The US dollar traded heavily in the holiday-shortened week.  It slipped against all the major currencies.  The recovery in commodity prices, the new stimulus Chinese officials suggested, and the relatively high yields conspired to help lift the dollar-bloc currencies.  Them and the Swedish krona fared best.  Sterling, the Swiss franc, and Japanese yen managed to eke out small gains.


The economic calendar is light in the week ahead, and participation will be as well.  Nevertheless, it is interesting to look at the technical condition of the dollar as the year draws to a close.


US Dollar Index:  It began the year near 90.00, and finished last week near 98.00.  There were three dollar phases in 2015.  The first was the continuation of the rally that began in mid-2013. It extended through mid-March. The Dollar Index then consolidated lower, though never taking out the 38.2% retracement objective of the advance.   A new leg up began in mid-October, and the high for the year was recorded in early December near 100.50.

However, as the year winds down, a fourth phase appears to be at hand.  The correction to the dollar’s last leg up does not appear complete.  A break of 97.70 now likely spurs a move to 97.20, the lows from earlier this month. A band of support is seen between 96.80-97.00.


Euro:  The correction to the euro’s decline from mid-October (~$1.15 to $1.0525) also does not seem finished.  The $1.1040-60 area is important.  A break gives potential toward $1.1125 initially, with the downtrend line drawn off the August high (~$1.1715) and the mid-October high (~$1.1500) comes in at the end of the year just below $1.1200.

The $1.08 area proved significant support in the summer, and again now it is important though the euro traded below it for most of November.  A convincing violation of it now would confirm the end of the consolidation phase.


Yen:   The 0.7% rise in the yen against the dollar over the past week does not capture the technical damage that might have been inflicted.  The greenback was pushed through a gradual uptrend line drawn off the late-August China-inspired spike (~JPY116.20) and the mid-October low (~JPY118.20).  It was found near JPY120.50 at the end of last week (and rises to ~JPY120.70 at the end of the year).  The JPY120.25 area corresponds with a 61.8% retracement of the dollar’s gains off the mid-October low.  There is no convincing technical evidence that a low is in place.

However, the yen’s upticks have been recorded despite the backing up of US yields and gains in US equities.  This supports our suspicion that the yen’s gains are likely being exaggerated by year-end position adjustments, including the lifting of short-yen hedges by equity managers.  Foreign investors have been net sellers of Japanese equities for three of the past four weeks.  We look for an opportunity to buy dollars on a spike through JPY120.


Sterling: The British pound was sold to eight-month lows last week, but bounced off of the $1.48 area.   It is too early to conclude that a durable low is in place.  The first test on the upside is near $1.4970, but it takes a move through $1.5025 be anything meaningful.  Even then, the four-month pattern of lower highs and lower lows will not be broken.

Sterling’s slide against the US dollar over the past four months coincided with decline in the UK premium over the US (on two-year government borrowings) from 10 bp to -37 bp now.  This is the biggest discount since 2006 when it had reached 50 bp.  Recent economic data warns that the UK economy lost some momentum, as have wages.  This leaves sterling vulnerable to a further pushing out of the BOE’s lift-off and perhaps some nervousness ahead of the UK referendum, which could be held near mid-2016.

A break of $1.4800 points to a test on the April low near $1.4565.  Sterling’s weakness since mid-November, but especially over the past month, may have also been a function of the unwinding of long sterling crosses against the euro.  The euro rallied from GBP0.70 to GBP0.7415.  Support now is seen near GBP0.7280 and GBP0.7240.


Canadian dollar:   The Canadian dollar was the worst performing major currency in H2 15, depreciating 9.6% against the US dollar.  It reached a multi-year high of CAD1.40 on December 18. Profit-taking was encouraged by the recovery in oil prices. Although disappointing data has heightened the risk of another rate cut in the first part of next year, the technicals suggest the upside correction for the Canadian dollar may not be over.  If the US dollar breaks CAD1.38, there is immediate potential toward  CAD1.3730.


Australian dollar:  The technical tone is constructive, and additional near-term gains are likely.  The Australian dollar is holding an uptrend line drawn off the early and late-September lows (~$0.6900 and ~$0.6940), and November low (~$0.7020).  The December low (~$0.7100) was above the trend line, which is where the trendline can be found at the end of the month.  A move above $0.7300 gives potential to the $0.7400, the upper end of the four-month range.  Intermittent resistance near $0.7330 and $0.7375 may stall the advance.


WTI:  The February 2016 light sweet crude oil futures contract snapped a four-week decline.  The drop in inventories and rig count spurred profit-taking by momentum traders.  The technical indicators warn of the likelihood of additional near-term corrective gains.  The 20-day moving average is near $39 a barrel, and the Feb contract has not closed above this moving average since early November.  Above there, $40.40-$40.70 may offer additional resistance.


US 10-year Treasury:  The March 10-year note futures contract will likely spend the last week of the year in a 125-17 to 127.00-127.10 range.  This roughly translates into a 2.17%-2.30% yield.  US economic data last week, including new homes sales and durable goods orders, points to an economy expanding below 2%.  The Atlanta Fed GDPNow tracker shows Q4 growth closer to 1.3% than 1.9% that was the estimate before the data.   Weaker consumption growth and residential investment prompted the revision.

That said, the December 2016 Fed funds futures contract suggests that expectations of the trajectory of Fed policy is unchanged by the disappointing data. The implied yield at the close on December 23 was 87 bp.  The highest since August 20 is 90 bp.  A break of this area would therefore likely reflect a shift in psychology.  It may have to wait for the next batch of jobs data though the FOMC statement hints at more weight on realized inflation going forward.


S&P 500:  The nearly 1% advance during last week recouped nearly half of the month’s decline.  The near-term technical tone is constructive.   Nearby resistance is seen in the 2076-2080 area.  Initial support is seen near 2040.  On the year, the S&P 500 is flat, as is the Russell 3000.