Greenback Finds Better Traction

The US dollar rose against all the major and most emerging market currencies last week. After selling off following the ECB and FOMC meetings, the dollar found better traction.  It was helped by widening interest rate differentials.  Regional Fed manufacturing surveys for March suggest the quarter is ending on a firm note.  With new orders rising, it is reasonable to expect the momentum to carry into Q2.  

Nearly half of the regional Fed presidents spoke last week, and the general takeaway is that the Fed's rate hiking cycle is likely to resume in the second quarter.  Several reiterated what Yellen indicated at the press conference following the FOMC meeting, namely that April meeting is live.    There is a small chance of a hike then priced into the Fed funds futures, but we suspect that a strong employment report on April 1 will see the risks of an April move increase.  

One of technical factor that emerged last week was the beginning of the correction of the dollar's losses.  This is most evident the in the Dollar Index and its biggest constituent, the euro.    The first thing to note is that the Dollar Index and euro have already retraced more than 61.8% of the move following the FOMC meeting (found near 96.10 and $1.1165 respectively.  The overshoot has been minor, meaning that both the Dollar Index and the euro are at potential turning points.  However, the technical indicators point to a further dollar recovery.  

The next logical assumption is that the dollar is recovering from the sell-off since the ECB meeting on March 10.  The Dollar Index met the 38.2% retracement near 96.05.  The 50% retracement is seen near 96.50, which corresponds to the 20-day moving average (~96.60).  The 61.8% retracement is around 97.00, which is where the Dollar Index peaked the day the FOMC statement and dot plots were updated March 16 (~97.05). 

The euro has also retraced 38.2% of the post-ECB rally.  It has not convincingly gone through it (~$1.1140).  The 50% retracement is just above $1.1080. Between the ECB meeting and the FOMC meeting, the euro built a little shelf near there. The 20-day moving average finished last week a little below $1.11.  

The Swiss franc has been somewhat more resilient.  It has not completed the 61.8% retracement of the post-FOMC gains, which is found by CHF0.9815.  Interestingly, this corresponds to the 38.2% of the franc's gains since the ECB meeting  (~CHF0.9820).  Even if this area is overcome, the band of resistance extends to CHF0.9920.  

The dollar continues to carve out a range against the Japanese yen.  Barring the post-FOMC overshoot that took the greenback briefly through JPY110.70, the JPY111.00 marks the bottom of the range.  On the top side, which has also been tested three times since mid-February, the JPY114.40-JPY115.00 provides the cap.   The technical indicators suggest the dollar can re-test the ceiling.  

Moreover, news from the MOF that Japanese investors bought a record amount of foreign bonds in the week ending March 18, means not only Japanese exporting their savings, but yen bears do not need to be concerned about repatriation ahead of the fiscal year-end.   The US 10-year premium over JGBs has risen to its best level since September 2014 around 200 bp.  The two-year premium is hovering over 100 and is the largest since 2008.  

On the other hand, foreign selling of Japanese stocks remain elevated.  Foreigners sold a record amount of Japanese shares in the week ending March 11.  Foreigners have been net sellers of Japanese equities for 11 consecutive weeks.  Over this eleven week period, foreigners sold JPY6.688 trillion (~$59.2 bln) of Japanese shares.  Although last week's sales slowed from the record (JPY1.582 trillion) of the previous week, the JPY677.6 bln sold is the third highest this year.  

Deepening strife within the UK's Tory Party and, therefore, the government weighed on sterling.  The terrorist attack on Brussels seemed to support the Brexit emotional appeal of withdrawal from Europe though the arguments are facile.  

In addition, the referendum itself moved to within the three-month timeframe which puts into more meaningfully on the radar screens.  Moreover, it had rallied 5% from the multi-year low seen at the end of February.  Recall too that in the week through March 15, speculators in the futures market bought a record amount of sterling contracts. 

At $1.4095, sterling met the 61.8% retracement objective of the rally from the end of February.  However, there was no much follow through selling, so this too could be a possible inflection point. Other technical considerations favor additional losses, with the $1.4000-$1.4020 important support. Although the RSI is neutral, the MACDs turned lower, and the five-day moving average has fallen through the 20-day average.   

The Australian dollar snapped a three-week advance and shed almost 1.3% last week.  The 61.8% post-ECB and post-FOMC retracements are found near $0.7510.  Like sterling, the RSI is neutral, but the MACDs have turned lower.    If this month's gains are being corrected, the $0.7460 area that was approached on March 24 represents a 38.2% retracement.  The 50% retracement is found just below $0.7400.  If the entire Q1 moves is being retraced, its 38.2% retracement is $0.7355.  

Ironically, this negative near-term technical picture is emerging as 50-day average is on the verge of crossing above the 200-day average.   Even if one places importance on this signal, our reading of the technical conditions suggests better levels will likely be seen.

The Canadian dollar snapped a nine-week advance.  The US dollar clawed back 2% and rose above the downtrend line drawn of the multi-year high set on January 20.  The MACDs have finally crossed after being on the verge for a couple of weeks.  The five-day average is poised to cross above the 20-day average early next week for the first time since the end of January.  Although CAD1.33 marks initial resistance for the US dollar, we look for it to move into the CAD1.34-CAD1.35 range. 

Given the Canadian dollar's sensitivity to oil prices, we should look more closely at crude.    The May light sweet crude oil contract fell last week for the first time five weeks as it surrendered 4%.  It approached but held the lower end of the range, around $38 a barrel.  It briefly traded below the 20-day average (~$38.80) for the first time in a month late but managed to close the week above it.  The May contract also frayed the 100-day average (~$39.40) but finished the week above it.    We suspect that oil is carving out a top, and the MACDs have turned lower, but the technical case needs more work.  

The US 10-year yield is largely flat around 1.9% last week.  The 1.85% levels looks to be the lower end of the new range and 2.00% on the top side.  Some of the technical indicators are stretched.  After all, the yield has risen by nearly 50 bp since mid-February's low.  The June futures contract looks firm.  The five-day average will cross above the 20-day average for the first time since the start of the month.  

After breaking the downtrend line off mid-February high on March 17-18, the contract spent most of the past week establishing a shelf above it.  On the upside, initial resistance is seen near 129-17.   That area corresponds to a neckline of a potential head and shoulders bottom.  The minimum measuring objective is near 131, which is also the 61.8% retracement of the decline since February 11.  

The S&P 500 and the Nikkei were the only G7 bourses to eke out gains last week, and even these were minor (0.2% and 0.4% respectively).   The S&P 500 has rallied 14% since the mid-February lows.  We are at the end of the quarter and about the begin the of earnings reporting period.  Many companies have to suspend their buyback programs.  Initial support is seen a little above 2020.  The MACDs appear poised to turn lower, but the firm close ahead of the weekend, and slow start to the new week (with much of Europe closed on Monday), may point to near-term consolidation.    The objective of the "W" bottom we anticipated in January and February projects to 2100.  

Gold appears to be mapping out a distributional top.  It lost 3% last week and is at the lows for the month.  The five-day moving averaged crossed below the 20-day moving average for the first time since very early-January.  The $1200 area continues to appear to be important psychological support, and the 38.2% retracement of the big run up from below $1050 in Q4 15 is found at $1194.  We peg initial resistance near $1230.




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