Dollar Momentum Takes a Life on of Its Own

(irregular posts during this European business trip)

The dollar's advance accelerated since the end of February.  The momentum has surprised everyone.  Pullbacks continue to be shallow. The move appears to have taken a life on of its own.  Consider last week, as the euro slumped more than 3%, sterling more than 2%, and the dollar-bloc more than 1%, US yields fell sharply.

The US 10-year yield fell 15 bp.  It has completed retraced the increase spurred by the strong jobs data on March 6.   The yield the December Fed funds futures contract fell 7 bp to 51.5 bp.  It settled at 49.5 bp the day before the employment report.  

The magnitude of the slide in the currencies (leaving aside the yen) has extended the technical condition.  If support is to designate the price at which demand is forthcoming, it is difficult to meaningfully discuss technical support when many of the major currencies have not seen these levels in many years.  

If resistance denotes where supply is triggered, the technical indicators may be more helpful here. Euro resistance is seen in the $1.0640-$1.0720 area.  Aggressive bears may try their hand near $1.0600, partly on ideas that euro bounces remain limited in time and magnitude.   

Given the psychological importance of parity (seemingly more so than the other currencies, including the Swiss franc, the Canadian dollar and the Australian dollar), it seems reasonable to expect some profit-taking before parity is seen.  A bounce before, say from the $1.0150-$1.0200 area would not be surprising.  

Sterling resistance is seen in the $1.4925-50 area.  Sterling fell to almost $1.4700.  Support is elusive. Bank of England Governor Carney seemed to reverse his earlier signals and encouraged the market to push out when he will deliver the first rate hike.  The national election in early May is very much on investors' minds.   The polls show no clear outcome, which boosts uncertainty and volatility. 

For the first time since 2007, the dollar spent the entire week above JPY120.  Despite the potential breakout, technical indicators are not generating a strong signal.  As the fiscal year end approaches at the end of the month, we see some risk that the dollar pulls back.   The JPY119.80-JPY120.00 may offer initial support.  

The US dollar broke out of the triangle pattern we have been monitoring against the Canadian dollar. Support now is seen the steep trendline drawn off the March 5 low.  It is found just below CAD1.2700 at the start of the new week. The Australian dollar needs to establish a foot hold in the $0.7700-$0.7740 range to stabilize the tone. 

Technically, the US 10-year yields look heavy after rejecting the 2.20%+ levels.  Disappointing US retail sales and the decline in oil prices left little resistance to the tug from the declining yields in Europe. 

The May crude oil futures contract has surpassed April in open interest.  It fell over $4 a barrel last week.  After consolidating in February and early March, oil prices appear to be resuming their decline. The May contract hit a low of $45.52 in late-January.  This is unlikely to offer serious support.  A move toward $40 seems likely, but we see the risk extending to the late-2008/early 2009 lows in the $32.50-$33.70 area.   

The S&P 500 lost about 1.25% last week.  The technical tone deteriorated.  However, a little shelf has been carved out with four session lows above 2040.  The 38.2% retracement of the rally off the early-February low is found just below 2034. Key support is seen in the 1970-1980 area.  Since last October, the end of S&P 500 pullbacks have been signaled by the price action, often in the form of a gap higher opening or one day reversal patterns.  None exists now, but watch for one in the coming days to signal the end of this correction.