Consolidation Or Correction?

France's Giscard d'Estaing passed away in early December.  He who accused the US of enjoying an exorbitant privilege of providing the chief reserve asset lived long enough to see European rates, including the long-end in Spain and Portugal, drop below zero. At the same time, the US dollar fell to two-and-a-half-year lows against many currencies, including the euro.

There had been a flurry of official comments when the euro initially probed $1.20 in early September, and Japanese officials fretted when the dollar fell below JPY104 in November.  However, the continued weakness of the dollar has been greeted with a near nonchalant attitude subsequently.  At last week's ECB meeting, President Lagarde barely addressed it and did not go beyond the boilerplate:  yes, the euro appreciation is weighing on prices, and yes, it is being monitored closely, but no, the ECB does not target it.  Similarly, with the Canadian dollar at its best level since Q2 18, Bank of Canada officials were also largely mum, except to say that the exchange rate impacts the economic outlook.  

While the G7 has been noticeably quiet during the dollar's latest lurch lower, the verbal and material intervention appears to be on the rise in East Asia.  Reserve growth has accelerated in several countries.  Some observers suggest maintaining the currency allocation of reserves (strategic) that following a period of dollar-buying, the intervening central banks will likely sell some dollars and buy euros (as the single biggest reserve currency after the US dollar).  There is merit in this, but consider the central bank that did not intervene.  Due to its appreciation, the dollar value of the euro's share of reserves has risen beyond the tolerance band around the allocation.  The central bank might find itself in a position to sell euros to rebalance.  

After trading in ranges for a few months, the dollar broke down and continued to push lower.  The momentum indicators warn that a consolidative phase may have begun.  Below we highlight near-term consolidation and initial targets if it morphs into a correction.  Politics (as in Brexit and US stimulus, and last-minute actions by President Trump) and positioning ahead of the holidays provide the backdrop for the FOMC and BOJ meetings and the preliminary December PMI reports.  

Dollar Index:  The low since April 2018 was recorded on December 4, a little below 90.50, and before the weekend, it made a marginal new low for the week near 90.60.  The Slow Stochastic has barely turned up from the oversold territory, and the MACD is about poised to cross higher.  A move above the 91.35-area would suggest the consolidation is becoming an outright correction.  It could spur short-covering by trend followers and spur a gain toward 92.00. (UUP, UDN)

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Read more by Marc on his site Marc to Market.

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