The disappointing US jobs data may mark the end of the first phase of the dollar's recovery. It may be like the US phase 1 deal from China. Many wonder if there will be another phase. We suspect that the employment data is not a game-changer. On the one hand, the divergence of economic activity between the US, Europe, and Japan, on the other, doesn't really change because of the employment data. The US economy is expanding, and Japan, and especially Europe, are contracting. Moreover, one way or the other, the US will be delivering significantly more fiscal stimulus.
However, against many of the major currencies, the dollar strengthened over the past month. While those positions are being adjusted, the dollar may pullback more before its upside correction resumes. Indeed, the heavier dollar tone that may emerge over the next few days or so is part of that upside correction.
Dollar Index: The Dollar Index stalled ahead of the employment report shy of the (50%) retracement objective (~91.75) of the decline since the election. A bearish key reversal was posted when it reversed lower after making a new high (~91.60) for the move and closing below the previous session's low (~91.08). The risk is for a near-term pullback that we initially target the 90.60 area, which also houses the 20-day moving average. The month-old uptrend line began the new week a little below there and finished a bit above 90.80. The MACD and Slow Stochastic are stretched, and the former is poised to turn lower.
Euro: Over the past month, the euro has fallen by three cents to about $1.1950. The disappointing employment data signals the end of that move, which is part of the correction of the euro's rally that began from around $1.16 as the US went to the polls. The reversal suggests the euro can move into the $1.2100-$1.2150 area in the coming days, though it must first overcome the downtrend line from early January that begins next week near $1.2085. The MACDs are turning up, though the Slow Stochastics are lagging. It would probably take a move above $1.2200 to signal the euro's downside correction was over.
Japanese Yen: The dollar's seven-day advance against the yen was snapped ahead of the weekend. Remarkably, the US 10-year yield rise managed to extend its rise for the seventh consecutive sessions, as oil put the finishing touches on a five-day (~8.8%) rally. The greenback managed to trade through the 200-day moving average (~JPY105.60) for the first time since last June. Its pre-weekend reversal left it vulnerable to a further near-term pullback, which we suspect can extend into the 104.40-JPY104.60 area. This year's uptrend line begins around JPY104.20, where the 20-day moving average is found. The MACD and Slow Stochastic appear poised to turn lower.
British Pound: The euro's nearly 4% decline against sterling over the past month gave the pound some resiliency in the face of the greenback's broader appreciation. Sterling is set to make new highs this week, and there does not appear to be meaningful resistance until closer to $1.40. Over the last few weeks, the sideways movement has rendered the momentum indicators less than useful, but note that the upper Bollinger® Band begins the new week near $1.3770.
Candian Dollar: The US dollar spent the entire week within the range established on January 29, the last day of the month, roughly CAD1.2740 to CAD1.2875. The wedge or triangle formed is seen as a continuation pattern, which would imply a stronger US dollar. Yet, the momentum indicators are turning lower, suggesting a pullback in the greenback. A break of the CAD1.2690-CAD1.2700 area would weaken the dollar's technical tone and suggest a retest multi-year a little below CAD1.2700.
Australian Dollar: The lowest level since late last year was seen (~A$0.7565) on February 2, and it did not really go anyplace over the next two sessions, despite the outside down session on February 4. The bounce ahead of the weekend, an outside up day, suggests the month-long downtrend is over, and the momentum indicators are poised to cross higher. Better levels are likely in the days ahead. Initially, there appears to be scope toward $0.7720-$0.7740. A base has been forged (~$0.7660-$0.7680) that will likely offer support later.
Mexican Peso: The dollar fell last week for the first time in three weeks against the Mexican peso and looks vulnerable to a further decline in the days ahead. Initial support is in the MXN20.00-MXN20.08 band. A break of that area signals a return to last month's low near MXN19.50. The MACD and Slow Stochastic have turned lower. The January CPI will be reported on February 9, and Banixco's decision is two days later. Of the 12 economists in the Bloomberg survey, 10 expect a 25 bp rate cut. President AMLO's appointments now compromise a majority of the board.
Chinese Yuan: The dollar has moved broadly sideways this year against the yuan. With one brief exception, the dollar has been confined to the ranges set on the first two sessions of the year (~CNY6.43-CNY6.5150). Most of the price action has taken place between CNY.6.45 and CNY6.50. In the face of the dollar's decline in response to the disappointing employment, it may be difficult to avoid a push lower in Shanghai. For most of the second half of January, the onshore yuan (CNY) was stronger than the offshore yuan (CNH). This seemed consistent with the dollar's firmer tone seen against most currencies. However, at the end of last week, the CNH rose above CNY. This would seem to also suggest pressure building on the dollar's downside. Note, too, that the Chinese New Year holiday celebration runs from February 11 through February 17.