The dollar rose against all the major currencies last week, except for the British pound and New Zealand dollar, which eked out minor gains. We have been suggesting two views. The first was a near-term pullback in the dollar, a correction to the November-December slide. The second was for the underlying downtrend to resume.  

The combination of the emerging divergence between the US and other high-income countries and our technical analysis warns this corrective phase for the dollar could last longer than we initially thought, and perhaps, run a bit higher. As we note below, the dollar's momentum studies look more robust on the weekly charts than the daily. The bearish dollar trade may have become too crowded, as it were.  Two currencies look particularly vulnerable.  

A convincing break below $1.2050 would likely confirm a larger topping pattern (possible head and shoulders) for the euro. It would suggest a pullback toward $1.1750 was possible. A deep retracement of its gains since the election (61.8%) would bring it a little below $1.19, and the $1.1975 (50% retracement) and the psychological support of $1.20 needs to be overcome first.  

The Australian dollar also appears vulnerable from a technical perspective. The roughly 42% rally from the March 2020 low surely exaggerates the nine-month rally, but it is also up almost 12% since the US election. The Australian dollar appears to be rolling over. A move toward $0.7275-$0.7300 cannot be ruled out, with intermittent support in the $0.7450-$0.7500 range. 

Dollar Index

The Dollar Index trended higher in the first half of January but has been in a 90.00-91.00 range since mid-month. Only a move outside of this range is important. The sideways activity has made the momentum indicators less than useful. However, on the weekly charts, both the MACD and Slow Stochastic look constructive. If the 91.00 area can be overcome, the next target is 91.75-92.00.  

Euro

In the middle of last week, the euro tested the month's low near $1.2055. It held, and the euro recovered, and although it closed the week on a firm note, it remains within that midweek range (~$1.2060-$1.2170). The 20-day moving average is near the upper end of that range, and the euro has not traded above it since January 8. The MACD looks like it is bottoming, but that was the case in the previous week. The Slow Stochastic has recovered, but the slope has moderated. Since peaking near $1.2350 on January 6, the euro has been below the (50%) retracement near $1.22 and has more or less held the (38.2%) retracement objective of the rally since the US election (~$1.2065). Here too, we note that the technical indicators are more bearish on the weekly charts than the dailies. 

Japanese Yen

The dollar rose by almost 0.9% against the yen last week. Around half of the gains were scored ahead of the weekend. The gains were all the more impressive because they were recorded while stocks were moving south, which is often seen as supportive for the year.  As the chart here shows, the dollar broke above a 10-month downtrend line in the middle of last week, and the gains accelerated to nearly JPY105.00 before the weekend. A move above JPY105.00 would immediately target the JPY105.60 area, which corresponds to the mid-November high and the 200-day moving average, which the greenback has not traded above since June. The MACD has accelerated as it became over-extended, while the Slow Stochastic has turned higher from the middle of its range. We note that net and gross long yen speculative positions in the futures market were near the best level in a couple of years.  As one might expect with such a sharp move, the dollar finished the week its upper Bollinger Band (~JPY104.60). Sometimes the prices move toward the Bollinger Band, but sometimes it is the other way around.  The dollar has been in very narrow ranges against the yen  One-month implied vol was at seven-month lows (~5%) to start last week. It finished near 5.4%.  An increase in volatility will see the Bollinger Bands widen.  

British Pound

In a week when the US dollar rose against most of the major currencies, sterling eked out about a 0.2% gain, putting it at the top of the pack. In fact, sterling made a marginal new high (~$1.3760), which is its best level since May 2018. It was the third consecutive weekly gain for sterling, which has only moved lower in two of the last 13 weeks (since the end of October). Sterling looks poised to make new highs, though the momentum indicators not particularly helpful now.  It has been flirting with its upper Bollinger Band (~$1.3760).  A move above $1.38 would target the $1.40 area.  The high since the Brexit referendum (June 2016) was in the first part of 2018, near $1.4375. Incidentally, the average since July 2016 has been about $1.2950. The 200-day moving average is about a quarter of a cent higher. The weekly momentum indicators have turned lower. Speculators may not be the cause of sterling's strength, but they are participating. In the futures market, the large speculators have gone from net short 20k contracts last November to net long around 15k by late January, which seems to be around an equal part of short-covering and new longs entering.  

Canadian Dollar

 The US fell to around CAD1.2590 on January 21, its lowest level since April 2018. It posted a bullish hammer candlestick and reached CAD1.2880 last week, the month's high. That is roughly the (38.2%) retracement of the greenback's losses since the post-election peak on November 4 (~CAD1.3300).  The next retracement (50%) is found near CAD1.2945 and the high from late December. It had been back-and-forth through the upper Bollinger Band in the second half of last week, and the momentum indicators are still trending higher and are just turning higher on the weekly charts.  On a purely directional basis, the correlation between the Canadian dollar and the S&P 500 is 0.87 over the past 60 sessions.  

Australian Dollar

The low for the month was set in the middle of last week, near $0.7645.  The five-day moving average slipped below the 20-day moving average for the first time since early November. The high was set on January around $0.7820, and the downtrend line off the subsequent highs begins the new week and month near $0.7750. The Slow Stochastic and MACDs are still trending lower.  A break of $0.7600 could signal another cent decline.  The $0.7500 area corresponds with the (38.2%) retracement target of the rally two-month rally. The momentum studies on the weekly charts are more bearish.  

Mexican Peso: 

Porfirio Diaz, the Mexican President at the turn of the 20th century, reportedly quipped: "Poor Mexico, so far from God and so close to the United States."  In the past week, Mexico reported stronger than expected retail sales, a record December trade surplus  (twice the $3.1 billion reported in December 2019), and a solid 3.1% expansion in Q4 GDP.  And the peso fell by about 1.7%, the weakest of the emerging market currencies and its biggest loss in over a month. The risk-off phase and the rising yields dull the peso's shine and attractiveness of its high-interest rates. We had seen potential toward MXN20.50, just beyond the (38.2%) retracement objective of the losses seen since the election. These considerations and the momentum indicators trending high warns that the greenback's high is not in place. We had seen potential toward MXN20.50, just beyond the (38.2%) retracement objective of the losses seen since the election. December's high was set around MXN20.6650.  We note that the weekly momentum indicators are more dollar constructive.   

Chinese Yuan

The dollar quietly fell to new lows since mid-2018 against the yuan before the weekend.  The last leg down to about CNY6.4236 was recorded in the North American session. The dollar appears to have been sold off into the local session close (to around CNY6.4450) and never recovered its balance. Month-end considerations and tax date may have played a role, but the PBOC has orchestrated a squeeze in the funding markets, sending key rates to multiyear highs. Some see this as a prelude to a rate hike, but we are less convinced. This rapping on the knuckles may foster a deleveraging that officials deem desirable. And good to get it out of the way before the Lunar New Year holiday, which will require more liquidity. The chances of its being misused now have lessened. We note too that the offshore yuan has not strengthened as much. The US dollar remains above the low set on January 5 near CNY6.4120, which also supports our "snugging" hypothesis. The gap between the onshore and offshore yuan favors the former by the most in eight months.  If the yuan was a freely traded currency and not so heavily managed, we expect the dollar to test the CNY6.40 area. Initially, the CNY6.47 area may cap upticks, but the CNY6.50 area looks stronger.