Dollar Index – 10-Yr Yield Couldn’t Break Loose from 1.5 Magnet, Dollar and Canadian Soared

Strong treasury yield continued to be a major theme last week. But for now, it seemed 10-year yield could still break loose from the “magnetic field” of S&P dividend yield at around 1.5%. Indeed, US stocks, including NASDAQ staged a strong rebound on Friday, as 10-year yield settled back in range. Such theme will likely remain dominant for the near term.

In the currency markets, Dollar ended broadly higher after Fed Chair Jerome Powell’s indifferent comments on yield. Though, Canadian was the strongest, with additional support from oil prices. Swiss Franc, Yen and Euro ended as the worst performing ones. With ECB meeting scheduled on March 11, there is prospect of some more downside for Euro.

Dollar index broke through 91.74 resistance after Fed Powell

Dollar rose last week after Fed Chair Jerome Powell sounded unconcerned with recent surge in treasury yields. He just noted that the climb in yield was “something that was notable and caught my attention”. He also left no hint on the possibility of an “Operation Twist” that concentrates on asset purchases on the longer-end, to counter the yield developments. The greenback was later supported further by much stronger than expected non-farm payroll growth.

On the other hand, ECB officials sounded increasingly uncomfortable with the rise in yields. There are speculations that ECB could hint on its readiness to “recalibrate” the policy, with more asset purchases in the long end, in the March 11 meeting. Meanwhile, traders remembered the yield curve control framework of BoJ, which allows 10-year JGB yield to fluctuate only inside a tight range around 0%.

Dollar’s strong rally against Yen and Euro pushed Dollar index through 91.74 support turned resistance last week. The rise from 89.20 is developing into a stronger rebound. Further rally is now expected in the near term as long as 90.63 support holds. Next target is 55 week EMA (now at 93.57).

At this point, such rebound is seen as a corrective move first. Hence, we’d look for strong resistance from 94.74 cluster resistance (38.2% retracement of 102.99 89.20 at 94.46) to limit upside. However, as the 89.20 low was close to 88.25 support already, sustained break of 102.99 would indicate that fall from 102.99 has completed and target 61.8% retracement at 97.72 and above.

10-year yield settled above 1.5% handle, more auctions eyed

10-year yield defended 1.4 handle well during the intra-week retreat. It then jumped to as high as 1.626 before closing inside established range, at 1.554. At this point, we’re seeing some hesitation for TNX to run away from the the much talked about S&P dividend yield at around 1.5%. 30-year yield also lacked follow through momentum to power through key resistance level at 2.45, which helped cap TNX.

The upcoming 3-yr, 10-yr and 30-yr bond auctions in the US will be closely watched this week. Yield could jumped again if these auctions are poorly received. Any upside re-acceleration could shoot TNX towards 2% key resistance zone. That could trigger another round of selloff in stocks. If that happens, we’d see if Powell would call the developments “disorderly”. Subsequent market reactions could be rather volatile and unpredictable.

CAD rose broadly with help from strong oil price

Canadian Dollar was indeed the best forming one last week, edging out Dollar slightly. The Loonie was additionally supported by strong rally in oil prices, after OPEC+ agreed to largely roll-over the production cut to April. WTI closed strongly at 66.26 last week, above 65.43 long term structural resistance. It could even be accelerating upwards through medium term channel resistance.

In any case, further rise would remain in favor as long as 59.17 support holds. Sustained trading above 65.43 will pave the way to 76.75 (2018 high). That, if happens, would provide strong support to floor any pull back in Canadian Dollar.

Talking about the Loonie, EUR/CAD’s down trend resumed last week and dived to as low as 1.5065. 100% projection of 1.5978 to 1.5323 from 1.5783 at 1.5118 was taken out without any hesitation. near term outlook will now stay bearish as long as 1.5208 resistance holds. Firm break of 1.5054 support will pave the way to 161.8% projection at 1.4707. Considering that current fall from 1.5991 should be a leg inside the long term pattern from 1.6103, the eventual target could be just slightly above 1.4263 support.

CAD/JPY’s up trend continued last week and reached as high as 85.66. 100% projection of 74.76 to 81.91 from 77.91 at 85.06 was taken out firmly on second attempt. Near term outlook will now stay bullish as long as 83.59 support holds. Next medium term target is 161.8% projection at 89.47. As log, as the down trend from 91.62 (2017) high should be totally completed at 73.80. There is prospect of retesting 91.62 down the road.

USD/CHF’s rise form 0.8756 accelerated to as high as 0.9317 last week and broke 0.9295 resistance. There is no sign of topping yet and initial bias stays on the upside this week. Next target is 61.8% retracement of 0.9901 to 0.8756 at 0.9464. On the downside, break of 0.9135 minor support will turn intraday bias neutral again. But further rally is expected as long as 0.9044 resistance turned support holds.

In the bigger picture, decline from 1.0237 is seen as the third leg of the pattern from 1.0342 (2016 high). Firm break of 0.9295 resistance, and sustained trading above 55 week EMA (now at 0.9227), will suggest that the pattern has completed. In this case, further rise could be seen back to 1.0237/0342 resistance zone in the medium term. On the other hand, rejection by 0.9295 will retain medium term bearishness for another low below 0.8756.

In the long term picture, price actions from 0.7065 (2011 low) are currently seen as developing into a long term corrective pattern, at least until a firm break of 1.0342 resistance.