The Dollar May Be At An Inflection Point

The US dollar softened last week as yields softened, and it continued to pare the gains scored in the second half of March.  The dollar's inability to gain after the much stronger than expected March employment data may have encouraged a bout of profit-taking. 

Next week offers a test on the hypothesis that the dollar-bullish divergence meme has been fully discounted. After a brief hiatus, US coupon sales will return ($110 bln), and a string of high-frequency data is likely to confirm an acceleration of prices and activity.  

On balance, we expect the US dollar and long-term interest rates to rise next week.  US rates fell, with the 10-year yield falling to two-week lows near 1.60%. This means that there is no concession to next week's supply that begins with a $58 bln sale of three-year notes on Monday.  The US will be raising $110 bln in coupon sales, while the data will likely show a jump in prices (base effect and more).  There will also be a surge in real sector data, partly reflecting the recovery from February's weather-induced weakness and the new stimulus.  Meanwhile, new restrictions in Japan and Europe mean that divergence with the US may extend deep into Q2.  In fact, if the dollar does not trade higher next week, the bears, who seemed to go into hibernation in Q1, will re-emerge on ideas that investors are moving beyond its focus on the stimulus-driven US recovery and yawning divergence (UUP, TLT).  

Dollar Index: Last week's pullback met the (38.2%) retracement target of the leg up since the late February low (~89.70) found near 92.00.   A  convincing break could signal a return to the 91.00-91.30 band.  A move now above the 92.50 area would lift the tone, with an initial target in the 92.85-93.00 band, and, perhaps, to the five-month high set at the end of last month closer to 93.50.  The MACD and Slow Stochastic point lower, while the RSI is turning higher.  The 200-day moving average, which the Dollar Index begins the new week a bit above, is found around9 2.35.  The recent decline has seen the five-day average slip below the 20-day moving average for the first time in a little more than a month.  

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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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