Chop City, but Dollar Express Still on Track, Even if Slowly

The US dollar tended to broadly consolidate its recent gains over the past week. Data and officials mostly confirmed what most investors had already anticipated. The Federal Reserve is most likely to hike rates in the middle of December. The ECB will most likely ease policy further just shy of two weeks before the Fed meets. The Bank of Japan is in no hurry to step up its already aggressive asset purchase program.

The Chinese yuan will most likely be included in the next SDR basket that will be announced later this month, though it will not implemented until next September. Meanwhile, the PBOC continues to adjust its mechanisms and policy tools and is continuing to ease policy. The latest measures have been targeted instead of broad. At the same time, it has doubled the required margin for equity purchases, which in this context is a macro-prudential measure. However, its efforts to curtail banks from financing offshore activity and other soft capital control measures issued recently are disconcerting even if not impacting prices.

If there was a change in the market, it was the relative outperformance of the dollar-bloc currencies. This could simply be a function of the corrective forces. Most of the "major" emerging market currencies also advanced against the greenback in recent days. For all practical purposes, the dollar-bloc is bouncing along a trough carved earlier after sharp losses in recent quarters. It is still too early to be confident that the currencies have bottomed. The interest rate differential between them and the US has not peaked, even if the driver of the divergence shifts. The CRB index set fresh six-year lows in the middle of last week.

The Dollar Index fell through the steep uptrend drawn off the October 15 lows. While we often suggest respecting the price action, this may be an exception. We see the violation as part of what appears to be a shallow correction. We suspect it may have signaled the end of the correction, as some of the new longs were shaken out. At the start of the new week, the trendline comes in just below 100.00. The multi-year high was set in March near 100.40. While we expect to see new highs over the next term.

Encouraged by Draghi's dovish comments, the euro finished the week on a poor note. Further losses are likely, as the market expectations ratchet up for the December 3 ECB meeting. Since mid-October, we have suggested a $1.0525-$1.0550 target, ahead of the $1.0460 low set in March. The downtrend drawn off this month's highs comes in near $1.0725 on Monday, a little below the pre-Draghi high of $1.0740. A move into this are would likely be greeted with fresh selling. The MACDs and Slow Stochastics continue to move sideways in their troughs while the RSI is curling over, and the lower Bollinger Band is now near the upper end of out target.

We often find the dollar-yen to be a range trading currency. Between late-August and late-October the pair were confined to a JPY118.00-JPY122.00 trading range. This month it has moved into a narrower, but higher range of JPY122.00-JPY123.75 and volatility has fallen. The MACDs are poised to turn lower, but there does not appear to be much of a technical reason to look for a break.

Sterling suffered a reversal of fortune after extending its recovery from the sell-off in the first week of the month that saw it shed nearly a nickel. On November 19, it pushed through the 61.8% retracement near $1.5320, a two-week high. It met a wall of sellers. By the European close on Friday, and without fresh US or UK data, sterling had slipped below $1.5200. It surrendered half of the upticks it had recorded since bottoming on November 6. There is additional support near $1.5145.

Given the underlying fundamental strength of the dollar, long sterling against the euro may be a more efficient way express a favorable assessment of sterling. The Bank of England is the next major central bank after the Federal Reserve that is likely to hike rates. What the market has come to appreciate is that by the time the BOE may lift interest rates, the Fed may have hiked twice or thrice, The euro has carved out a shelf near GBP0.6985. A break signals an immediate test and likely break of the multi-year low set in July near GBP0.6935. Over the medium-term, we look for the euro to fall toward GBP0.6500. The GBP0.7020-GBP0.7040 area has been capping upticks recently.

The Canadian dollar is the laggard within the dollar-bloc. The January light sweet crude contract stabilized near $41 a barrel and moved sideways, and equities had a good week. Both of which should have been supportive of the Canadian dollar, which slipped about 0.35% against the US dollar last week. The trendline drawn off the middle of October's lows remains in play. It comes in near CAD1.3250 at the start of the new week. On the upside, the recent highs near CAD1.3370 are the immediate cap.

The Australian dollar panned out as we expected. The downtrend from the October 12 high was successfully violated. Follow through buying lifted the Aussie to $0.7250, a target we had identified, which also coincides with the 61.8% of the downtrend and the upper Bollinger Band before the weekend. The weekly close was strong, suggesting scope for further upside. The next target is $0.7300. It probably takes a move above $0.7400 to be a catalyst for speculation that of lower rates.

Perhaps the most noteworthy observation about oil prices is that the downside momentum has broken. Prices of the front-month January crude contract fell from near $50 near the start of the month to about $41. It has gone broadly sideways over past week, ultimately rising about 1%. That the selling is abating may spur a near-term bounce. The first target is a little above $43, but there is near-term potential toward $44.25.

US 10-year Treasury yields were essentially unchanged in the week. The pullback from the November 9 peak near 2.375% appears to have ended a little below 2.23%. The 2.235% area corresponds to a 38.2% retracement objective of the increase in the yield since testing 2.0% in late-October. The 20-day moving average is found near 2.21%. The shallowness of the pullback suggest yields that the underlying trend is still toward higher yields.

The S&P 500 staged a key reversal on Monday, after having gapped lower on both November 12 and 13. Follow through buying lifted it about 3.45%, the largest weekly gain of the year. The gaps have been closed. Ahead of the weekend it remained above the 61.8% retracement of the losses since November 3 (~2079.40), which coincides with the 20-day moving average (~2078.70). The five-day average is poised to cross above the 20-day average early next week. The VIX is not at an extreme. It is slipping below 16%, compared with the recent low near 12.8%. The S&P enjoys good momentum last week and the technicals are constructive, even if the pre-weekend close was not inspiring.