Technicals: Dollar Looks Good, But…

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjfAWM-SZSuOGh7fOdM4gnHVjz6h69xVTFNs_E6XMm-RtyRiD-8UnhQ-wjGuzrvBiMgXGZ0qLNG-WfngM9ncVBrGXzhkqwfoGxsqwjOZ6rySr0l7EHlgdxlvhJk8DMfQEL-TkATe5Fpx7Ql2Kov7icSvax5E7aezKWyIDFQ-7l005tXRtn6vVZUMQGh4g=s1000"><img alt="" border="0" data-original-height="667" data-original-width="1000" src="https://blogger.googleusercontent.com/img/a/AVvXsEjfAWM-SZSuOGh7fOdM4gnHVjz6h69xVTFNs_E6XMm-RtyRiD-8UnhQ-wjGuzrvBiMgXGZ0qLNG-WfngM9ncVBrGXzhkqwfoGxsqwjOZ6rySr0l7EHlgdxlvhJk8DMfQEL-TkATe5Fpx7Ql2Kov7icSvax5E7aezKWyIDFQ-7l005tXRtn6vVZUMQGh4g=s400" width="400" /></a></div><p><span><b>The aggressiveness that the market now sees in Fed tightening underpinned the dollar, while the 2–10-year yield curve flattened to levels last seen in November 2020.&nbsp;</b> The market has about a one-in-five chance that the initial move in March is 50 bp.&nbsp; The swaps market has about 135 bp of tightening discounted for this year.&nbsp;&nbsp;<o:p></o:p></span></p><p><span><b>With a Fed move in March as done of a deal as these things gets, the US employment report may lose some of its market-moving ability.</b>&nbsp; The same can be said of Canada.&nbsp; Weakness will be attributed to the virus.&nbsp; The focus turns to the Reserve Bank of Australia, the Bank of England, and the ECB.&nbsp; The RBA's dovishness may be curbed, but a decline in the eurozone's January CPI, as the German VAT increase drops out of the year-over-year comparison, will keep the ECB on the sidelines.&nbsp; The BOE can be aggressive, with a rate hike, and first G7 central bank to allow its balance sheet to shrink.&nbsp;&nbsp;<o:p></o:p></span></p><p><span><b>The greenback punched through some key technical levels, and after the false breaks earlier this month in the yen and euro, some short-term players and momentum traders may be trying to pick a top.&nbsp;</b>&nbsp;Several of the pairs that we discuss below are beyond their Bollinger Bands (two standard deviations around the 20-day moving average).&nbsp; However, for medium-term participants, we expect the US dollar to rise further.&nbsp; &nbsp;<o:p></o:p></span></p><p><b><span>Dollar Index:&nbsp;&nbsp;</span></b><span>Since bottoming on January 14 (~94.60), the Dollar Index has jumped nearly 3% and took out last year's highs.&nbsp; In the consolidation ahead of the weekend the 97.00 area offer support.&nbsp; The upper Bollinger Band begins the new week near 97.15.&nbsp; The MACD is moving higher but the Slow Stochastic is on the verge of becoming stretched.&nbsp; Still, the last time the Slow Stochastic entered over extended territory, the Dollar Index rose by almost another 200 points before peaking.&nbsp; The next technical objective is the 97.70 area, which is the (61.8%) retracement of the decline since the March 2020 high (~103.00).&nbsp; A break of the 96.35-96.50 area would warn of a false break.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Euro:&nbsp;</span></b><span>&nbsp;The euro recovered from the initial pre-weekend push to a new low around $1.1120.&nbsp; The minor gain snapped a four-day drop.&nbsp; The upticks were not sufficient to lift the single currency much above the lower Bollinger Band, which finished the week slightly above $1.1165.&nbsp; The week's decline of around 1.6% was the largest loss since last June and pushed the Slow Stochastic into oversold territory.&nbsp; The MACD is falling at near the middle of its range.&nbsp; There appears to be little meaningful chart support until closer to the $1.1000-$1.1050 area.&nbsp; We suspect that some of the fuel of the euro's recent drop was late longs that played the upside break earlier this month were forced to liquidate.&nbsp; While there may be scope for some near-term consolidation, the divergence between the ECB and the Fed may be underscored by what will likely be a decline in January EMU CPI and Lagarde’s patience.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Japanese Yen:&nbsp;&nbsp;</span></b><span>The yen is torn between rising US yields and falling equities.&nbsp; After briefly dipping below JPY113.50 at the start of last week, the dollar rose to almost JPY115.70 before the weekend.&nbsp; However, equity market volatility seemed to have deterred new dollar buying.&nbsp; The momentum indicators have turned higher, and the five-day moving average looks poised to cross above the 20-day moving average in the coming days.&nbsp; We peg initial support for the dollar in the JPY114.85-JPY115.00 band.&nbsp; The dollar rose to its highest level in five years at the start of the month (~JPY116.35). It can be retested in the coming days if equities steady.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>British Pound:</span></b><span>&nbsp; &nbsp;Sterling's 1% loss last week made it the second strongest major performer against the dollar after the Norwegian krone.&nbsp; Political uncertainty continues to hang over 10 Downing Street, even though what appears to have happened in broad terms does not appear out of character for the Prime Minister.&nbsp; The Bank of England is expected to deliver its second hike in the cycle and reach the threshold (50 bp) to begin allowing a passive reduction of its balance sheet.