Weekly Review and Outlook: Dollar Pared Gains as Focus Turns to Non-Farm Payroll This Week

Dollar index jumped to 14 year high last week as markets continued to bet on Fed’s December rate hike. Nonetheless, traders turned a bit more cautious in holiday mood as the greenback will now November employment data to be released this week. Meanwhile, stocks struck a hat trick with DJIA, S&P 500 and NASDAQ making new record higher on anticipation of president Donald Trump’s expansive fiscal policies. Treasury yield also extended recent rally, in particular, with 30 year yield closing above 3% handle for the second straight week. Meanwhile, gold spent some unfruitful effort to hold on to 1200 but failed and dived to close at 1183.4. WTI crude oil also reversed initial gain to 49.2 and closed nearly flat for the week at 46 as markets once again question the chance of OPEC making agreement on production freeze. More volatility is anticipated this week as US is back from holiday and with non-farm payroll report featured.

In the currency markets, Dollar closed the week mixed on profit taking as traders adjust their positions again of NFP. Nonetheless it should be noted that the expectation of Fed’s rate path is getting firmer. As of Friday, fed fund futures are pricing in 57.6% chance of another rate hike by June next year, after the fully priced in December hike. We’d maintain that surging stocks and treasury yields would continue to solidify such expectation and provide support to the greenback. Meanwhile, Sterling is set to end the month as the second strongest major currency ahead of Dollar on BoE’s neutral stance. Yen and Euro would likely end as the two weakest major currencies. In particular, Euro will be vulnerable for more weakness, depending on what ECB would announce in the December meeting, regarding what’s next to the current asset purchase program that ends in March.

Technically, dollar index has met long term fibonacci level of 61.8% retracement of 121.02 (2001 high) to 70.69 (2008 low) at 101.79 already. While a bit of brief set back cannot be ruled out, downside should be contained above prior resistance at 99.11. The index is expected to extend the up trend to 61.8% projection of 78.90 to 100.39 from 91.91 at 105.19 next and probably to 100% projection at 113.40 next year.

DJIA is showing upside re-acceleration as seen in the weekly chart. The break of 61.8% projection of 17063.08 to 18668.43 from 17883.56 at 18875.66 now indicates that medium term rise from 15450.56 is at most in its middle part only. That is, it’s far from nearing to completion. We’d expect DJIA to head to 61.8% projection of 1040.49 to 18351.36 from 1540.56 at 20361.72 in medium term.

Momentum in 10 year yield also remained strong and showed acceleration in weekly MACD. 2.489 is the key resistance next. TNX could consolidate at around that level on initial attempt. But even though, current momentum warrants a test on the key resistance level 3.306, which will be the real indication on where the long term trend is heading to.

Regarding trading strategy, we’re holding on to AUD/USD short, sold at 0.7550. The rebound from 0.7310 was relatively stronger than we expected. But then, as mentioned last week, we kept a rather “wide stop” at 0.7550 to give the trend a large breathing room for the time being. Based on our view, medium term consolidation pattern from 0.6826 low should have completed and the larger down trend is ready to resume. Hence, we’re expecting a test on 0.7144 support in near term, as first target. And decisive break there will likely extend the larger down trend through 0.6826 low. Hence, we’re viewing current rebound as another selling opportunity and will add to our short position at 0.7480 this week.

USD/JPY’s rally continued last week and reached as high as 113.89. Initial bias stays on the upside this week for 61.8% retracement of 125.85 to 98.97 at 115.58. Whole rise from 98.97 could either be correcting the fall from 125.85 to 98.97, or resuming the longer term up trend. We’ll assess the outlook based on the structure and momentum of the current rise. For the moment, we’ll be cautious on topping at around 115.58. Meanwhile, on the downside, below 112.34 minor support will turn bias neutral first.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It could either be totally completed at 98.97 or be developing into a sideway pattern. But in any case, the long term up trend from 75.56 (2011 low) is expected resume after the correction completes. Next upside target will be 135.20 long term resistance level.

In the long term picture, the rise from 75.56 long term bottom to 125.85 medium term top is viewed as an impulsive move. Price actions from 125.85 are seen as a corrective move which could still extend. But, up trend from 75.56 is expected to resume at a later stage for above 135.20/147.68 resistance zone.

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Weekly Review and Outlook: Dollar Pared Gains as Focus Turns to Non-Farm Payroll This Week

Gold Rebounds off Key Level ahead of Busy Week

As we reported the possibility on Friday of last week, gold did indeed fall further lower this week. The rising dollar, yields and US equity prices all weighed on the appeal of the buck-denominated, noninterest-bearing and perceived safe-haven precious metal. Next week, as well as the much-anticipated OPEC-meeting and top-tier Chinese economic data, we will also have important macro pointers from the worlds’ largest economy, which should provide the clearest indication yet if the Fed will indeed raise interest rates come December 14. Ahead of these important events, speculators have apparently lightened up their long dollar and short gold positions, which makes sense in this shortened trading week for US investors in particular. Consequently, gold and the EUR/USD have bounced back, although both are off their best levels at the time of this writing.

While gold has reached a key technical area (see below for details), the fact that the dollar remains fundamentally supported makes us remain bearish on gold. The precious metal can of course rise in tandem with the dollar, but it will at least require stocks to fall in order to boost its safe-haven appeal. But with US stock indices at record highs, it is impossible to say when they will eventually top out. In terms of the dollar, the slight weakness we have observed at the end of this week could very well turn out to be temporary even if a December rate rise may already be priced in. Obviously we will have to wait for the Fed’s so-called dot-plots to find out the expected path of future rate rises. But if economic data continues to remain positive, which coupled with Donald Trump’s promise of fiscal spending spree next year, inflation could rise faster than the market currently expects. Thus, the Fed’s tightening cycle could be more aggressive than expected, which could help keep the dollar underpinned, especially against currencies where the central bank is still dovish and against noninterest-bearing precious metals.

But gold has now reached our key bearish objective at $1172, so from a purely technical point of view, we are less sure about gold’s next move. As can be seen on the chart, this level corresponds with the 61.8% Fibonacci retracement against the December 2015 low. Given that large upsurge, it could be that a bottom was already made last year. Thus, the pullback here could provide another opportunity for the so-called “smart money” to reload their long positions, at a time when sentiment among the “street money” is clearly bearish. But for us to turn technically bullish on gold, we will need to see the breakdown of some key resistances now, starting with that $1190-$1200 range, which was support and resistance in the past. If and when gold starts to move above this area then we may see the breakdown of further resistance levels, for example, at $1206, $1221 or even $1241.50. However, for the long-term trend to turn decidedly bullish once again, we will need to see gold print a higher high above the most recent swing point at $1337/8 area. That is miles away from where we are at the moment. So any potential rallies in the interim should be treated with extra caution as they could very well be traps for bulls. For the bears, if support at $1172 gives way on a closing basis then they may target the other Fibonacci levels shown on the chart. In short, despite today’s bounce, gold’s path of least resistance remains to the downside for the time being.

Gold Rebounds off Key Level ahead of Busy Week