Dollar Bull Move Remains Intact

The US dollar turned in a mixed performance in the week after the strong jobs data boosted expectations that the Fed's lift-off would take place next month.    The Fed funds futures imply a 20.5 bp effective rate in December.  At the end of October, it was 19.5 bp.   In contrast, the 2-year note yield eased 3 bp over the past week to 85 bp, which is still 13 bp above where it closed last month. 

The lack of much follow through dollar buying is not unexpected, as the strong rally had left the greenback a bit stretched technically and the news stream failed to provide significant information.  The Fed's leadership gave no reason to think that liquidity conditions in the middle of next month would stay their hand, barring no important economic or financial surprises.  Although it is clear that not all ECB officials favor more asset purchases, Draghi continued to play up the downside risk that were materializing.  

The Dollar Index consolidated its recent gains by drifting a bit lower.  It held the 38.2% retracement of the rally from the end of last month that is found near 98.40.  The week's high near 99.50, reached on November 10, represents a seven month high.   The technical indicators we look at are supportive and a new marginal high next week would not  surprise.  However, it may still be early to anticipate a push through 100.00.  

The euro is bouncing along its trough.  The attempt to squeeze it back above $1.08 was greeted with fresh sales.  The technical tone is poor, and we look not only for a restest on the recent low near $1.0675, but more progress toward our near-term objective of $1.0525-$1.0550.   The broadly sideways movement alleviated the short-term technical over-sold condition that caught our eye last week. 

After reaching JPY123.60 on Monday, the dollar pulled back toward JPY122.45 at the end of the week.   The three-day 60 point slide in the S&P 500 may and the ten basis point pullback in the 10-year US Treasury yield provided the incentive.  Nevertheless, the dollar held the 38.2% retracement objective of this month's advance.    

A negative Q3 GDP print on Monday in Tokyo could fan expectations that the BOJ will ease later in the week when it meets.  This could buoy the dollar though we do not think the BOJ will be persuaded by a small decline in growth, especially when trend growth is so low, and the early indications suggest the economy is stabilizing here in Q4. 

Sterling was the strongest of the major currencies against the dollar in the past week, strengthening by 1.2%.  It made the highs for the week just before the weekend near $1.5265.  As it often seems to do, sterling stopped at the 50% retracement of this month's decline.   The 20-day moving average is near $1.5300, and sterling has not closed above that average since November 3.  Nest week's economic data, especially the inflation report, will likely reinforce ideas that while the BOE is the next central bank after the Fed to likely hike rates.  There will still be a considerable lag.   We see initial support near $1.5120-$1.5140, with a break re-targeting $1.50. 

The three main drivers of the Canadian dollar aligned against it over the past week, facilitating the US dollar's highest close against the Loonie since late September.  Oil prices fell nearly 10% over the past week.  The US premium over Canada on two year money widened by 5 bp to reach 25 bp, the widest since mid-September.  The weakness in equities also did not do the Canadian dollar any favors.    The technical indicators warn against picking a top to the greenback.  Look for a retest the multi-year highs set in late September near CAD1.3460.  

The Australian dollar nearly matched sterling's strength.   It held the $0.7000 area at the beginning of the week, and strong, even if overstated, jobs data helped lift the Aussie to almost $0.7160.  The upside was held in check by the down sloping trend line of the October 12 high.  It is a four-point trend line.  It was near $0.7165 before the weekend and near $0.7115 at the end of next week.  If the trend line is violated, the next target is near $0.7200-$0.7220.   Initial support is seen in the $0.7075 area. 

Oil prices have broken down and are now at their lowest level since late-August.  The only element of caution from the technical condition is that the January light sweet contract is through the lower Bollinger Band (~$43.65).  Still, outside of a near-term technical bounce a retest on the $40 level is likely.  Initial resistance is pegged near $42.80. 

US 10-year yields slipped lower after reaching 2.375% at the start of the week.  There is scope for some additional modest slippage, especially if next week's data, which includes CPI, industrial output, and housing starts, are subdued as expected.  Yields in the 2.15%-2.20% may be the lower end of the new range. 

The technical condition of the S&P 500 deteriorated.  On November 12, the S&P 500 gapped lower.  That gap remains open and is found between 2072.30 and 2074.85.   The S&P 500 gapped lower against on September 13.  That gap is found between 2044.65 and 2045.65.   The pre-weekend low tested 38.2% retracement objective of the run-up from the last September low at 2023.05.   The five-day average cross below the 20-day average for the first time since early October. The gaps theoretically should draw prices, but the technical indicators warn of further downside risks, and after a six-week 13.1% rally, it was ripe for profit-taking.  The next target is in the 1994-2000 area. 

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