Dollar Outlook: Almost There

The US dollar rose against all the major currencies last week. It also appreciated against most of the emerging market currencies, save two from Latam (Mexico and Peru) and two from Asia (Philippines and Malaysia). The US January jobs report on February 1, coupled with disappointing European data and a less hawkish Reserve Bank of Australia, helped the dollar recover from the lower end of its recent ranges. The return of Chinese participants from the week-long Lunar New Year holiday, the data calendar and events (here) point to the risk of higher volatility. The dollar has approached the upper end of those recent ranges on several currency pairs. The ranges may fray, but we do not expect the macroeconomic data to encourage a sustained break quite yet. 

Dollar Index: The Dollar Index closed firmly ahead of the weekend, its seventh consecutive higher close.  In this time, since the ECB meeting, the Dollar Index has rallied from almost 95.15 to almost 96.70. Last month's high was just shy of 97.00. Although the RSI is overextended, the other technical indicators do not appear to stand in the way of additional near-term gains. At the end of last year, the Dollar Index recorded the year's high near 97.70.  Technicians note that this is a little short of the 61.8% retracement of the sell-off that began in early 2017. A break now below around 96.25 could be seen by short-term participants as a sign that the momentum is flagging and that the easy money is gone.   

Euro: The euro moved lower every day last week. It was the first time it has happened since last May. Last week the euro fell about 1.15% against the US dollar. Back in May, it lost 1.4% in its week-long slide, which was part of a six-week tumble. The poor close ahead of the week may see the euro pressed to the lower end of its $1.13-$1.15 range. The question is not really so much whether the range will break but whether a break is sustained. The one-week 25 delta risk reversals (the skew between puts and calls) shifted last week from favoring calls to favoring puts as it tracks spot. We continue to favor fading the break, though making money in the range means likely not being positioned for the break.   

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Read more by Marc on his site Marc to Market.

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