Dollar sits on the precipice

The dollar began last week with a drubbing.  The euro briefly pushed above $1.20, and the Australian dollar inched through $0.7400.  Sterling neared $1.35, and the greenback slipped below CAD1.30 for the first time since January.  However, profit-taking by momentum traders turned into a rout as some ECB officials seemed to push back, and the greenback ended on a firm tone.  

Although equities continued to rise for a day or so after the dollar bottomed, broad corrective forces were unleashed. Three question face market participants: How deep is the correction? How long will it last?  What are some events that could help facilitate a resumption of the underlying trend?  

Dollar Index:  The Dollar Index fell below 92.00 for the first time since April 2018.  It rebounded to 93.25 ahead of the weekend.  The 93.50 area capped upticks in the second half of August, and it did not trade above 94.00 in the first half of last month.  The 94.00 is also a (38.2%) retracement of the DXY decline since the end of June.  The next retracement objective (50%) is near 94.75. The MACD and Slow Stochastic have turned higher. 

Euro:    The euro's shooting star candlestick on September 1, reversing lower after trading above $1.20 for the first time since May 2018, signaled the subsequent correction.   In the sell-off before the weekend, the euro held above the previous week's low (~$1.1765).  The euro spent most of August in a two-cent range (~$1.1700-$1.1900).  The upside breakout was rejected, and a test on the lower end of the range ought not to surprise at this juncture, given market positioning.  Stops are likely below $1.17, and triggering them could be worth another half-cent.  The momentum indicators are moving lower.  The downside pressure could persist until the middle of the new week or even into the ECB meeting, but once that is out of the way, the ball comes back to the US court with the FOMC meeting on September 15-16.  

Japanese Yen:  The dollar spent the entire week within the range set on August 28 (~JPY105.20-JPY106.95).  Within the range, the dollar edged higher every day last week.  The drama in the equity market did spur yen gains as it often does.  Rising long-term US yields could support the greenback, but net-net, the 10-year yield was practically unchanged last week near 70 bp.   The technical indicators do not appear to be generating robust signals.  Unexciting as it may be, continued range trading is the most likely near-term scenario.  

British Pound: Sterling peaked on September 1, near $1.3480.  It fell to about $1.3175 before the weekend, a whisker below the 20-day moving average (~$1.3180).  A trend line connecting the June and July lows since found near $1.3135 at the start of next week as sterling has a three-day losing streak into tow, its longest slump in a month.  The lower end of the August range is near $1.30, and that (~$1.3015) corresponds to a (38.2%) retracement of the rally here in Q3.  The momentum indicators did not confirm the new highs.  The Slow Stochastic is moving lower, and the MACD has been moving sideways but is now softening.  

Canadian Dollar:  The Canadian dollar was the only major currency to hold its own against the resurging greenback.  It was the eighth consecutive weekly slump for the US dollar.  The US dollar's bounce from the dip below CAD1.30 on September 1 fizzled near CAD1.3165 on September 3, just in front of the 20-day moving average (~CAD1.3175).  The greenback has not closed above the 20-day moving average since July 14.  The MACD has flatlined, and the Slow Stochastic is turning higher from oversold territory.  The Canadian dollar's resiliency in the face of the dramatic drop in equities is noteworthy.  The US dollar's lows for the year was set on January 7 near CAD1.2955, and that is the next important target. The Bank of Canada meets on September 9.  It is not expected to change policy but will confirm it is prepared to do so, if needed.  

Australian Dollar: The move signaled by the shooting star candlestick pattern on September1, after briefly trading above $0.7400, may have ended with a hammer candlestick ahead of the weekend.  The Aussie recovered from a low near $0.7220, near where a trendline off the late June, July, and August is found, to the $0.7290 area, despite evaporating risk appetites.  The lower end of its previous range was closer to $0.7150.  Momentum indicators warn that the correction may not be over, but a move above $0.7330-$0.7340 would suggest otherwise.  

Mexican Peso:   The Mexican peso was the second stronger currency in the world last week, gaining almost 1% against the US dollar.  Only the Brazilian real was stronger, gaining nearly 1.5%.  It was the fourth consecutive weekly advance.  Ahead of the weekend, and despite the weakness in equities, the dollar traded below its 200-day moving average against the peso (~MXN21.5180) for the first time in six months.  The June lows in the MXN21.46-MXN21.47 region beckon.  Below there, the next important chart area is near MXN21.22.  The technical indicators look stretched, but there is no indication they are ready to turn higher. Resistance is now seen in the MXN21.70-MXN21.80 area.  

Chinese Yuan: The dollar fell to new lows for the year against the yuan on September 1, near CNY6.8125.  The broader dollar bounce saw it trade up to almost CNY6.8470 ahead of the weekend.  Chinese officials have accepted the dollar to decline six weeks in a row and ten of the past 11 weeks.  While the strengthening of the yuan may go contrary to the direction of monetary policy, it would seem to serve its trade needs.  The yuan's appreciation could be confirmation that it plans to step up its imports, and, if true, could support commodity prices.  The CNY6.90 area that served as support previously may now function as a near-term cap.  

Gold:  The record high was set on August 7, near $2075. The correction began.  It was repulsed in the middle of August when it tried to recapture $2000, and in last week's attempt was turned back from about $1992.50.  Support is seen near $1900. The MACD and Slow Stochastic suggest the correction could continue.  If the major central banks are engaged in an uncoordinated effort to convince investors that they are serious about pushing inflation higher and that in part, it means lower rates for longer, it is difficult to envision a deep or sustained decline in gold prices.  

Oil: Oil had a tough week, even though US inventories continued to fall.  At first, OPEC's plan to boost output seemed to weigh on sentiment, and then at the end of the week, demand concerns and falling equity markets dragged prices lower.  The outside down day ahead of the weekend was like an exclamation point for the price action.   The 6.7% drop in October WTI was the largest weekly loss since early June.  It had been trading mostly between $41.50 and $43.50 since early August and bumping against the 200-day moving average (now near $42.85). It had posted its peak on August 26, nearThe momentum indicators are trending lower.   A break of the late July low near $39.00 could spur losses toward $36.00.  

US Rates:  The US 10-year yields drifted lower for five sessions in a row through September 3, as what seemed like an exaggerated response to the FOMC's average inflation target was unwound.  However, the sharp drop in the unemployment rate to 8.4% from 10.2%, beyond what many economists forecast for year-end, saw the yield jump back and finished the week little changed. The Treasury will auction $108 bln in coupons next week (roughly split between the three-year notes and 10- and 30-year bonds), and there are expectations for more investment-grade issuance.   The 10-year break-even, which has been trending higher since bottoming in March, stalled around 1.80%, the high for the year. It has not been above 2.0% since late 2018.  

S&P 500:   From the midweek record high near 3588, the S&P 500 fell roughly 6.7% to about 3350 ahead of the weekend.  At one point, the NASDAQ traded 10% below its record high.  US equities began recovering around the time European markets closed for the week. The S&P 500 reached 3450 in late turnover. Its drop appeared to complete a (61.8%) retracement of the last leg up that began in late July (from around 3205).  The constructive close may encourage buyers after the long holiday weekend.  A move above 3470 would lift the tone and above 3500, and a run to new record levels will be anticipated.  The recovery bodes well for foreign markets at the start of the new week.