&nbsp; The market has four hikes discounted and 75% chance of a fifth hike.&nbsp; With the recent decline, sterling has met the (61.8%) retracement objective (~$1.3395) of the rally that began a little before Xmas near $1.3175 and peaked on January 13 at almost $1.3750.&nbsp; It closed below the lower Bollinger Band on last Thursday but closed above it (~$1.3385) ahead of the weekend.&nbsp; The MACD is trending lower and the Slow Stochastic is about to enter oversold territory.&nbsp; The $1.3470-$1.3500 area offers a nearby cap.&nbsp; Separately, but related, the euro has been sold to almost GBP0.8300.&nbsp; The low from the February 2020 is near GBP0.8280.&nbsp; It was slightly lower in December 2019, this is the weaker end of where the euro has been since the June 2016 referendum.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Canadian Dollar:&nbsp;</span></b><span>&nbsp;Despite the Bank of Canada also signaling what Governor Macklem repeatedly call a "significant" shift in policy, the Canadian dollar suffered in the wake of the greenback's surge.&nbsp; In fact, the market sees the Bank of Canada as the most aggressive of the G7 central banks this year.&nbsp; The swaps market has nearly 160 bp of tightening discounted.&nbsp; The Bank of Canada's balance sheet will also likely begin falling this year.&nbsp; The greenback's gains negated the head and shoulders pattern we've been monitoring.&nbsp; It bottomed near CAD1.2450, well above the CAD1.2250 measuring objective.&nbsp; The dollar's assault stopped shy of CAD1.28 ahead of the weekend.&nbsp; It met the (61.8%) retracement objective of the recent decline (from ~CAD1.2965 on December 20 to CAD1.2450 on January 19), which came in near CAD1.2770.&nbsp; The upper Bollinger Band begins the news week near CAD1.2810.&nbsp; Neither momentum indicator is stretched, and both are moving higher.&nbsp; The CAD1.2900 area becomes the immediate target when CAD1.28 is paid.&nbsp; The CAD1.2950-CAD1.2965 area capped the greenback last year.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Australian Dollar:</span></b><span>&nbsp; The Aussie's 2.5% decline last week was the biggest since last August.&nbsp; The conjoined risk-off and Fed hawkishness proved too much.&nbsp; Before the weekend, it was sold below $0.6970 for the first time since July 2020.&nbsp; The greenback's ascent slowed broadly in North America, but the Australian dollar still struggled to regain a foothold above $0.7000, a key technical area.&nbsp; Given the nearly three-cent slide in two weeks, the momentum indicators are moving lower and the Slow Stochastic is more advanced in the move than the MACD.&nbsp; There are two relevant caveats.&nbsp; First, the Australian dollar settled the last two sessions below the lower Bollinger Band.&nbsp; The last time this happened, it marked the end of a down move and a nearly four-cent rally in two-and-a-half weeks.&nbsp; Second, the speculators in the futures market have been all over this, with having amassed the largest net short position on record in the middle of January.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Mexican Peso:&nbsp;</span></b><span>&nbsp;The dollar rose against the peso every session last week.&nbsp; Its 2% gain was the most in a couple of months.&nbsp; The peso's weakness was partly a function of the risk-off shift.&nbsp; It delivered a 1% loss to the JP Morgan Emerging Market Currency Index, which snapped a three-week advance, large enough to offset nearly the full gain of the past two weeks.&nbsp; Part of the peso's weakness may also be a result of shifting short-term funds.&nbsp; Brazil has become a favored destination and the real was the only currency in the region to appreciate last week.&nbsp; Other central banks are raising rates more aggressively than Banxico, and Brazil is going to deliver 150 bp rate hike on February 2.&nbsp; However, last week, the only Latam currency that did worse than the Mexican peso was the Chilean peso, even though the Chilean central bank delivered a larger than expected rate hike.&nbsp; The momentum indicators are constructive, suggesting the greenback has potential to run further against the Mexican peso.&nbsp; The MXN21.00 area is the next obvious technical level.&nbsp; Above there, potential extends into the MXN21.20-MXN21.45 range.&nbsp;<o:p></o:p></span></p><p> </p><p><b><span>Chinese Yuan:&nbsp;</span></b><span>&nbsp;The dollar fell to almost four-year lows against the Chinese yuan in the middle of last week to hold barely above CNY6.32.&nbsp; It rebounded by 0.75% on January 27, the largest single day advance in six months to approach CNY6.37.&nbsp; The greenback consolidated ahead of the week-long holiday in China.&nbsp; &nbsp;It appears that Chinese bonds and stocks are less attractive now for many international asset managers and it looks like Brazil may have replaced it as a favored overweight.&nbsp; The dollar is trading a little stronger against the offshore yuan (CNH) and settled a little above CNH6.36. Like the yen and euro, the yuan's apparent breakout may not be sustained.&nbsp; The CNY/CNH6.40 area is the top of the recent range.&nbsp;&nbsp;<o:p></o:p></span></p><p><br /></p><p><span>Disclaimer</span></p><div>
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