Investors sense that the sands beneath their feet are shifting. Rising US yields and equities have traditionally been yen negative. With the recent gains that carried the yen to its best level against the dollar since late 2016 and up 6% to lead the major currencies this year, the old relationships appear to have broken down.
The 60-day rolling correlation between the level of the dollar-yen exchange rate and the yield on the US 10-year Treasury yield has become inverted since mid-January, and now at -0.87 is the most inverted since 2001. Rising yields also were linked to the recent dramatic slide in equities, but in recent days, the US yield edged higher while stocks rallied. The S&P 500 turned in its best weekly performance since 2011. The US 10-year yield rose nine basis points at the most and finished the week two basis points higher. The two-year yield rose nearly a dozen. The rise in the short-end appears to be a function of shifting views on Fed policy. The implied yield of the December 2018 Fed funds futures rose 8.5 bp over the past week.
Rising US interest rates, the anticipation of more aggressive Federal Reserve, and a supportive policy mix has done little for the greenback, which fell to new multi-year lows against the euro, Swiss franc, and yen before the weekend. The greenback staged a dramatic recovery against most of the major currencies in North America ahead of the weekend.
The negativity of sentiment toward the dollar discourages putting too much emphasis on a few hours of trading in NY before a long holiday weekend. Still, the price action before the weekend suggests another window of opportunity for a correction to the over-extended positioning and sentiment toward the dollar in the days ahead.
The Dollar Index frayed important chart support in the 88.30-88.50 area but recovered smartly. It closed above the previous day's high. The technical strength of such a pattern is enhanced by the fact that a new low for the move was recorded before the reversal; hence the nomenclature of a "key reversal." The technical indicators did not confirm the short-lived new lows. A move above the 89.30-89.50 area would improve the tone.
The euro snapped a five-day advance ahead of the weekend. It initially made new highs since late 2014 but proceeded to sell off through the previous day's low. It also closed below the previous days low to trace out a key reversal. The RSI and MACDs did not confirm the high, leaving a potential bearish divergence in its wake. The Slow Stochastics, on the other hand, are turning up. Although short-term traders have been conditioned to buy the euro on dips, the lower end of the range is still at a couple cents lower (~$1.22). Initial support may be seen near $1.2340. On the upside, the 61.8% retracement of the euro's decline from the 2014 high is found near $1.26 and the monthly downtrend line is near $1.2640.
The yen closed higher against the dollar every day last week until Friday. The buying appears to have been led by Japanese participants. The dollar was sold in Asia every day and before the weekend it was driven to almost JPY105.50 after finishing the previous week near JPY108.80. The dollar recovered to new session highs near JPY106.40. The fear that Japanese selling may not be over may have contributed to the note of caution. Unlike the euro, the technical indicators were mixed, and only the RSI did not soften ahead of the weekend. We peg initial resistance in the JPY107.00-JPY107.20 area. Support is seen near JPY105.
Unlike the euro, yen and Swiss franc, sterling failed to make a new high last week. Sterling's high was set on January 25 a little below $1.4350. It has made two lower highs since. Before the weekend, it briefly traded above the 61.8% retracement (~$1.4125) from last month's peak before the weaker than expected retail sales sent it back to$1.40, where it just missed pushing through the previous day's low. A break of $1.3975 could signal a likely return to $1.3765-$1.3800. The technical indicators are mixed, with the RSI and MACDs still trending lower, while the Slow Stochastic crossing higher.
Like sterling, the Australian dollar's advance brought it near the 61.8% retracement of the decline of the since late January's high near $0.8135. After approaching the retracement objective near $0.7990, the Aussie reversed course and returned toward $0.7900. It also just missed recording an outside The Slow Stochastic has turned up and the MACDs are about to cross higher. The RSI flattened out in response to the Aussie's pullback. There is a band of support in the $0.7855-$0.7880 area, which if penetrated of a retest the recent low near a cent lower.
The US dollar snapped a two-week advance against the Canadian dollar, but the loss was minor (-0.20%), and the key technical development was constructive for the greenback. It recorded an outside up day against the Canadian dollar, above the previous day's high. A move above CAD1.2660 would likely clarify the technical tone in favor of the greenback and suggest a return to CAD1.29. Support is seen near CAD1.2450.
Although nearly every economic release ahead of the weekend was stronger than expected (including import prices, housing starts and permits and University of Michigan Consumer Sentiment Survey) the US 10-year yield slipped 3.5 bp. The yield had approached 3.0%, which is an important psychological level. Key support for the March 10-year note futures contract is 120-00. It marks the 50% retracement objective of the rally from the 2007 low. A break could spur a move toward 61.8% objective near 116-08. Bullish divergences are evident in the daily MACD and RSI.
After falling more than 10% in the previous two weeks, April crude recovered 4.3% last week. It initially retested the previous week's low near $58 a barrel and climbed to almost $62.00 before the weekend. It stalled near the 50% retracement of the decline since the start of the month. The 61.8% retracement and the 20-day moving average comes in a little below $63.00. The Slow Stochastic is turning higher and the MACDs are poised to do so in the coming days.
After dropping almost 5.2% in the previous week, the S&P 500 rallied 4.3% last week. It was the best week since 2011. It retraced a little more than 61.8% of the losses since the record high was set on January 26 near 2872.9. The retracement objective (~2743) is a little below the 20-day moving average (2751). Although it pushed a bit through there, the close was a little below. A convincing move above there would target the record high, which seems like what the technical indicators are suggesting. However, this is also around where one would expect the bears, who think that the drop is the real move and that spike in volatility signals a new period, would make a stand.
The Russell 1000 Value Index led the Russell 1000 Growth Index lower during the market slide (9.30% to 8.65%). However, it lagged during last week's recovery (3.90% to 4.70%). This suggests that despite the dramatic price action, the preference for growth over value continues, even through the spill. Year-to-date the Russell 1000 Value Index is flat, while the Russell 1000 Growth is up 4.1%.