Technicals turn against the dollar

The dollar rallied strongly from March 9 through March 20 or the start of last week on March 23. It has subsequently sold off and done so in dramatic fashion. It is not clear the trigger of the stunning reversal. Some observers attribute it to the Fed's currency swap lines, which were offered daily (seven-day operations) to a handful of large central banks.

Others link it to the better risk appetites reflected in meaningful bounces in equity markets, but nothing as striking as the 17% rally in the Nikkei. Even with a 915-point tumble in the Dow and a 3.3% drop in the S&P 500 before the weekend, both ended with double-digit gains on the week. Gold's 8.6% rally will not sit well with those who view it as a safe haven. The 30- and 60-day rolling correlations on the percent change of gold and the S&P 500 are positive for the first time since the middle of last year and October 2018, respectively.

The technical indicators that we monitor, the MACD and Slow Stochastic, have turned down for the dollar against all the major currencies. The poor technical condition suggests the dollar's weakness is more than a function of month- and quarter- and fiscal year-end flows, but was technically over-extended. We will use Fibonacci retracement and moving averages to identify potential price targets and relative strength.

Dollar Index: The Dollar Index fell every day last week, for a 4.4% drop, which is among the largest weekly declines since at least 1980. It has shot up from the year-and-a-half low on March 9 (~94.65) to a three-year high on March 20 (~103.00). Last week's decline retraced more than half that advance (~98.80), which also coincides with the 20-day moving average. The next retracement objective (61.8%) is found near 97.85, with the 200-day moving average found just above there (~98.00). A break of its targets 96.60. The MACD and Slow Stochastic turned lower from over-extended territory last week. The lower Bollinger Band is near 94.00.

Euro: The single currency recorded its multi-year low at the start of last week near $1.0635 and rallied to almost $1.1150 ahead of the weekend. The (61.8%) retracement objective of the precipitous decline that began after the test on $1.15 (March 9) is found a little above $1.1165. The MACD and Slow Stochastic have turned up after having not fallen below last month's lows, a potential bullish divergence. Additional resistance will likely be encountered around $1.1200. A break below $1.0950 would call this optimistic outlook into question.

Japanese Yen: The dollar bulls ran into a wall of offers in the JPY111.50-JPY111.65 area before finally giving up. They retreated in the last two sessions and the dollar reached a low of almost JPY107.75 ahead of the weekend. The (38.%) retracement objective of the rally from the JPY101.20 low on March 9 is found just below JPY107.70. The next retracement (50%) is found by JPY106.45. The MACD has crossed, but the Slow Stochastic is just to turn, suggesting the move has only begun. Below JPY105, and Japanese officials get more concerned about yen strength.

British Pound: Illustrating both the risk and opportunities of the volatile environment, sterling appreciated 7.15% last week after depreciating a little more than 11% in the proceeding two weeks. It traded near $1.2485 ahead of the weekend after a 35-year low was recorded near $1.1415 on March 20. The four-day advance saw it narrowly surface the (50%) retracement objective (~$1.2465) of the decline from the election high around $1.3515 in mid-December. The next objective (61.8%) is a little above $1.2700 and the 200-day moving average (~$1.2670), though the $1.2500-$1.2520 may offer initial resistance. The MACD and Slow Stochastic have just begun to turn higher.

Canadian Dollar: The US dollar's four-week, around 8.5% rally against the Canadian dollar was snapped last week. The greenback fell by about 2.65% even though oil prices continued to tumble, and the Bank of Canada surprised with a 50 bp rate cut ahead of the weekend and a start of an asset purchases program for the first time. It was the last of the major countries to be at (or below) the effective zero-bound. The US dollar carrying a four-day losing streak into next week after posting its lowest close in ten sessions, below CAD1.40. The MACD and Slow Stochastic have turned lower. The initial target is in the CAD1.3800-CAD1.3840 area.

Australian Dollar: The Australian dollar jumped 6.6% last week after falling more than 13.25% in the previous two weeks. It nearly met the (61.8%) retracement objective (~$0.6235) of the drop since the March 9 high (~$0.6685). The 20-day moving average is seen near $0.6220. The MACD and Slow Stochastic are trending higher, and a move above the retracement target spur a move toward the $0.6400-$0.6450.

Mexican Peso: The US dollar's five-week rally against the peso ended last week with a 4.4% pullback. During the rally, the dollar had surged more than 28% to a record high (~MXN25.46). Initial support was found in the second half of last week a little below MXN23.00, where the (382%) retracement objective of the rally that began from mid-February lows (~MXN18.52). The next retracement (50%) is near MXN22.00, and the 20-day moving average is around MXN22.18. Here too, the momentum indicators have turned lower.

Chinese Yuan: For the past seven sessions, the dollar has carved out a new range against the Chinese yuan between CNY7.05 and CNY7.12. There has been written in the financial press about a dollar funding shortage in China. Although the dollar is near the best levels of the quarter, its strength is quite mild. The yuan has fallen 1.3% over the past month. While the upside pressure on the dollar has been evident, the PBOC's reference rate has consistently set for a weaker dollar than the bank models. A continuation of a pullback in the dollar, as the technical indicators discussed above suggest, it could return to its former range against the yuan seen roughly between CNY6.95 and CNY7.05.

Gold: The price for the yellow metal bottomed near $1450 (March 16-20) and recovered smartly last week. With the pullback ahead of the weekend, it finished with a gain of almost $130 an ounce or an 8.65% gain. It follows a 10.65% decline over the past two weeks. The rally has stalled near $1650, well beyond the (61.8%) retracement objective of the losses from the March 9 multi-year high a little above $1703. The MACD and Slow Stochastic are trending higher. Initial support may found near $1590. As noted earlier, in this most volatile and frightening moment, quantitatively gold is being treated more like a risk asset than its opposite.

Oil: Globally, it appears oil output is falling, and inventories are rising, as demand is evaporating even faster. May light sweet crude prices remained trapped near their $20.50 trough. Below $20, the next chart point is the 2001 low is found near $16.70. Last week's high set on Wednesday was about $25.25 and has not been above $24.65 since. The MACD and Slow Stochastic are flatlining in oversold territory. Prices could go up to $30 and still not change the overall technical picture.

US Rates: The generic US 10-year yield traded in a nearly 23 bp range last week. It was in a 65 bp range the previous week and 70 bp the week before that. Net-net the yield fell 17 bp (to 67 bp) following an 11 bp the in the prior week. The yield finished last month near 1.15%. The two-year yield is pushing lower, but at 24 bp, it is still 10 bp above where it bottomed in the Great Financial Crisis. The Federal Reserve will be buying about $60 bln a day of securities compared with $60 bln a month prior to the crisis. The technical indicators suggest the long-end can outperform the short-end, resulting in curve flattening. The bill yields (out to six-months) are slightly negative. It reflects a dislocation in the markets, not policy, of course. The demand for prime money market funds (rather than gold) as the preferred move to security and liquidity seems to be a driving force. T-bills remain the ultimate safe-haven.

S&P 500: The question is being debated is what kind of bottom was recorded at the start of last week in the S&P 500. After dipping below 2200 at the beginning of last week, it gapped higher on Tuesday and made a high on Thursday (~2637) before consolidating ahead of the weekend. The bounce brought it to within spitting distance of the (38.2%) retracement objective (~2651) of the decline since the record high on February 19. The 20-day moving average is a little higher (~2657). The technical indicators have turned higher. The 2700 area may offer resistance, and the next retracement (50%) is near 2792. Volatility is still elevated (VIX is ~65%). The five-day moving average begins the week near 2465, which corresponds to the (38.2%) retracement of last week's bounce.