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Thoughts about the Price Action

Summary:
The Federal Reserve was more dovish than expected, but that did not stop the dollar from appreciating against most of the major currencies last week.  Even the Norwegian krone, which one would have thought would have been better supported following the central bank's rate hike, closed lower on the week. Among the majors, the yen and Swiss franc were resilient in the face of the dollar's strength. The dollar also rose against many of the high-beta emerging market currencies, like the Turkish lira, the South African rand, the Hungarian forint, and Argentina's peso.   The Mexican peso was an exception.  It had rallied nearly 1.8% until surrendering 2/3 ahead of the weekend, managing to close 0.6% stronger.  The Indian rupee gained for the fifth consecutive week, but the

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Thoughts about the Price Action
The Federal Reserve was more dovish than expected, but that did not stop the dollar from appreciating against most of the major currencies last week.  Even the Norwegian krone, which one would have thought would have been better supported following the central bank's rate hike, closed lower on the week. Among the majors, the yen and Swiss franc were resilient in the face of the dollar's strength.

The dollar also rose against many of the high-beta emerging market currencies, like the Turkish lira, the South African rand, the Hungarian forint, and Argentina's peso.   The Mexican peso was an exception.  It had rallied nearly 1.8% until surrendering 2/3 ahead of the weekend, managing to close 0.6% stronger.  The Indian rupee gained for the fifth consecutive week, but the momentum appears to be fading, setting the stage for a near-term pullback.  The Hong Kong Monetary Authority intervened last week to further weakness, and helped by the fall in US yields, saw some success by the end of the week.  The Hong Kong dollar gained 0.03% against the US dollar last week. 

Dollar Index:  Often it seems that the market gets it backward.  The Dollar Index rallied on the dovish ECB earlier this month, but that marked the end of the short-term dollar advance.  It did not start a new dollar advance.  Similarly, the Dollar Index sold-off on the dovish Fed, but that was the end of the retreat begun with the ECB meeting.  It hit about 95.75 on the FOMC and closed on its lows and below the 200-day moving average.  Bear trap.  It hit 96.80 ahead of the weekend, helped by the disappointing EMU PMI and closed at 96.65, just above the 20-day moving average.  The Dollar Index retraced half of its drop since the ECB-meeting high, and the next retracement objective is near 97.00.  A trendline from last September's lows and the January and February lows come in last week near 95.60.  That it held reinforces its significance.  

Euro: The euro reached almost $1.1450 on the back of the FOMC, weakened the following day and then was sold aggressively after the poor PMI.  The euro reached about $1.1280 before finishing the week a little above $1.1300.  The weekly price action looks like a shooting star (bearish). The retreat retraced a little more than 61.8% of the rally from the ECB-induced low just above $1.1175. The euro has spent most of the past five months between $1.13 and $1.15. The lesson has been to fade the breakouts, though as we have acknowledged that to make money in the range leaves one unprepared for the eventual break.  The price action, however, seems to be signaling a somewhat lower trading range.  It has not traded at $1.15 since the end of January.  It has been spending more time below $1.13.  The MACDs and Slow Stochastics, which had been trending up as the euro rose in seven of the eight sessions through the FOMC announcement, appear to be crossing lower.  

Yen:  The US dollar stalled at JPY112 this month.  The last attempt was on the Ides of March.  It was still was near there before the FOMC meeting.  The drop in yields and stocks saw the dollar post a bearish outside down day against the yen in the middle of the week.  After consolidating on Thursday, the dollar was pushed lower by the same drivers--falling stocks and interest rates--and traded below JPY110 for the first time since February 11. The US 10-year premium over Japan fell to 250 bp last week, the smallest since early last year.  The 60-day rolling correlation of the percent changes in the S&P 500 and the dollar-yen exchange rate is at 0.54.  It has not been above 0.58 since mid-2017.  Some of the Japanese institutions that might be otherwise inclined to buy dollars may be hampered in the week ahead by the fiscal year-end.  The technical indicators warn that despite the losses in recent days, the move does not appear exhausted.  The five-day moving average is now slipping through the 20-day, and the technical indicators suggest there is more room to go.  The dollar traded from about JPY104.85 on the flash crash low (January 3) to a little above JPY112 a few weeks ago.  The JPY109.35 area corresponds to the 38.2% retracement and the 50% mark is at JPY108.50. As the dollar has weakened, implied volatility has jumped.  Three-month vol rose for the past four sessions, and near 6.5% it is the highest in a little more than a month (February 19). The 100- and 200-day moving averages are 7.05%-7.45%, while the same averages for the dollar converge in the JPY111.20-JPY111.40 area.  

