The technical condition of the US dollar, which has been advancing through most of the Q4 16, has been deteriorating in our assessment. This led us to anticipate a consolidative or corrective phase. Although the holiday-thinned market conditions may have spurred exaggerated price moves, like the euro ahead of the weekend, it now appears that this phase is set to continue.

We have argued that the dollar rally was part of a larger portfolio adjustment that began in early October, with the US election providing extra fuel to a move that was already underway. For example, the anticipation of the hike by the Federal Reserve at the December FOMC meeting was building before the election, and most data was stronger than expected, lifting the economy to something close to two-times trend.  The broader changes in the investment climate included bearish curve steepening, rising equities, higher oil, and lower gold prices. Markets may move at different speeds, but dollar's pullback is likely part of a larger correction to the powerful Q4 16 moves.

In the last trading session of 2016, the Dollar Index slipped through its 20-day moving average (102.15) for the first time in a couple of weeks, but managed to close just above it (~102.20). It could have put in a third point in a trend line that connects, the November 9 (~95.90), December 8 (~99.45) and December 30 low (~101.95). Nevertheless, the technical indicators remain bearish. The Dollar Index has been stalling.  Consider the highs from the past three weeks, 103.56, 103.65 and 103.63. The week's 0.8% loss snaps a three-week advance. Last week, we suggested the potential of this pullback extends to 101.00-101.50.  This still seems reasonable at this juncture, though the risk is over an overshoot to the downside.  The 100.70 area may be key for the outlook for Q1 17.

The euro spiked briefly through $1.0650 on the last trading session of the year. Although this proved premature as the euro quickly surrendered the gains, the near-term outlook is constructive. The fading upside momentum in the Dollar Index was matched by the euro, its largest component. The euro’s lows from the last three weeks are $1.0367, $1.0352, and $1.0372. The MACD and Slow Stochastics have turned up, and the five-day moving average is set to cross above the 20-day average in the coming days. Last week, we suggested potential toward $1.0675, but the way the correction has unfolded, it looks like there is scope for gains beyond there. The $1.0715 area represents a 38.2% retracement of the euro’s gains since the US election. The 50% retracement objective is near $1.0825. 

The dollar marched higher against the yen for six consecutive weeks but has not fallen for two. Indeed, at the end of last week, the greenback slipped below its 20-day moving average against the yen for the first time since the day after the US election. We had anticipated a move to JPY116.50 last week. The dollar fell to almost JPY116 last week, roughly corresponding to a 50% retracement of the rally since the December 8 low near JPY113.15. The next target we identified was the JPY115.25-JPY115.50 area.A trend line off the highs since December 15 comes in near JPY117.20 at the end of the week (January 6), though the JPY17.60 area may offer more important resistance.  

Sterling finished 2016 above its 5-day moving average for the first time in two weeks. It reached almost $1.2390 before the weekend.  The $1.2400 level is a 38.2% retracement of sterling’s losses since the December 14 high a little above $1.2720. Support is seen near $1.2325. The RSI is firming. The Slow Stochastics are about to turn higher, and the MACDs look poised to cross higher as well.The upside beckons.  The 50% retracement is found near $1.2460.  The 61.8% retracement is near $1.2525.

The US dollar initially extended its strong recovery against the Canadian dollar but ran out of steam in front of CAD1.36, where it peaked in November.  The pullback in the last two sessions of 2016 was sharp. It retraced 38.2% of the nearly three-week rally to almost the tick in front of CAD1.3400. The RSI has turned lower, and the MACD and Slow Stochastics appear set to turn lower in the coming days. The 50% retracement objective is near CAD1.3340. 

The Australian dollar reached almost $0.7250 before the New Year, but proceeded to sell-off, briefly dipping below $0.7200 and posted a poor close. Nevertheless, the technical indicators suggest the near-term risk is on the upside. The downside momentum that pushed the Aussie from $0.7525 in mid-December faded in the $0.7160-$0.7175 area. This band is an important support. The MACDs and Slow Stochastics are turning higher. The $0.7250 area needs to be taken out, and the next target is near $0.7300, though the correction may extend toward $0.7350-$0.7380.   

Oil prices are firm but are moving broadly sideways. The February light sweet crude futures contract has been largely confined to a $51-$54 range last month. The contract has not traded below its 20-day moving average since November 30. It is found a little below $53. The technical indicators are not generating a strong signal, but while we suspect a top is close, there is risk of another push higher first.  

The US 10-year yield rose from 1.77% to 2.64% in a six-week rally that began after the jobs data in early November. However, in the past two weeks, the yield has pulled back to 2.43%. The pullback may not be complete. The 2.35%-2.40% area offers better value. The March note futures finished 2016 with two consecutive closes above the 20-day moving average. The five-day moving average will likely cross above the 20-day moving average in the days ahead for the first time since the end of September. The technical indicators point to additional near-term gains.  After finishing 2016 at 124-09, there is potential toward 125-00 to 125-16.

Year-end profit-taking may have prevented the Dow Jones Industrials from going through 20k and saw the S&P 500 finish the year below its 20-day moving average for the first time since November 4 when it recorded a four-month low.  The sell-off gave back nearly half of December's gain (~2232.50). The technical indicators we use warn of additional losses. The 2200 area offers initial support, but near-term potential may extend to 2160.  The 200-day moving average is near 2135, and a test on it often brought in new buyers last year.