The US dollar turned in a mixed performance last week. Favorable economic data and a recovery in equities helped the Antipodean currencies advance the most. The New Zealand dollar rallied nearly 2%, and the Australian dollar gained 1.5% on the week. Their central banks meet next week, but there is little chance of a change in policies.
Hopes of an EU-UK agreement lifted sterling a little more than 1%. The euro was little changed. The funding currencies, which are often confused as safe havens; namely, the Japanese yen and Swiss franc, were the weakest of the majors, losing 1.1% and 0.65% respectively. The outcome of the US mid-term election and the FOMC meeting are next week’s highlight.
These events coupled with confusing, if not contradictory indications on trade from the US Administration undermine near-term conviction. The inability of the S&P 500 to sustain the recovery momentum also leaves investor confidence fragile. The technical condition that had warned of the risks of a correction has not been alleviated by the dollar’s pullback.
Dollar Index
The year’s high was recorded in the middle of last week near 97.20 before a sharp sell-off took it a little below 96.00, which corresponds to a retracement objective and the 20-day moving average. A strong jobs report and reports suggesting the ECB was considering a TLTRO (which Draghi had identified at the recent ECB meeting as a possible measure if needed), helped the Dollar Index recover to 96.60, which marks a 50% retracement. A move above 96.75 would likely signal the start a run to new highs.
Euro
The prospect that a trade war between the US and China could be averted helped the euro recover after coming within 1/100 of a cent of the year’s low set in mid-August. We assume that given the strong divergence in play, that the euro’s correction would be of its latest leg down rather than the larger move that began in late September. The move we think is being “corrected” began on October 16 near $1.1620. The euro’s recovery faded (~$1.1455) as it recouped nearly half of what it had lost. If this area is overcome, $1.1500 comes in view. The close before the weekend was soft, back below $1.1400. A break of $1.1350 may signal a move to new lows. The next important technical target is a little below $1.12.
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