The dollar rose against all the major currencies over the past week. The divergence meme we have emphasized has continued to unfold. The ECB eased policy at the start of the month. Less than 48 hours after the Fed hiked rates, the BOJ tweaked its asset purchase program to sustain it. 

Holiday-thin markets make for more treacherous conditions than usual. The news stream lightens, and participation will fall off until January 4.

The key question for many short-term participants is whether the dollar’s downside correction of the rally that began in mid-October is complete. Given the extent of market positioning, we have yet to be persuaded by the prices that the adjustment is complete. 

The Dollar Index has flirted with the 61.8% retracement of the decline that began with the ECB meeting (~99.25). There is a small downside gap created by the Dollar Index gapped higher the day after the Fed hiked. That gap is found 98.59-98.61. The technical indicators are mixed, with the MACDs about to cross higher and the RSI soft. While it is difficult to have much confidence in the near-term move, we continue to look for higher levels in the medium and longer-term. Without getting too fancy, we suspect that the June 2014 through March 2015 rally was a third wave of some magnitude. The April through mid-October was some sort of fourth wave consolidation. I suspect a fifth wave began mid-October. 

The euro lost about 1.3% last week, and it tested impact support near $1.08. The 50% retracment of the post-ECB rally comes in just below there as does the 20-day moving average. A break would target the $1.0730 area (61.8% retracement objective). We have anticipated the persistence of the $1.08-$1.10 trading range for this corrective phase. Like the Dollar Index, the technical indicators we use are mixed. 

The dollar recorded a big outside down day against the Japanese yen before the weekend, whipsawed by the unexpected moves by the BOJ. We see the move as largely operational adjustments that will allow the unprecedented large asset purchase plan to continue while minimizing the risks of dislocations. Japanese corporates are experiencing record profits, and their balance sheets are flush with cash. We don’t see the extension of the pre-Kuroda corporate lending schemes as significantly boosting CapEx.