Sterling:  At this juncture, a long extension seems to be the most likely scenario, which we suspect will be seen as bullish for sterling.  The first time, people may be able to express themselves at the polls might be the EU Parliamentary election at the end of May.  Since mid-February, sterling has chopped between roughly $1.2950 and $1.3350.  It held $1.30 last week and finished near the middle of the week's range, a little above $1.3200.  A trendline from early January lows, mid-February, early and late March lows comes in around $1.31 at the end of March.  The technical indicators do look particularly supportive.  -0.8% 

Canadian Dollar:  The Canadian dollar was the weakest of the major currencies last week, losing 0.6% against its US counterpart.  It is the Canadian dollar's third decline in the past four weeks. Poor economic data, most recently the unexpected fall in January retail sales (-0.3% vs. median forecast in the Bloomberg survey for a 0.4% gain) and the downward revision in the December series (-0.8% rather than -0.5%).  Much ink has been spilled about the inversion of the US curve as in the 10-year yield is below the US T-bills (four weeks through 12 months) that yield 2.44% to 2.46%.  The Canadian curve has inverted longer.  Canada's 3, 6, and 12-month bills yield 1.65%-1.66% while the 10-year bond yield is 1.60%.   The CAD1.3460-CAD1.3470, highs set earlier this month is the only notable obstacle to the US dollar returning to the CAD1.3365 area seen at the end of last year.  The trendline from last September lows, early and late February lows, and through the early March low comes a little below CAD1.32 at the end of the month.  

Australian Dollar:  For the past four months, the Australian dollar is recording lower highs.  The high for March may have been recorded in the aftermath of the FOMC meeting a touch below $0.7170.  A downtrend from the December and January highs comes in near $0.7200 at the end of the month.  The drop before the weekend, which left it virtually unchanged on the week, tested another trendline.  This one connects this month's lows and begins the week near $0.7085 and finishes the month a little above $0.7110.  The MACDs looks poised to turn lower, and Slow Stochastics don't look far behind. It has not closed above its 200-day moving average (now ~$0.7215) since the middle of last March.

Mexican Peso:  The US dollar ended a downdraft against the Mexican peso in the last two sessions.  It had fallen in eight of the previous nine sessions.  In the immediate aftermath of the FOMC meeting, the dollar fell to its lowest level against the peso (~MXN18.75) since the middle of last October.  The greenback recovered as the risk appetite waned, and finished the week back in the old range (MXN19.09).  The 14-day RSI has turned up, and the Slow Stochastics are poised to do so shortly.  The MACDs a lagging.  As of March 19, speculators (non-commercials) in the futures market had their largest net long position in six years. The dollar's bounce in the second half of last week stalled near the 50% retracement objective of the decline from March 7 (MXN19.19).  The next retracement objective is found a little above MXN19.29.

Oil: Light sweet crude oil for May delivery rose for the third week.  It has risen in all but three weeks since the start of the year. It stalled near $60 a barrel but the pullback before the weekend saw new buying come in near the minimum retracement of this month's rally (~$58.30) before closing a little above $59.  The RSI and MACDs have turned down. The next retracement and the 20-day moving average are around $57.60-$57.80. The neckline of the head and shoulders bottom that projects toward $67 that we have been monitoring comes in by $55.  

US Rates: Bloomberg calculates that the (generic) US 10-year yield fell by the most since June 2016.  The nearly 15 bp decline saw it finish the week near 2.43%.  Intraday is had fallen a couple of more basis points.  It was the third consecutive weekly decline.  The yield has risen in only five of the past 19 weeks.  Over this span, the yield has fallen by about 75 bp.  The break below 2.50% important.  The next big level is 2.25%-2.30%. The continuation futures contract spiked higher and closed above the 38.2% retracement (123-27) of the decline since the early July 2016 high (134-07).  The 50% retracement is 125-26.  The June contract closed above its upper Bollinger Band. The last time it did was that January 3, which had been the high for the year, until the pre-weekend session.  

S&P 500: The initial bounce in stocks after the FOMC was short lived and shares finished lower on the day.  However, it was as if investors reconsidered and took the S&P 500 to new five-month highs the following day.  Investors may have been cautious about extending the 1.1% rally the following day, but growth concerns, fanned by the poor EMU PMI, turned into a rout.  The 1.9% loss before the weekend was the largest since January 3 and brought the benchmark back to 2800, and it settled on its lows.  There are two gaps from earlier this month that may be important.  The first was created on the higher opening on March 13.  The low that day was roughly 2799.80, and the high from the previous session was about 2798.30.  The second gap was created by the March 12 higher opening.  The low that day was about 2786.70.  The high from the day before was 2784.00.  The half-way mark of this month's rally is near 2791.30.  Going into the last week of the quarter, the S&P 500 is up almost 12% this year.  If asked at the start of the year, many investors would have been happy with this return for the entire year.   The risk seems to favor more profit-taking.  

Disclaimer



Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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