Still Wary Of A Breakout

The dollar's losses were extended last week, but among the majors, only the New Zealand dollar and the Swedish krona made new highs for the year.  Last week, we were cautious about chasing the greenback lower, and we still are.  Perhaps the bearish dollar view making the front page of the Wall Street Journal before the weekend reflects the ubiquitousness of the dollar bearish view and offers a contrarian indicator.

While the US preliminary PMI accelerated, the eurozone and Japan showed a contraction in business activity.  Similarly, while Japan and the EMU wrestle with deflation (falling prices), the US CPI (headline and core) is above 1%.  The divergence of economic performances is likely to find further evidence next week.  While the unemployment rates in the euro area and Japan are expected to make new cyclical highs, the US's unemployment rate is expected to continue to ease.  The high was recorded in April at 14.7%.  It slipped below 7% in October.  

Neither the rally in equity markets nor the weaker US dollar offered gold any succor.  The once precious metal tumbled nearly 5% last week, the largest decline in eight months, and fell through the 200-day moving average for the first time since March.  Even the assassination of Iran's nuclear program architect was not enough to prevent gold from breaking down further.  

Meanwhile, US, German, and Japanese benchmark 10-year yields were little changed, while the yields in the periphery of Europe (Italy, Spain, Portugal, and Greece fell to new record lows.  Rising agriculture, industrial metals, and oil prices lifted the CRB index by more than 2% for the fourth consecutive week.  The US 10-year breakeven (the difference between the yield of the inflation-protected security and the conventional note) firmed to about 1.75% last week, almost a seven basis point increase on the week. It is near the upper end of the range since briefly pushing above 1.80% at the end of August/early September. 

Dollar Index:   Under strong selling pressure, the 92.00-level gave way.  It stopped shy of 91.75 seen on September 1. There appears to be little meaningful support below there ahead of the 90.00 area.  The RSI and Slow Stochastic are over-extended, while the MACD is trending lower.  The lower Bollinger Band comes in near 91.50.  A move back above the 92.00-92.20 band would help stabilize the technical tone (UUP, UDN).  

Euro:   The $1.18-level held in a volatile session to begin last week, and the euro finished the week probing a little above 1.1960, its best level in almost three months.  Beyond it lies the $1.20, which when tested on September 1 brought a flurry of chatter from ECB officials, who emphasized the linkages between euro strength and deflationary pressures. The record of the ECB's recent meeting was underscored the downside risk of prices. The momentum indicators are trending higher, and the Slow Stochastic is in the over-extended territory. It appears to be leveling off.  The upper Bollinger Band begins the new week a little above $1.1975. The euro's strong recovery against sterling, likely Brexit-related (~GBP0.8865 Monday's low to almost GBP0.9000 ahead of the weekend), appears to have helped the euro against the dollar (FXE).  

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Read more by Marc on his site Marc to Market.

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