Dollar Bulls Approaching a Well-Known Wall After Impressive Run

(Bloomberg) -- After profiting from a world-beating rally, dollar bulls find themselves at risk of being back at square one again when it comes to sustaining gains against the yen.

Even after finishing Friday lower following some soft U.S. economic data, the greenback has rallied 3.8 percent to 113.30 yen in the past month, the biggest advance among major currencies. The rally has some traders looking to 114.54 yen -- a key retracement point of the move since the U.S. election in November -- and to 115 yen, a level the dollar failed to sustain momentum beyond already on three occasions this year.

Dollar Bulls Approaching a Well-Known Wall After Impressive Run

Things may not look that different this time around, according to some quants and strategists who follow technical indicators. The prospect of rising U.S. interest rates and subdued market volatility justifies a stronger dollar, but the analysts say the advance may have gone too far, too fast. The currency has overshot its short-term equilibrium of 111.8 yen, according to Quant Insight, a research firm that develops models to identify the macroeconomic drivers of various assets.

Evidence of an improving economy may be needed for dollar-yen to climb past the barriers, according to Marc Chandler of Brown Brothers Harriman & Co. Data on Friday showed a pickup in retail sales last month, adding to signs of steady consumer spending that will help propel the economy after a first-quarter slowdown.

"There’s a lot of resistance up here, and we’ve come quite far," said Chandler, global head of currency strategy for Brown Brothers in New York. "But it’s not so much what you do right here. I’d be inclined to buy the dollar dip."

Other strategists aren’t sure whether the four-year bull run still has more to go. Since late 2012, diverging monetary policies between the U.S. and Japan has driven the dollar as much as 63 percent higher. Now, most analysts say the best days are behind it. The currency will weaken to 112 yen by the end of June, and end 2017 at 114, according to the median estimate in a Bloomberg survey.

"In terms of valuation, dollar-yen is too high even given all the moves in the drivers," which include rising Treasury yields and lower equity volatility, said Mahmood Noorani, a former portfolio manager at BlueCrest Capital Management who founded Quant Insight in 2014.

Investors will get further evidence on the state of the economy on Tuesday, when the government releases data that track housing starts and industrial production during an otherwise quiet week. Here’s what else to watch this week:

May 15Empire Manufacturing
TIC Data
May 16Housing Starts
Industrial Production
May 17MBA Mortgage Applications                    
May 18Initial Jobless Claims
Philadelphia Fed Business Outlook Survey
Treasury 10-Year TIPS Auction
Fed’s Mester Speaks in Minneapolis
May 19Fed’s Bullard Speaks in St. Louis