADP stole the thunder from the non-farm payroll report. When the dollar did not sell-off further on the back of the disappointing ADP estimate on January 6 or the events in the Capitol, it signaled a dollar recovery. However, the dollar has been soft in recent days. The euro rose nearly a cent last week. Sterling, the Canadian dollar, and the Mexican peso made new highs. As we discuss below, it is messy, but broadly speaking, we look for the dollar's corrective advance to resume in the days ahead.
Dollar Index: The Dollar Index recovery from the January 6 low near 89.20 was stopped at the start of last week around 90.95, about 20 ticks shy of the (38.2%) retracement target of the decline since early November. It pulled back to almost 90.00, stopping a little less than 20 ticks from an important retracement of its recovery (61.8% near 89.85). The momentum indicators look toppish, but a move above the 90.50-90.60 area improves the technical tone. We note that the momentum indicators on the weekly bar charts are considerably more constructive. Perhaps a head and shoulders bottom is being carved out, with a neckline near 91.00. If the neckline is overcome, the minimum measuring objective would be around 92.80. The (61.8%) retracement of the Dollar Index decline since early November is about 92.35.
Euro: The euro tested the $1.16-level the night of the US election and rallied to almost $1.2350 on January 6. It pulled back and briefly dipped below $1.2050 at the start of last week. The decline met the (38.2%) retracement objective near $1.2065. It traded higher most of last week and reached almost $1.2190 ahead of the weekend before steadying. The MACD and Slow Stochastic are turning higher. However, the euro's recovery held the (50%) retracement objective at $1.2200, which is also where the 20-day moving average is found. The next retracement objective (61.8%) is about $1.2235. Initial support may be in the $1.2100-$1.2120 area. Like the flash PMI readings, the first look at Q4 GDP (US, Germany and France) will again highlight a stark growth divergence that could fuel the downside correction.
Japanese Yen: The dollar bounced from ten-month lows on January 6 near JPY102.60 and peaked a few days later (January 11) around JPY104.40. It has since trended lower since, and that trendline that held the highs will start the new week near JPY103.80, by where the greenback settled for the second consecutive week. The dollar slipped through the ledge formed around JPY103.50 at midweek but held the (61.8%) retracement of the bounce since the start of the month found a tad below JPY103.30. The Slow Stochastic has been trending lower since the middle of the month. The MACD is moving horizontally near recent highs. We note that the 10-year interest rate differential peaked on January 11 (~111 bp) and consolidated (above ~104 bp). The premium was closer to 90 bp at the end of last month.
British Pound: If the dollar was correcting higher, no one seemed to have told sterling, which edged to new highs since May 2018 near $1.3750. Disappointing retail sales and preliminary PMI figures ahead of the weekend pushed it back to almost $1.3635 before it found a good bid, but still gave back about a third of the week's gains and returned to virtually flat on the year. There are two technical yellow flags. First, the momentum indicators have not confirmed the new highs, and the rule of thumb is to go with the indicator, i.e., bearish divergence. Second, it has been bumping up against the upper Bollinger Band (~$1.3745). Support is seen near $1.36 with the 20-day moving average (~$1.3610) and then $1.3500-$1.3520.
Canadian Dollar: The Bank of Canada's decision not to deliver the mini-cut, seemingly hinted at by the Governor, saw the US dollar briefly below CAD1.26 for the first time since April 2018. It reversed higher that same day, leaving a bullish hammer candlestick pattern in its wake. Follow-through buying ahead of the weekend, despite incredibly resilient Canadian retail sales (+1.3% in November vs. a flat median forecast in Bloomberg's survey and a 2.1% surge excluding autos), lifted the greenback to around CAD1.2740. It finished a little above the 20-day moving average (~CAD1.2720). The recent down trendline, drawn off the December 21 (~CAD1.2955), January 11 (~CAD1.2835), and January 18 (~CAD1.2800), begins the new week near CAD1.2760 falling. Note that the CAD1.2860 area is the (38.2%) retracement objective of the greenback's slide since the election.
Australian Dollar: After closing on January 18 below the 20-day moving average (~$0.7685) for the first time since the day before the US election, the Australian dollar rallied a cent over the next three sessions. It approached the slightly down sloping trend line from off this month's highs (~$0.7790) before turning down ahead of the weekend to finish back near the 20-day moving average (~$0.7715). It was the third consecutive week closing above $0.7700, but the underlying technical condition seems vulnerable. The five-day moving average is poised to drop below the 20-day moving average next week for the first time since early November. The MACD and Slow Stochastics have been trending lower for a couple of weeks. Even in a flattish consolidation, as opposed to a downside correction, the Aussie could ease toward $0.7625. The high set on January 6 was near $0.7625.
Mexican Peso: The dollar recorded a new 10-month low against the Mexican peso on January 22, a pinch below MXN19.55. However, it was a bear-trap. The dollar quickly reversed course and closed above the previous session high, meeting the definition of a key reversal. Follow-through dollar buying ahead of the weekend briefly poked above MXN20.00. The dollar needs to rise above MXN20.15 to be anything important from a technical point of view. The Slow Stochastic is trying to turn up, while the MACD has turned up from elevated levels. Still, these momentum indicators are more bullishly positioned on the weekly charts than the dailies.
Chinese Yuan: The dollar continues to consolidate against the Chinese yuan. In the first two sessions of the year, the greenback traded between CNY.43 and CNY6.5150. It has remained in that range over the past two and half weeks. If the dollar-yuan exchange rate were not so closely managed, the price action looks bullish. The dollar gapped lower on January 20. It gapped lower the next day but filled that gap. Ahead of the weekend, it gapped higher and closed firmly, above CNY6.48. The dollar approached the 20-day moving average (~CNY6.4870), which it has not traded above this year yet. A move above it could see the greenback return to the CNY6.54-CNY6.56 congestion area. Since the end of October, the 10-year interest rate differential has narrowed by about 30 bp to around 200 bp. A year ago, the spread was close to 120 bp.
Reviewed by Marc Chandler
on
January 24, 2021
Rating:
