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The Dollar’s Technical Picture Turns more Nuanced and the Significance of the Gaps in the S&P 500

Summary:
The US dollar fell against most of the major currencies over the past week. The yen and the Swiss franc were the exceptions.  The technical correction, we anticipated last week, may have some more room to run.  However, we do view it as a counter-trend move and expect the data to show the US economy picked up some momentum going into the end of Q1.  If recession fears are exaggerated so too are expectations that the Federal Reserve will cut rates.  An adjustment of such expectations can be the fuel of the next leg up for the dollar.  Dollar Index:  The Dollar Index tried one more time to push through the 97.50 area at the start of last week and gave up and retreated to about 96.75, where the 50-day moving average is found, ahead of the weekend.  It traded below its

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The Dollar's Technical Picture Turns more Nuanced and the Significance of the Gaps in the S&P 500
The US dollar fell against most of the major currencies over the past week. The yen and the Swiss franc were the exceptions.  The technical correction, we anticipated last week, may have some more room to run.  However, we do view it as a counter-trend move and expect the data to show the US economy picked up some momentum going into the end of Q1.  If recession fears are exaggerated so too are expectations that the Federal Reserve will cut rates.  An adjustment of such expectations can be the fuel of the next leg up for the dollar. 

Dollar Index:  The Dollar Index tried one more time to push through the 97.50 area at the start of last week and gave up and retreated to about 96.75, where the 50-day moving average is found, ahead of the weekend.  It traded below its 20-day moving average (~96.90) for the first time this month but managed to close just above it.  The move that we think is being corrected began ironically with the low on March 20 when the FOMC last met and the Dollar Index posted an outside down day.  But there was no follow-through, and before the past week, it had risen in the nine of the 12 sessions after the FOMC meeting.  It had retraced 38.2% of the move by the middle of last week (~96.85) but before the weekend, made a push lower toward the 50% retracement (~96.65).  The 61.8% retracement is found about 20 ticks lower.  The five-day moving average (~97.02) is poised to fall below the 20-day moving average (~96.90), which may be a useful proxy for some models.  The technical indicators we look at also suggest scope for more declines.  Waiting for some sign of a reversal may be preferable to trying to catch the falling knife. That said, on a risk-reward basis dip below 96.50 would look attractive.

Euro:  The single currency was capped near $1.1285.  It looked as if the market was about to give up and then talk of a large direct investment related euro-yen trade propelled it higher as stops were triggered.  It was the first time in nearly three weeks that the euro traded back into its old range (~$1.1300-$1.1500).  The technical condition is still constructive although it was disappointing that it failed to close above $1.13.  The five and 20-day moving averages are set to cross, and many of the late shorts are in weak hands.  The next target is $1.1350, which is retracement target and the 100-day moving average. Above there, the $1.1400 area would beckon.  On the downside, a convincing break of $1.1280 would be a warning sign that the correction may be flagging, while a move below $1.1250 would suggest the upper end of the new range has been found. 

Yen: In the middle of last week, the dollar tested trendline support that connects the flash crash low (January 3) a little below JPY105 and the March lows (~JPY109.75).  It was near JPY110.85 in the middle of last week, and the dollar sprung higher.  It pushed through JPY112.00 for the first time ahead of the weekend and the highest close since a week before last Christmas.  Although we look for the dollar to head toward JPY114-JPY115, the charts suggest caution.  The Upper Bollinger Band is nearby (~JPY112.20).  The Slow Stochastics have not confirmed the new highs, setting up a potential bearish divergence and the MACDS have not generated a strong signal.  A setback toward JPY111.60 may provide a new opportunity to play for a breakout. 

