Equities And The Greenback Recover While Rates Firm A Little

US disruptions are being minimized, and this is understood as dollar positive as it underscores the challenges elsewhere. One disruption is the partial government shutdown, which market participants are looking past, partly because the direct economic impact is seen as modest and temporary. 

Another disruption is trade. Here talks between the US and China continue, and the constructive elements, including what some see as a greater willingness on the part of the American president to make a trade deal even if the large strategic confrontation is not truly addressed, have fueled hopes that the tariff escalation could be avoided. Investors' attention has not turned to the upcoming talks with Japan and the EU. Drama punctuated by threats and tariffs is likely with America's traditional allies like we saw with NAFTA 2.0, as with its strategic rivals. 

A third disruption is the combination of easy access to credit, technological prowess, and a certain disregard for the environmental impact has led to a shale revolution in America. This is one of the large structural shifts in the US and global economy since the Great Financial Crisis. However, the downward pressure on oil prices has subsided as US inventories fall and OPEC+ supply cuts in the period ahead. 

Dollar Index

The Dollar Index has rebounded smartly (~1.5%) from the three-month low on January 10. It was the first weekly gain since mid-December. The pre-weekend gains to the almost 96.40, met a 38.2% retracement of the decline since the cyclical high set in the middle of last month near 97.70. The RSI is overextended, but the MACDs and Slow Stochastics show more upside potential. The next upside technical objectives are in the 96.70-97.00 band. A break below 95.85 would be disappointing.

Euro

The euro recorded last year's low in mid-November near $1.1215 and subsequently drifted higher reaching a three-month high (~$1.1570) on January 10. It posted bearish outside down session (traded on both sides of the previous day's range and a closed below its low) ahead of the weekend. The five-day moving average has crossed below the 20-day moving average for the first time in a month. A trendline off the lows comes in near $1.1330 at the end of next week. Alternatively, the euro has been consolidated mostly in a $1.13-$1.15 trading range, and breaks have proved false--not sustained. The euro typically fell last year when the ECB met and given data since the last time it met and Draghi's speech last week, it is difficult to envision an upbeat message, i.e., a hawkish hold. The question is whether the looming clouds have been discounted. We think that is indeed the risk. After having been disappointed playing for the breakout, look for short-term players to turn cautious as the euro approaches the lowest end of its range. Also, after the ECB and BOJ meetings, the focus shifts back to the US the following week with both the FOMC meeting (and press conference) and the January employment report for which there will likely be payback of the heady 312k increase in December. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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