The US dollar was whipsawed ahead of the weekend. The greenback had been pulling back following the soft core PCE deflator the day before, and losses accelerated after the disappointing US August employment report. However, a report citing unnamed European officials warned that the ECB might not be ready to decide on its asset purchase program as many expected at the meeting on September 7. This spurred a reversal of the euro and helped lift the dollar more broadly. 

One currency the was resilient in the face of the greenback’s recovery was the Canadian dollar. It was the strongest major currency before the weekend and for the week. The strong Q2 GDP report (4.5% annualized, 4.3% year-over-year) encouraged speculation that rather than wait for October, like many, including ourselves, expected, the Bank of Canada could hike rates again next week.

We expect September to be a challenging month for the dollar, which on a real broad trade weighted basis has fallen for the first eight months of the year, the longest losing streak since 2009. However, once past the debt ceiling (and spending authorization), we expected a better Q4 performance.

The dollar sell-off that began before Yellen and Draghi spoke at Jackson Hole accelerated at the start of the past week. The Dollar Index fell to nearly 91.60 on August 29, a new low for the year. It staged a dramatic rebound. Of technical importance is the fact that the 50% retracement of the big rally since mid-2014 remained intact. It recovered to almost 93.35 in two sessions before meeting new sales. The whipsaw with the jobs/commentary double whammy took the Dollar Index from 92.60 to 92.10 and then 92.90. The technical indicators are mixed on the daily bar charts. The weeklies, the MACDs, and Slow Stochastics are poised to turn higher later this month, consistent with our expectation of a better Q4 for the greenback.

The euro has risen for the past six months. Last week was only the third weekly loss here in Q3. Trend followers and momentum traders became cautious after the euro broke through the $1.20 level. Profit-taking took the euro toward an initial retracement target near $1.1820 It bounced to $1.1980 on the disappointing US jobs report, which is the 61.8% retracement of its pullback. The technical indicators are mixed, but on balance, given market positioning and the heightened risk of a disappointing ECB, we suspect the risk lies on the downside. The $1.1820 area offers initial support. It is also where the 20-day moving average can be found. A break could spur a move back into the $1.1650-$1.1700 area.