Sterling:   For two and a half weeks, sterling has bounced between $1.30 and $1.32, but from a slightly larger vantage point, it is carving out a triangle. This is most commonly seen as a continuation pattern. In this case, that is bullish.  The top of the triangle is drawn from the March 13 high near $1.3380 and late March high and early April high. It came in near $1.3135 ahead of the weekend and arguably held sterling back from strong gains.  The lower part of the triangle begins with the March 11 low of about $1.2950 and connects the March 29 and April 4 lows.  It is found a little below $1.3010 at the end of next week.  The technicals have not turned, but pullbacks to the lower end of the triangle may offer good risk-reward. 

Canadian Dollar:  In January and February, the US dollar traded between CAD1.3100 and CAD1.3300, with a few exceptions.  It moved into a higher range in March.  It now seems to be in a CAD1.3300 and CAD1.3440.  The market seems comfortable in that range, and the three-month implied volatility is at five-year lows (~5.2%).  Outside of a few months in 2014, the implied volatility has not been below 5% since 2000.  

Australian Dollar:   The Australian dollar advanced nearly 1% last week to extend its streak to three weeks.  Ahead of the weekend it almost reached $0.7200, for the first time since late February.   A trendline from last November and late January highs comes in near there as does the 200-day moving average.  The Aussie has not closed above its 200-day moving average in a little over a year.  The technical indicators suggest there is near-term to push through it.  The next hurdle is near $0.7250.  Positive news from China seemed to offset news of potentially large layoffs and branch reduction by Australia's largest lender.   

Mexican Peso:   The Mexican peso was the second strongest currency in the world last week, only bested by the Argentine peso (~1.7% vs. 4.1%).  The dollar had its lowest close so far this year ahead of the weekend (~MXN18.75).  It appears the high-interest rates are drawing capital, offsetting the talk that many domestics are bringing savings offshore.  The next technical target is near MXN18.40, but a move toward MXN18.00 cannot be ruled out.  It is not a tail risk.  Given the current volatility, there is a reasonably good chance it may be seen in the coming months.   Peso strength will add pressure on the central bank to cut rates, which explains the appeal to many levered accounts the attractiveness of the Mexican cetes.  

Oil: Every day WTI for June delivery bumped up against resistance near $65 a barrel.  It is primarily a supply story.  OPEC+ cuts are deeper than the commitments.  Venezuela and Libyan supply have been compromised, and the US has yet to decide on the waivers from the embargo against Iran.  The price of WTI has risen for the past six consecutive weeks and has only fallen three weeks of this year's first 15 weeks.  The technical indicators are stretched, of course,  but they have not turned down.

US Rates:   For only the second time this year, the US 10-year yield rose in back-to-back weeks.  It was virtually flat coming into the end of the week, and despite the softer University of Michigan inflation expectations, the yield jumped six basis points.  Rising oil and stock prices, and the data that made gave credence to ideas that it too is finding better traction were thought to have spurred the sales.  The next important target is near 2.60%.  That had been the floor through most of the first quarter.  The June note futures closed at its lowest level since March 20.  A break of 122-26 could signal losses toward 122-00.  In the first two weeks of April, the implied yield of the January 2020 Fed funds futures fell 13 basis points to about 2.285%.  Given the current average effective rate is 2.41%, there is scope for more adjustment.   It is only halfway to pricing in a Fed that is on hold this year.  

S&P 500:  The S&P 500 closed at new six-month highs before the weekend after gapping higher at the open.  Favorable earnings from JP Morgan, a large acquisition in the oil sector (Chevron-Anadarko), and strong export and lending growth in China, lifted sentiment.  The gap is found between the April 11 high (~2893.4) and April 12 low (~2898.4).  If it is a "normal gap" it should be closed over the next few sessions.  The longer it is unfilled, the more bullish the signal.  The gap created by the higher opening on April 1 appears on the weekly bar charts and has not been filled.  The last time the S&P 500 was this high, the 10-year yield was near 3.15%, and the two-year yield was around 2.82%.  If it is a measuring or runaway gap, the S&P 500 met the initial objective. If the pre-weekend gap is like the April 1 gap, it projects to the record high set last September near 2941. 

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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