The US dollar appreciated against most of the major currencies last week while several of the typically volatile emerging market currencies, like the Turkish lira, South African rand, and Brazilian real appreciated. The US President's criticism of the Federal Reserve, shared by many noted economists, including Nobel-prize winner Krugman (just doesn't want Trump to say it), that it is moving rates too fast notwithstanding, the market is attributing a little more than an 80% chance, according to the CME's model, of a hike in December. 

For several years, a concern among investors was that the Fed would not raise interest rates sufficiently in the expansion phase to allow it to provide the cuts it often needs to in the down cycle to stimulate the economy. This is why many expect the Fed's balance sheet to grow again in the coming years. Now the concern is that the Fed may kill the recovery. A majority of Fed officials recognize the eventual need of bringing the fed funds target above its long-term estimate (3%), which is understood as the equilibrium rate (r*). In part owing to this ambivalence, the US dollar may find it difficult to build on its recent gains.  

Dollar Index

The upside momentum faltered as the 96.00 area was approached. Although there had been some minor penetration earlier in the month, the Dollar Index has not closed above it since August when the high for the year was recorded near 97.00. A pullback toward 95.30 in the coming days would not be surprising, however, a break of 94.80, the recent low would be disappointing. 

Euro  

The month's low a little above $1.1430 was successfully tested ahead of the weekend. The RSI and Slow Stochastics argue against chasing the market. Look for better levels to sell as it already fell two cents from the week's high. The upper end of the range is seen in the $1.1600-$1.1630 area that also houses the 100-day moving average and the recent highs. Initial resistance is seen near $1.1530-$1.1550.  

Yen 

The dollar recorded its lowest level since mid-September at the start of the week near JPY111.65. As volatility gradually eased in global equities and US rates firmed, the greenback recovered to almost JPY112.75, a retracement objective of the leg down since the JPY114.30 area was seen earlier this month, before consolidating ahead of the weekend. The MACD and Slow Stochastics have not turned, which allows for some additional dollar weakness, but the move is complete or nearly so. There is scope initially toward JPY113.00-JPY113.25. The dollar is climbing a trendline drawn off the March, August, September, and October lows. It comes in near JPY112.00 at the end of next week and around JPY114.25 at year-end.  

Sterling  

When everything is said (Brexit) and done (economic data) sterling is little changed since the end of last month near $1.3130. Support near $1.30 held and consolidation was seen before the weekend, signaling a break in the downside momentum that took two cents from sterling from the week's high on October 16. Sterling needs to resurface back above $1.31 (100-day moving average is just below there) to lift the technical tone. The technical indicators are not particularly sanguine about it and maybe warning not to chase it if it does.  

Canadian Dollar

An unexpected decline in August retail sales and softer than expected September CPI provided the fuel for the push toward the trendline (off the June high) that comes in near CAD1.3130, which also coincides with the 50% retracement of the four-month decline. The technical indicators suggest new dollar highs, perhaps toward CAD1.32 is possible. However, with the Bank of Canada most likely to deliver a 25 bp rate hike next week and the volatility of the equity markets easing, the Canadian dollar may find better traction.  

Australian Dollar

The sophistry that makes it seem as if the Australian dollar is a proxy for the Chinese equities was dashed last week. Before reversing higher after making new four-year lows before the weekend, the Shanghai Composite was off 5% on the week (and recouped half). For its part, the Australian dollar spent the week consolidating but did edge higher to a two-week high in the middle week and closed marginally higher on the week. The technical indicators are generally supportive, and the next target is the trendline drawn off the January, June, August, before being whipsawed intraday in late September. It is found near $0.7190 next week. The 50-day moving average, retracement objectives, and past congestion are found in a band between $0.7180-$0.7210. 

Mexican Peso

The dollar rose against the peso for the third consecutive week, aided by Fitch's decision to Pemex credit on negative watch. It has approached the upper end of its recent range (~MXN19.30) and appears poised to break higher, though the technical indicators are mixed. A move above MXN19.40 would signal a return to the MXN19.70-MXN20.00 area. The peso's 2% decline paced the emerging market currencies last week and was its largest weekly loss in five months.  

Oil

The price of WTI for December delivery lost 6.5% over the past two weeks, and that includes the 1.1% rally ahead of the weekend. Ideas that Saudi Arabia would use oil as a weapon waned and US inventories rose more than expected. This provided the fundamental fuel for what appears to be a simple technical correction. The pullback met the minimum retracement objective of the rally that began in mid-August (~$68.50) and held the 100-day moving average (just below $68). The technical indicators have not turned, but will if this assessment is correct. The real test may be seen as if prices enter the $70.00-$72.60 band.  

US Rates

The two-year generic yields rose 5.5 basis points last week to 2.92% to new cyclical highs. The 10-year yield edged up a couple of basis points to 3.20%. The 3 1/8% to 3 1/4% is the near-term range. However, the December 10-year note futures suggest the uptick in yields a small setback within a larger correction that could see a push back to the lower end of the range. A modest concession could help the market absorb the continuing supply nearly $120 billion of new coupons will be sold next week (two-year conventional and floater, five- and seven-year conventional).

S&P 500

We were right that the air pocket hit was sharp and short, but the recovery we anticipated fizzled out in the middle of the week as the S&P 500 approached the 100-day moving average (~2825) and a retracement objective of the loss from the October 3 high near 2940. The three-week slide ended with a small 0.5% gain. The RSI has turned higher as has the Slow Stochastics and the MACDs are poised to do so next week. Earnings season plays, and sector-specific developments may be limiting visibility. The technical studies on the weekly bar charts warn the corrective pressures may not be exhausted. A retest on the recent low near 2700 cannot be ruled out, and a close below it would be a blow to sentiment.