Dollar: trending or rangebound? - BBH

Brown Brothers Harriman (BBH) is out with an overview of technicals heading into the new week.

Key quotes

BBH notes that the calendar has rolled over into a new period following last week's Q1 wrap, "the turn of the calendar--a new marking period begins--offers an opportunity to look afresh at the price action.  What makes a review of the dollar difficult, however, is that we only know the dollar relative to other currencies and there is no one pattern that fits all." BBH started with the Euro's rally that kicked off 2018, stating that "the euro appreciated by 2.7% against the dollar in Q1.  The rally was mostly a January story, and for the past two months, it has been trading broadly sideways.  One way to illustrate the range-trading is that the five, 20 and 50-day moving averages have converged (~$1.2340-$1.2355)." BBH further clarified that the Euro's position could be related to swings in electoral favourites within Europe and noted the ensuing technicals, "In the larger picture, the euro's rally since last April when it became clear that the populists-nationalists were not going to win in the Netherlands or France, has brought it to an important technical area that is has stalled around.  The $1.2520 area, for example, marks the 38.2% retracement of the euro's decline from the record seen in July 2008 near $1.6040.  The $1.26 area houses a monthly downtrend line from then as well as the 61.8% retracement of the euro's decline since mid-2014 when it was last near $1.40. While those levels give one a sense of likely inflection points on the upside, a break to the downside should not be ruled out.  Market positioning and sentiment heavily favor further dollar losses, but the widening short-term interest rate differential (think Eurodollar and Euribor) makes it increasingly costly to be long dollars against the euro without the euro appreciating to offset the carry (interest rate differential).  Currently, that interest rate differential translates into about five basis points a week. The $1.2180-$1.2200 area offers chart support, but on March 1, the euro spiked down to $1.2155 before staging a key reversal.  But before the euro can set up a test on those important supports, it must punch through the base in the second half of March near $1.2240.  A break of the range would set up a test on the $1.1940-$1.2040 area initially."

BBH then moved onto the Yen by stating, "the Japanese yen was the strongest of the major currencies in Q1, rising 6.1% against the US dollar.  The highs were made late in the quarter, amid reports of aggressive exporter hedge-related dollar sales.  The dollar fell to JPY104.55 on March 26, the lowest level since November 2016.  It posted its own key reversal that day, and two days later, it tested JPY107.00. The dollar-yen exchange rate strikes us to be often rangebound, and when it looks like it is trending it is moving from one range to another.  Now, perhaps at the start of the new fiscal year, a new range is being established.  For the last three quarters of 2017, the dollar largely traded in a JPY108-JPY115 range. We do not know the new broad range yet, but there does appear to be a near-term range.  The floor is had been JPY105, but now it JPY104.55.  A break would suggest potential toward JPY100.  On the upside, the JPY107 is the nearby cap, but JPY108 may be more significant.  The upper end of the broad range may come in around JPY110."

Brown Brothers Harriman also touched on the Sterling, attributing the Sterling's recent activity to interest rate moves between the UK and the US, "Sterling has been trending higher since the so-called flash crash in October 2016. The uptrend, though, did not begin in earnest until March 2017.    Sterling peaked in late January just below $1.4350.  With a few exceptions since it has been confined to a $1.38-$1.42 range.  The beginning of the next stage of Brexit negotiations, the recent string of economic data, and two dissents at the last MPC meeting, calling for an immediate hike helped bolster sterling.  Half of Q1's 4% gain took place in March amid these favorable developments. If there is a major central bank that can keep up with the Federal Reserve this year, the Bank of England is one of the few candidates.  Talk of three more hikes this year in the US has quieted in the face of the return of the Q1 curse of disappointing GDP and little progress on wages. Meanwhile, the market is looking past the rate hike widely expected in May toward another hike before the end of the year (now about a 50% chance is priced into the OIS curve). A break of the $1.3980 warns that the March run at new highs has faltered.  While the immediate recognition could spur a move toward $1.3915, the $1.3700-$1.3750 area may hold the key to the medium-term technical outlook. On the upside, above the $1.4350 post-referendum high, the is $1.4520, which equates to the 50% retracement of the decline since the 2014 high near $1.72."

BBH finished off by touching on the Aussies weakness for 2018, "the Australian dollar has been trending lower since peaking in late January near $0.8135.  It recorded the low for the year on March 29 near $0.7645.  The risk extends toward $0.7500, but the MACDs and Slow Stochastics suggest a low may be close.   There have been a couple of two-three cent corrective bounces within the downtrend.   A bounce of that magnitude would bring the Aussie toward the mid-March highs near $0.7920. In a broader view, the Australian dollar has been tracing out a larger range since the end of Q2 17.  That larger range also sees $0.7500 as the marker of the lower end.  The upper end of the range is around $0.8125. The Aussie was turned back from there in late January.  However, note that since then short-term US interest rates have risen above Australia, undermining one leg, while lower metals prices weaken another."