The Rubber Band Snaps Back: Dollar Correction Begun



An exogenous shock disrupts relationships and patterns.  It may be a useful reminder the correlation does not mean 100% co-movement.  The strongest currency in the world last week was the Swiss franc (FXF), a safe-haven that rose by almost 0.5%.  The weakest major currency, and third weakest overall, was the Japanese yen (FXY), also a leading safe-haven. The second strongest currency was the Canadian dollar (FXC).  Our reading of the charts gave us the most confidence in it.  Its modest 0.35% gain contrasts with the performance of the other dollar-bloc currencies that fell by around 1.25%.  

The dollar raced higher for most of the week.  It was if, in this giant card game, the coronavirus provided an opportunity to change cards.  And after a quick review, investors doubled up on the long US card.  The sense of a new divergence lifts the dollar (UUP).  New highs since April 2017 were seen against the euro.  The US dollar rose to fresh 10-year highs against the Australian dollar (FXA).  The dollar visited levels not seen since 2001 against the Norwegian krone.  On February 19, the dollar rose a little more than 1.3% against the yen, reaching a seven-month high. The single-day advance was larger than any weekly gain since the middle of July 2018. 

The dollar's gains came to a halt as the fuel for the rally, the economic divergence, was called into questioned into question, ironically, by the diverging flash PMI reports.  The somewhat better than expected EMU composite helped stabilize the euro (FXE), but it was not until the weaker than expected US report got the ball rolling.  This looks like the end to this leg up for the US dollar and barring new shocks, a consolidative/corrective phase may be at hand. 

Dollar Index:  The century level was almost seen as the rally was extended to fresh highs since Q2 17.  The loss ahead of the weekend was not signaled by any reversal pattern or drop in the momentum indicators.  Nevertheless, the impulsive nature of the decline, with a modification of the macro narrative, and the turning lowe the said momentum indicators warn that additional near-term losses are likely.  With the conservative assumption that the move that is being correct is this month's, not the December 31 low, the first retracement objective is near 98.95. More significant support is in the 98.60 area, which houses a retracement objective (50% around and the 20-day moving average).  A move back above 99.60 would call this more bearish into question. 

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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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