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Dollar Retreat Extends

Dollar Retreat Extends

The US dollar remains under broad pressure after yesterday's sharp decline.  Neither dovish comments by ECB President Draghi, nor the Reserve Bank of New Zealand have managed to reverse the gains of their respective currencies.   Similar, the rise in US yields and firm equities have failed to push the yen lower. 
Investors and policymakers are trying to link news developments to the price action, but it seems to be a bit of a stretch.  It is true that NY Fed President Dudley, who had suggested in late-August that a rate hike in September was less compelling, warned that financial conditions had tightened considerably since the December and that if this were sustained, it could alter the outlook for growth and the balance of risks.  
However, the market never really had high expectations for a March hike and the yield on the March Fed funds futures slipped a half of a basis point.  While the December contract was more volatile, the implied yield finished off a single basis point.  
The US non-manufacturing ISM fell more than expected and at 53.5, it is the lowest since February 2014.  Ten of the non-manufacturing sectors reported expansion while eight, including mining and transportation, reported contraction.  The volatility of the financial markets and global weakness weighed on sentiment.    Some observers emphasized the weakness in the employment index (52.1, down from 56.3 and the lowest since April 2014.  However, this is a bit of selectively lining up the data to fit the price action.  The ADP employment estimate was reported a couple of hours before the ISM, and it was a touch stronger than expected.  
Some linked the yen's surge to reports that underscored that only a small slice of deposits at the Bank of Japan will be hit with a negative rate in a little more than a week's time.    The projection that as the year progresses, there may be as much as JPY30 trillion (of over JPY250 trillion) subject to negative interest rates was known when the announcement was made and was contained in the FAQ posted on Monday. 
It is almost as if the price action, not just in the financial markets, but gold and oil as well, have taken a life on of their own.   And although a compelling narrative may be elusive, the price action must be respected.  The euro has met retracement objectives of both the decline since late-August and the decline since mid-October.  The 50% retracement of the longer move corresponds to a 61.8% retracement of the shorter move.  Both are found near $1.1120.  The next objective is near $1.1260. The trendline that connects the August and October highs is found near $1.1040.  This and previous resistance near $1.1060 will likely provide initial support. 
Sterling's  last leg down began in mid-December near $1.5240.  It fell to $1.4080 on January 21.  It is flirting with the 50% retracement that is found near $1.4660 ahead of the BOE meeting and the Quarterly Inflation Report.  No one is expecting more action of even a signal that a rate hike is drawing closer.  Some suggest that BOE Governor Carney may caution investors against getting too relaxed.  
Assuming the $1.4660 is successfully overcome, the next target is found $1.4745-$1.4800.  That range holds that 38.2% retracement of the mode since last August as well as the 61.8% retracement of the decline since mid-December.  Note that the 100-day moving average is near $1.50, while the 50-day average is just above $1.4700.  
A former colleague of BOJ Governor Kuroda from the Ministry of Finance and now an adviser opined that is would not be surprising to see further cuts in the negative interest rate that carry it to minus 100 bp.   Still, the dollar cannot sustain even modest upticks against the yen.  Today is the fourth consecutive session that lower dollar highs against the yen are being recorded.  Initial support in North America is seen near yesterday’s JPY117.05 low.  Below there, the JPY116.00-JPY116.50 may be safe ahead of tomorrow’s US jobs report.    
The Canadian dollar is extending its dramatic recovery.  The greenback’s slide stopped near the 50% retracement of the rally since mid-October's CAD1.2835 low, which was found near CAD1.3760.  It is now near CAD1.3670.  The 61.8% retracement objective is found near CAD1.3540.  
The head and shoulders bottom pattern we identified in the Australian dollar had a minimum measuring objective near $0.7250.  We had been skeptical that it would be met and had identified resistance near $0.7140 that held until yesterday.  Today’s high is a little above $0.7230.  The intraday technical warn of scope for additional gains. 
Of note, the markets which had apparently been roiled by China at the very start of the year, have become increasingly decoupled.  The yuan appears to have been re-pegged to the dollar and remains within the range set on January 8.  China is continuing some reform efforts, even as it enforces some other capital control measures.  With capital outflow concerns, it is not surprising that officials are liberalizing the QFII regime.   Reports suggest China is diluting some of the restrictions on QFII funds.  It appears to be making it easier to get new quotas and allows foreign investors to repatriate funds in a shorter period. 
The US session features the Q4 productivity and unit labor costs.  These are derived from Q4 GDP.  Productivity likely contracted, while unit labor costs rose.  Weekly initial jobless claims are overshadowed by tomorrow’s national report.  December factory and durable goods data too dated to have much impact.  Three Fed officials speak; Rosengren, Kaplan, and Mester, which may attract some market interest. 

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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