The lack of full participation and the resulting choppy conditions may have obscured the signal from the capital markets. That signal, we think, was one of correction since shortly after the Fed's rate hike in mid-December. The question now, after the US employment data showed continued labor market strength and that earnings improvement remains intact, is whether the corrective phase is over.
The technical evidence is not clear, but on balance, we are inclined to assume the correction is intact unless proven otherwise. The price action before the weekend is setting up a test of this in the coming days. The price action itself should be respected.
The Dollar Index returned to levels seen on December 14 when the Fed hiked. The five-day moving average slipped below the 20-day average for the first time since the day before the Fed's hike. A move now above the 102.60 area would be a preliminary signal of another run to 103.80 and higher. The next downside target is near 100.80 and then 100. 00.
The five and 20-day moving averages crossed in the euro as well. Provided the $1.0480-$1.0500 area remains intact, the upside correction appears to remain intact. On the upside the $1.0600-$1.0620 blocks a test on the year-end high a little above $1.0650 and the post-Fed high near $1.0670.
The dollar's near-term peak against the yen was set on December 15 near JPY118.65. It fell to almost JPY115.00 before recovering after the US employment data. Ironically the moving averages also crossed down for the dollar for the first time since right after the US election. Provided the dollar stays below the JPY116.80-JPY117.25 band, the downside correction remains intact. If JPY115 breaks, the next target is found in the JPY114.25-JPY114.50 area.
Despite a series of robust economic reports, sterling continues to trade heavily. The five and 20-day moving averages have not crossed. Although a double bottom appears to be in place near $1.22, and neckline near $1.2400 was surpassed, it was not sustained. A break of $1.2280 is an early signal of another push lower. A push below $1.2200 could open the door to $1.2000-$1.2050.
Since December 23, the Canadian dollar has been the strongest of the majors. It has gained 2.4% against the US dollar. Strong trade and jobs data before the weekend helped extend the Canadian dollar rally. However, the momentum eased as the greenback approached the trend line drawn off the August, September, and December lows. It was found near CAD1.3150 before the weekend and is near CAD1.3170 at the end of next week. The technical indicators warn that it may be a bit early to pick a bottom for the US dollar. Some are looking for a test of the 200-day moving average near CAD1.3100. A move above CAD1.3280 could be an early sign that a low may be in place.
The Australian dollar carved out a bottom near $0.7160 over the last couple of weeks and bounced a little through $0.7350. The close before the weekend was poor, near session lows. A break below $0.7250 would be a preliminary sign that the upside correction is over. The technical indicators are constructive, though the five and 20-day moving averages have yet to cross higher.
The February light sweet crude oil futures contract finished last week with a three-session rally, allowing the winning streak to the fourth consecutive week and the fifth in the past six weeks. Reports suggesting that several OPEC producers are in fact cutting output, the unexpectedly large (~7 mln barrel ) drawdown in US inventories, and the cold weather in parts of the US and Europe helped support prices. The technical indicators remain mixed, though. The $52 area provides support.
Last week we had suggested that the US 10-year yield could fall to the 2.35%-2.40% area. The yield dipped briefly below 2.34% ahead of the weekend, before moving higher on the back of the employment report and jump in hourly earnings. Nevertheless, it was not able to rise above the previous day's high yield print (2.45%), and that was the third consecutive session of lower highs and lower lows. There is scope for the yield to rise to 2.45% and maybe 2.50%, perhaps in anticipation of a robust retail sales report at the end of next week. The March note futures approached the initial retracement objective near 124-07, below there support seen in the 123-14 to 123-28 area.
The S&P 500 set a new record high before the weekend. The saw tooth pattern of alternating weeks of advancing and declining remains intact since the last week in November. The NASDAQ also set new record highs. It also has risen on alternating weeks. The Dow Industrials continue to knock on the 20k level. Although there are still concerns about valuation, the technical tone looks constructive and gains this coming week would break the saw tooth pattern. Initial support in the S&P 500 is seen in the 2250-2260 area.