Has A USD Correction Begun?

The MSCI benchmark for developed and emerging market equities has fallen for the past five weeks. The dollar has done well over this period. Although it lost some momentum ahead of the weekend, the Dollar Index reached a two-month high at the end week, reflecting the two-month lows of the euro and sterling. The Australian dollar recorded new lows for the year near $0.70 before rebounding before the weekend. The Swiss franc is often seen as a safe-haven, but the dollar outshone it and rose to three-month highs as equities tumbled. The yen is the main exception. It was the only major currency to rise against the dollar last week (~0.5%). We retain a medium-term bullish dollar outlook but cautious near-term due to some signs that it remains technically stretched after approached important chart points.  

Dollar Index  

The advance in four of the past five weeks brought the Dollar Index through the 96.00-cap and approached the year’s high set in mid-August just shy of 97.00. The reversal lower before the weekend left a bearish shooting star candlestick in its wake. Previous resistance (96.00) should offer support, while a break of the 95.70 area warn a top of some import could be in place. The technical indicators are mixed, and the upper Bollinger Band on the daily and weekly charts converge in the 96.50-96.65 area. 

Euro

The euro rallied a nickel from the August 15 low of the year (~$1.13) to late September, when it briefly poked through $1.18. While the new Vice Chair of the Federal Reserve’s first public speech showed the independence of the central bank is preserved by endorsing additional gradual rate hikes over the stepped-up pressure by the President and some of his economic advisors, Draghi and the ECB emphasized the need for the accommodative monetary policy after the asset purchases conclude at the end of the year.

The renewed divergence helped drive the euro to $1.1330 before the pre-weekend reversal (possible hammer candlestick pattern). The technical indicators did not turn higher. Still, we suspect the euro can move back into the $1.1440-70 range. Over the slightly longer-term, we continue to look for a break of the $1.12 area, which is the last major (61.8%) retracement of the 2017 rally.