The dollar rose against nearly all the currencies last week. Among the majors, the chief exception was the Japanese yen, which seemed to benefit from the equity weakness and the drop in yields, perhaps not really so much of the widely touted safe haven attribute, but the unwinding of funding positions. The main exception among emerging market currencies was the Indian rupee, which moved into the upper end of its three-month trading range as tensions with Pakistan appeared to ease, and foreign interest in Indian equities continued.
The disappointing US jobs growth saw the greenback's gains pared ahead of the weekend. Does the loss of momentum signal a correction is at hand? Will the anticipation of a dovish hold by the Federal Reserve on March 20 dissuade short-term participants from aggressively chasing the dollar higher from here? Here is how we see the near-term technical condition.
Dollar Index: The Dollar Index rose 0.8% last week to match the 2018-high set in December near 97.70, sparked by a more dovish ECB than expected. It closed before the employment data above its upper Bollinger Band. The pullback ahead of the weekend was minor. The technical indicators have barely registered it. The 97.00 offers an initial test for many near-term participants. It is a retracement objective of this month's leg up and was resistance before the ECB meeting. A break could signal a consolidative/corrective phase. In the big picture, the Dollar Index is at the upper end of a five-month trading range between roughly 95.00 and 97.50.
Euro: True to form, the euro was sold in response to the ECB. It briefly traded to almost $1.1175. It was the lowest level since June 2017 and a test on the 61.8% retracement objective of the euro rally in 2017 (~$1.1185). The euro benefited from the broad dollar selling seen after the US jobs report and closed the week back inside the Bollinger Band (~$1.1220). It is either threatening to enter a new range (low vol scenario) or trends lower (higher vol scenario). To stabilize the technical tone, the euro needs to resurface above $1.1300, the lower end of what was a well-worn range. Initially, the $1.1250-$1.1260 area offers resistance. At the current volatility, the euro may trade between around $1.1060 and $1.1465 over the next month.
Yen: The dollar posted its first weekly loss against the yen since early February, ending a four-week advance. That matches its longest run since last May. The dollar recorded its high for the year (so far) early last week near JPY112.15 before slumping to JPY110.80 after the US jobs data. It fell through the 20-day moving average (~JPY111.00) for the first time in a month but managed to close back above it. The BOJ meets this week. While the data points to the likelihood that it lowers its assessment for exports and output, it is not as if it is a policy signal. Another consideration is the approaching fiscal year-end that often sees Japanese investors repatriate funds, which sometimes is associated with yen strength. A word of caution here. In 2016,2017, and 2018 the dollar fell in March, but the previous seven years, it rose. The performance of the other the other capital markets is also an important consideration for the yen, and we review some below
Sterling: The market has sold sterling this month. It has fallen for the past seven sessions. It peaked in late February at $1.3350 and saw $1.2990 ahead of the weekend. The low was recorded after the US employment data, signaling, it would seem, the importance of Brexit over near-term economic developments. The $1.2990 area corresponds to a 61.8% retracement of sterling's last leg up that too it from about $1.2775 on February 14 to that end of the month high. A trend line drawn from the flash crash low at the start of the year and the mid-February low is found near $1.2975 to start the week ahead and finishes near $1.3020. The MACDs and Slow Stochastics suggest sterling is vulnerable in the days ahead.
Canadian Dollar: The Canadian dollar was sold twice. First in response to the disappointing GDP data (March 1) and then when the Bank of Canada responded to it (March 6). Widening interest rate differentials helped fuel the US dollar's climb from CAD1.3130 (with a bullish outside up day to start the month) to CAD1.3470 before easing on contrasting employment reports. Ironically, the Canadian economy grew three times the number of jobs as the US did last month, apparently. Technically, we have suggested a potential bottom pattern that projects back toward the high seen at the end of last year around CAD1.3660. The greenback found support near CAD1.3390 and finished the week near CAD1.3415, and back within the Bollinger Band that it closed above for the previous two sessions. Without much Canadian data in the week ahead, the Loonie be at the mercy of the general risk appetite (S&P 500?) and the rate differential. We expect firm US data that could see the two-year rate differential extend the gains that carried it to 85 bp last week, the most since the Great Financial Crisis.
