The Dollar's Technical Condition at the Start of Q2

The US dollar rose against most of the major currencies in the last week of March.  The stronger than expected January GDP (0.3%) helped lift the Canadian dollar (~0.6%), which was the notable exception.  The Australian dollar's rise ahead of the weekend and the end of Q4 allowed it to secure a small gain for the week (~0.2%). 

The risk that the UK leaves the EU without a deal seemed to many to have increased after a majority of the House of Commons failed to back any alternative, including the Withdrawal Bill for the third (and possibly not the last) time.   This saw sterling briefly trade below $1.30.  We still think a longer extension the leads to a softer and later UK exit will eventually be negotiated and that this will be seen as sterling positive.   The Reserve Bank of New Zealand confirmed what many market participants had suspected, namely that the next move in rates is probably a cut.  This sent the New Zealand dollar lower, and after sterling's 1.3% decline, its 1.1% decline was the second largest among the major currencies.  Around $0.6800, it is in the middle of the two-cent range that that largely confined it in Q1. 

Dollar Index:  It closed at its best level since March 8 near 97.30.  It has risen in six of the past eight weeks.  The Dollar Index will begin the second quarter just below important resistance area, 97.50-97.70 that has stalled rallies.  Above there is the longstanding target 97.85-97.90 that is the (61.8%) Fibonacci retracement of the 2017 sell-off.  The first quarter was the fourth consecutive quarterly advance for the Dollar Index.  It is the longest run since 2008-2009.  The technical indicators, like the MACDs and Slow Stochastics, and the daily and weekly basis, give scope for additional gains. 

Euro:  The single currency never was able to recover from the disappointing economic data and dovish ECB at the beginning of the month.  It fell about 0.75% last week, its third decline in the past four weeks.  The finished a little below $1.1220, for its lowest weekly close since the middle of 2017.  The technical indicators warn of the risk that the euro is entering a new trading range.  A two-cent band on both sides of $1.14 have has confined the euro for the past five months with the exception of the reaction to the ECB's dovishness in March. A convincing move back above $1.1250 would be an early sign that the range may hold. 

Yen:  The dollar closed at the week's highs near JPY110.85.  It rose in four of the past five sessions for about a 0.85% gain, which pared March's loss to around 0.5%.    The dollar appreciated by a little more than 1% over the quarter after it fell roughly 3.5% in Q4 18.  The recent price action reinforced support a little below JPY110.  The technical indicators favor the dollar.  The JPY111.00-JPY111.10 area housing both the 20- and 100-day moving average.  The 200-day average is near JPY111.45, which is around where the downtrend line from March is found at the end of the week ahead.  

Sterling: The prospects of a no-deal Brexit weighed on sterling last week, and it dipped below $1.30 before the weekend for the second time in March, though it is not closed below it since February 19.  However, sterling has violated the uptrend line connecting the January, February, and the early March lows.  It found near $1.3130 now and rises toward roughly $1.3175 by the end of the week.  Sterling's gains in January and February (~2.8% and 1.2%) was a sufficient cushion to absorb March's 1.7% decline to still make it the strongest of the majors in Q1 19 with a 2.2% gain.  The $1.28-$1.29 offers the next band of technical support.  The upper end of sterling's recent range is around $1.3450. 

Canadian Dollar:   The strong recovery before the weekend in response to the upside surprise of January GDP put the Canadian dollar in a strong position to start the new month.  The first target for the US dollar is CAD1.3300-CAD1.3320.  Ultimately though, the lows from earlier in March near CAD1.3250 may be a more formidable barrier to a return to the CAD1.3100 area.  We suspect that last month's diverging jobs reports will be reversed with the US jobs growth bouncing back and Canada paying back for the outsized gains in February. This may catch new Canadian dollar longs in weak hands.  

Australian Dollar:  For the past six weeks, the Australian dollar has been confined to a $0.7000-$0.7200 range.  A shelf was forged last week near $0.7050, but it is unlikely to withstand a dovish RBA or disappointing economic data. The  10-year bond yield fell by more than 50 bp in Q1 to record lows a little above 1.70%, and the equity market rallied 9.5%.   The Australian dollar snapped a five-quarter slide, eking out a 2/3 of a percentage gain. That matched the longest quarterly drops since the early 1980s.  The Australian dollar turned lower early last year from above $0.8000.  The downside momentum has stalled, but there is little enthusiasm for the upside.  Short-term speculators used to get paid to be long Aussie because of the interest rate differentials, but now one pays.  

Mexican Peso: The Mexican peso has fallen out of favor in recent days, declining in five of the past seven sessions.  It fell 1.7% last week, to pare the quarterly gain to a little more than 1.1%.  It looks vulnerable.  The dollar closed above its 200-day moving average (~MXN19.3450) and has favorable momentum.  The speculative bullish positioning in the futures market is extreme.  President Trump has stepped up his rhetoric, threatening to close the border.   The high from earlier in March (~MXN19.62) is set to be challenged and a move above MXN19.70 would re-target MXN20.00.

Oil:   The price for a barrel of WTI for May delivery rose 1.85% last week, its fourth weekly advance and its first weekly close above $60 since last November. Supply concerns have outweighed slower growth.  The head and shoulders bottom we suggest was carved at the end of 2018 and early 2019 projects toward $67.  President Trump again used his Twitter account to reiterate his call on OPEC to produce more oil.  Support is seen in the $58.00-$58.50 area. The 200-day moving average, which has not been transgressed for five months is near $60.75.  

US Rates: The US 10-year yield reversed higher after briefly dipping below 2.34% on March 28.  Like it seemed possible in the middle of March (though it proved wrong), there is another window of that the buying frenzy may have been exhausted.  The first leg down was spurred by the dovish ECB and the poor US jobs data in early March.  The next leg down was triggered by the FOMC forecasts and the disappointing flash EMU PMI.  The Fed may have already begun trying to rein in market expectations that have priced about 35 bp of easing into the fed funds futures strip.  We expect the upcoming economic data to support this official effort. This runs contrary to the call for an immediate 50 bp cut by the latest nominee to the Board of Governors and echoed by the National Economic Adviser Kudlow.  The Fed is trying to steer an independent course--independent between being delivered a fait accompli by market participants and having the executive branch advocate a specific monetary policy.    

S&P 500: The S&P 500 closed at the week's high to ensure that the sawtooth pattern of alternating weekly advances and declines remained intact.  Indeed, the weekly close (~2834) was the highest weekly since last October.  The S&P 500 rose almost 1.8% in March, the third consecutive monthly rise for a little more than 13%. It fell nearly 14% in Q4 18.   The March 21 high around 2860 is the next immediate target and then 2900.  A break of 2775-2785 area would weaken the technical outlook.  

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