Greenback's Recovery Has More Room To Run

After a three-week decline, the dollar was over-extended in our view, coming into the past week.  A correction began in recent days, and the greenback rose against the major currencies but the Canadian dollar last week.Among emerging market currencies, Latam provided the bookends.Ahead of today's elections (October 27), the Argentine peso fell about 2.8% to finish near two-month lows.On the other side was the Brazilian real, which was up as much as the peso was down.Pension reform is projected to save BRL800 bln (~$190 bln) over the next decade.The Bovespa rallied to new record highs and the credit default swaps, which insure against sovereign default, have fallen for the 13th consecutive session ahead of the weekend to its lowest level in about 6.5 years.At about 120 bp, it's still relatively elevated, about 30 bp more than Mexico and 50 bp below South Africa, to put it in a context.

Generally speaking, the dollar's upside has more room to run from a technical perspective.  It ended last week on a firm note, and the momentum may be sustained into the run-up to the FOMC meeting at midweek.However, the likelihood of soft jobs data at the end of next week may inject some caution and cool the dollar buying.

Dollar Index:The Dollar Index rose four of last week's five sessions and snapped a three-week decline.It closed firmly at the week's highs to secure a 0.6% advance and successfully resurfaced above the 200-day moving average (~97.40).The technical indicators suggest the recovery will likely continue.A move now through 98.10 would see 98.40.

Euro:The euro began the month at new two-year lows near $1.0880 and reached almost $1.1180 at the start of last week.Our technical analysis had anticipated a pullback, and the euro finished the week on its lows near $1.1065 to meet the (38.2%) retracement objective.Further near-term losses are likely, and the MACDs and Slow Stochastics only recently turned down.The next target is near $1.1030 and then around $1.10.The euro posted an outside down day on October 24, and the high from then (~$1.1065) ought to offer a near-term cap.

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Read more by Marc on his site Marc to Market.

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