Australian Dollar: Disappointing GDP figures and the downgrade to Chinese growth weighed on the Australian dollar, seeing it test $0.7000 for the first time since January 4. It finished the week above $0.7020, the 50% retracement of the rally since the flash crash. The 61.8% retracement is near $0.6950 and is the next downside target. Resistance is seen in the $0.7080-$07100 band. The US offers 80 bp more to borrow for more than two years than the Australia government, the most in over 20 years. The premium was less than 60 bp at the start of the year. The technical indicators are getting stretched, warning that while new lows are possible, momentum could soon falter.
Mexican Peso: The dollar rose to MXN19.6225, its highest level in three months, before pushing back below MXN19.50 before the weekend. The dollar has risen for two consecutive weeks against the peso for the first time since last November. The dollar met the 50% retracement objective of the sell-off seen last December (yes while equities were selling off in December the peso strengthened). Initial support for the dollar is seen near MXN19.40, a retracement target of the latest leg up, and where the 5-day moving average is found. Below there support is cited in the MXN19.25-MXN19.30 area. Mexico's industrial output fell each month in Q4 18, but it is expected to have risen by 0.2% in January (reported March 13). Disappointment would likely weigh on the peso.
Oil: US inventory build and concerns are growth briefly saw the price of WTI for April delivery trade down to nearly $54.50, the lowest level since mid-February. However, it recovered in late turnover to close above $56 a barrel and preserved roughly 0.5% gain for the week. The price action appears to have reinforced the importance of the range with $58 on the top side. The exemptions to the Iranian oil embargo are to end next month. On the other hand, some Libyan production is expected to return. Technically, we are monitoring a potential head and shoulder bottom than projects toward $67.
US Rates: The US 10-year yield fell about 12 bp in the four-session prior to the US employment data and closed one basis point lower before the weekend. The yields eased every session last week, which does not appear to have happened for the past three years. It drew the closest to 2.60% since the very start of the year, when it bottomed in the 2.53%-2.54% area. The June note futures approached 123-00, which has stalled gains since early January. The contract high was set on January 3 at 123-17. The MACD and Slow Stochastics are turning higher. We expect the high- frequency data to show serially improvement but may be hard to shake the pessimism over the stalling of US jobs growth, and apparently the economy in Q1. The January 2020 Fed funds futures imply an effective yield at the end of the year of 2.345%. Before the jobs data, it was 2.41%. The current average has been the interest paid on reserves of 2.40%. With a new coupon supply coming next week, yields low and the dollar firm, the primary dealer may have to increase their inventories.
S&P 500: Bond yields fell every day last week, and so did the S&P 500. The 2.15% fall is the largest of the year and the first decline since the end of January. The NASDAQ fell 2.5%, snapping a 10-week advance, making it the first decline of the year. Perhaps aided by the ECB's growth concerns (slashed growth and warned risks still were on the downside), the S&P 500 gapped lower, below the 20-day moving average the day before weak jobs growth was reported. That gap (~2767.25-2768.7) is unfilled. It may be significant for the near-term outlook, with a move above it, keeping the bullish tone intact. The S&P gapped lower again after the jobs report but recovered late in the session to close it. Still, it finished below the 200-day moving average for the first time in almost a month, and the five-day moving average crossed (barely) below the 20-day moving average for the first time January 9, a helpful guide to the near-term trend. Last week's decline retraced a bit more than 61.8% of the most recent leg up from the February 8 low (~2733.4), and the benchmark managed to close back above it. We expect to see buying interest near 2700, but the 38.2% retracement of the rally the low at the end of last year is found by 2637.2.