Equities and the Greenback Recover While Rates Firm a Little

US disruptions are being minimized, and this is understood as dollar positive as it underscores the challenges elsewhere. One disruption is the partial government shutdown, which market participants are looking past, partly the direct economic impact is seen as modest and temporary.

Another disruption is trade. Here talks between the US and China continue, and the constructive elements, including what some see is a greater willingness on the part of the American president to make a trade deal even if the large strategic confrontation is not truly addressed, have fueled hopes that the tariff escalation could be avoided. Investors attention has not turned to the upcoming talks with Japan and the EU. Drama punctuated by threats and tariffs is likely with America's traditional allies like we saw with NAFTA 2.0, as with its strategic rivals.

A third disruption is the combination of easy access to credit, technological prowess, and a certain disregard for the environmental impact has led to a shale revolution in America. This is one of the large structural shifts in the US and global economy since the Great Financial Crisis. However, the downward pressure on oil prices has subsided as US inventories fall and OPEC+ supply cuts in the period ahead.

Dollar Index: The Dollar Index has rebounded smartly (~1.5%) from the three-month low on January 10. It was the first weekly gain since mid-December. The pre-weekend gains to the almost 96.40, met a 38.2% retracement of the decline since the cyclical high set in the middle of last month near 97.70. The RSI is overextended, but the MACDs and Slow Stochastics show more upside potential. The next upside technical objectives are in the 96.70-97.00 band. A break below 95.85 would be disappointing.

Euro: The euro recorded last year's low in mid-November near $1.1215 and subsequently drifted higher reaching a three-month high (~$1.1570) on January 10. It posted bearish outside down session (traded on both sides of the previous day's range and a closed below its low) ahead of the weekend. The five-day moving averaged has crossed below the 20-day moving average for the first time in a month. A trendline off the lows comes in near $1.1330 at the end of next week. Alternatively, the euro has been consolidated mostly in a $1.13-$1.15 trading range, and breaks have proved false--not sustained. The euro typically fell last year when the ECB met and given data since the last time it met and Draghi's speech last week, it is difficult to envision an upbeat message, i.e., a hawkish hold. The question is whether the looming clouds have been discounted. We think that is indeed the risk. After having been disappointed playing for the breakout, look for short-term players to turn cautious as the euro approaches the lowest end of its range. Also, after the ECB and BOJ meetings, the focus shifts back to the US the following week with both the FOMC meeting (and press conference) and the January employment report for which there will likely be payback after the heady 312k increase in December.

Yen: The dollar reached the highs for the year before the weekend near JPY109.90. The five-day average is poised to cross above the 20-day moving average next week for the first time since mid-December. Lower equity volatility and increasing core yields are associated with a weaker yen. The dollar's high last year set early last October near JPY114.55. Given the flash crash, at last week's highs set ahead of the weekend, the dollar retraced 50% of that decline. The JPY110.00-JPY110.30 offers the next hurdle. The RSI is overextended, but the MACDs and Slow Stochastics are considerably more constructive. A break of JPY108.70 would indicate that the surge from the flash crash low below JPY105 is over.

Sterling: Sterling reached a two-month high ($1.3000) the day after Prime Minister May survived the vote of confidence in Parliament. This was a technical target we cited, and with heightened uncertainty, this may prove to be an important high. May will submit a new proposal on Monday, but Parliament will not vote on it until the following week. It rallied about 3.3 cents from the low after the stunning defeat of the Withdrawal Bill. The technical indicators are rolling over, warning that late longs can be trapped. Initial support is seen in the $1.2800-$1.2835, but it takes a break of $1.2650-$1.2700 to be anything of importance.

Canadian Dollar: The US dollar rose against the Canadian dollar every week in Q4 18 except one. It has now fallen for the last three weeks. The MACDs and Slow Stochastics are turning higher, but a retest of support in the CAD1.3180-CAD1.3200 area cannot be ruled out. Still, we think the next big move is in favor of the US dollar supported by widening two-year interest rate differentials. Rising above CAD1.3300 would help lift the tone.

Australian Dollar: The Australian dollar rallied a nickel from the flash crash low but the momentum stalled near $0.7235. It has been trading in a narrow range for the past week. The technical indicators suggest a downside break is likely. Initial support is seen near $0.7150, but it takes a move below $0.7100 to signal that a deeper correction has begun.

Mexican Peo: After falling about 8.7% since early December, the dollar's downside momentum has eased. It closed at a little below MXN19.10, its highest close of the week. The technical indicators are poised to turn higher. A greenback advance above MXN19.20 would likely confirm a low is in place. That is our bias and anticipate a move toward MXN19.45-MXN19.55 in the coming weeks.

Oil: The March WTI futures contract may have carved out a head and shoulders bottom pattern. The neckline is at $55, and $60 is the minimum measuring objective. The 38.2% retracement of the decline that began last October is found near $55.50, and the 50% retracement is near $59.50. The 61.8% retracement found close to $63.50. A break of $50 would negate this view, and the MACDs and Slow Stochastics are beginning to turn lower.

US Interest Rates: The US 10-year yield rose every day last week for the first time since last April. The eight basis point increase is the largest weekly increase in more than two months. The yield bottomed near 2.55% at the start of the year and is approaching the old base at 2.80%. On January 17, the March note futures posted an outside down day, and there was follow through selling ahead of the weekend, reaching nearly 121-00, an old ceiling and near the 38.2% retracement of the rally that began last October. The five-day moving average has fallen below the 20-day moving average for the first time since mid-November. The RSI is overextended, while the MACDs and Slow Stochastics are still falling. The current effective average Fed funds rate is 2.40%. The July Fed funds futures contract implies 2.47%. Seven basis points of another 20 bp hike in the interest on reserves (the rate that ought to be the cap on the effective funds rate). At the start of the year, the implied yield implied 10 bp of 20 bp cut was discounted.

S&P 500: The S&P gapped higher before the weekend to cap the four-week rally. It reached 2675.5, up from about 2346.5 on the day after Christmas. It gapped above the 50% retracement of the losses since the record high from last September (~2643.7). We have been targeting 2700, and the 61.8% retracement is found near 2714. The gap is found between last Thursday's high (~2645.1 to ~2647.6). If the gap is normal, it will be filled over the next couple of days. If it is a measuring or breakaway gap, there should be follow-through buying in the next few days. If it is an exhaustion gap, it would mark an important high. The closes have often have been near session highs, and this leaves the Slow Stochastic over-extended. The MACD and RSI are also at elevated levels, though on a weekly basis they have only recently turned higher.