Dollar may Trade with Heavier Bias Ahead of Employment Data

The US dollar was mixed last week.  Consolidative technical pressure, after it spurted higher at the end of the previous week with the help of a dovish ECB and rate cuts by the PBOC, and month-end pressures dominated.  There was some disappointment that the BOJ did not ease, helping send the yen higher before the weekend. Heightened expectations for an RBA rate cut in the week ahead weighed on the Australian dollar. The euro itself was virtually unchanged on the week and off 1.5% on the month.  

The dollar gained against most emerging market currencies though there were a few notable exceptions.  The rebound in oil prices may have helped the Mexican and Colombian pesos and Brazilian real to close the week on a firm note (0.5% and 0.7% and 0.5% respectively) to lead the emerging market currencies.   The Chinese yuan also rose about 0.5% last week, helped by speculation of intervention and reports that capital controls may be lifted in a potential experiment in the Shanghai free-trade zone.  

The dollar's technical tone is not particularly strong as the new month starts.  The next big push in the divergence is not until December when the ECB may ease, and the Fed may tighten.  The late dollar longs may have their conviction tested.  Even a strong jobs report at the end of the week may be unable to restart the dollar's upside momentum.    

The Dollar Index rallied about 4.4% in the second half of October.  It went from the lower end of its recent range to the upper end.   The data that may determine next month's policy decisions have not been collected yet.  It seems prudent for dollar bulls to take some profits in front of 98.00 in the middle of last week.  Assuming the correction of the advance in the last couple of weeks has begun, the first target is near 96.30, but we suspect the 95.70 area is the main objective. 

The euro's dip brief below $1.09 seems to denote the end of a technical move.  Key support is at $1.08, but for short-term participants it is a bridge too far, and the first sign momentum has slowed after a big move, others get out as well.   Note that at $1.0940 the euro had given back 61.8% of its gains from March through August.  That bounce in the euro followed a nine-month slide that began from near $1.40 in Q2 14.   The March-August recovery in the euro fell shy of the 38.2% retracement of the preceding nine-month drop.     

On what appears to be a short-covering bounce, the euro approached the bottom end of the $1.1080-$1.1100 band of resistance before the weekend.  A move above $1.1125 could signal a move back to $1.1200-25, the latter housing the 20-day moving average.   It looks like the MACDs and stochastics can turn higher next week. 

Since the immediate dollar gains after the ECB and PBOC announcements, the dollar has chopped around a JPY120-JPY121.60 range.   The JPY121.85 area marks the 61.8% retracement of the dollar's decline since the August higher.  The current range itself is the upper end of the band that has persisted since late-August.  Daily ranges did increase last week.  The market here too seemed reluctant to challenge the dollar extreme, which extends to JPY122.00 (and corresponds to the 20-week moving average).  

Purchases against the euro helped lift sterling against the dollar ahead of the weekend.  It managed to close above the downtrend line drawn from the August 25 high (~$1.5820) and the September 18 high (~$1.5660).  The trend line was violated on an intraday basis but not on a closing basis in October until the end of the month.  It came in near $1.5410 at the end of the week, below there support is pegged near $1.5350.  The next upside target is in the $1.5510-$1.5525 area, with a break signaling a move toward$1.5600.  

The dollar took out a downtrend line against the Swiss franc before the weekend but closed back below it.  The trendline connects the September 11 high (~CHF1.1050), the October 13 high (~CHF1.0950) and the October 28 high (~CHF1.0900).  It comes in near CHF1.0885 at the start of next week and finishes the week closer to CHF1.0865.  The RSI did not confirm the breakout.  The CHF1.0905 area also corresponds to a 50% retracement of the dollar's losses since September 11, and the 61.8% retracement is near CHF1.0940.  

The US dollar spent the first half of October easing against the Canadian dollar after 11-year highs were recorded at the end of September.  The greenback recovered in the second half of the month before stalling in the middle of last week in the CAD1.3270-CAD1.3280 area.  It tested the CAD1.3255 area before the weekend that corresponds to a 50% retracement of the greenback's gains since the middle of the month.  The 61.8% retracement is found near CAD1.3000.  A break of that targets CAD1.2940, and then CAD1.2800.  

Softer than expected Q2 inflation data fanned expectations of an RBA rate cut this week and weighed on the Australian dollar.  With the help of continued credit expansion, the Australian dollar found support near $0.7070 and recovered to almost $0.7150 before the weekend.  Immediate resistance is seen in the $0.7185 area.  Assuming this is overcome, the initial target is $0.7210-$0.7225.  While the RSI has already turned higher, and the MACDs and Stochastics look poised to turn in the next session or two.  

Light sweet crude oil looks to move higher in the coming days.  The down draft that took the December contract from about $51.40 a barrel on October 9 to almost $42.60 on October 29 appears complete.  The 50% retracement target (~$47.00) was met before the weekend.  The next retracement target is a little above $48.00.  The technical indicators are constructive, and the risk is that the retracement objectives are surpassed.  The 100-day moving average is found near $49.60.  

US 10-year Treasury yields rose from 2.00% on October 27 to nearly 2.20% before running out of steam.  This is an important technical area.  It corresponds to the 20- and 200-day moving averages. It also is where a trendline is drawn off the mid-July (~2.46%) and mid-September (~2.30%) highs is found.  We anticipate a consolidative phase ahead of the employment data, which suggests a downward drift in yields.  

The S&P 500 looks technically vulnerable after posting an outside down day before the weekend. It made a new high for the move on Friday before reversing to close below Thursday's lows.   Given the big run-up, the price action should be respected. Look for lower prices, especially in the first part of the week.  We look for the gap created by the sharply higher opening on October 23 to draw prices. That gap is found roughly between 2055.20 and 2058.20. Additional support is expected near 2050.  

Disclaimer