Did Dollar Bears Overstay Their Welcome?

Sentiment has swung in the US dollar's favor faster than speculators can adjust positions.  This has seen a surge in the greenback that pushed it outside of the Bollinger Bands (two standard deviations around the 20-day moving average).  The poor close before the weekend warns that a consolidative or corrective phase may be at hand.  

The continued rise in US interest rates boosts the cost of being short dollars.  The relationship may not be linear, but the US rate premium against Europe is near-record levels, and the rate differential and outlook have spurred some Japanese asset managers to boost the allocation of unhedged US investments.  To different extents, the European Central Bank, the Bank of Japan and Bank of England seem to be less confident than the Federal Reserve of their economic outlooks.   

The Dollar Index rose 1.35% last week, which the second largest advance since the end of 2016.  It is on a run.  It is advanced for 9 of the last 12 sessions and 10 of the past 13 weeks.  With the latest gains, it has retraced half of what it had lost since last October high.  The 61.8% retracement is seen near 92.50.   There was a potential reversal pattern ahead of the weekend (shooting star candlestick). The technical indicators are stretched, and the recent momentum is unlikely to be sustained.  Former resistance near 91.00 should now act as support, but the risk extends to 90.20.

In addition to our macro view, there were two technical reasons we did not abandon our bearish euro view, as painful as it was.  First, the euro's rally since the start of the last year approached but did not violate levels that were consistent with a correction to the slide that had begun in 2014.  The 61.8% retracement is found at $1.26.  Second, a monthly trendline from the euro's record in 2008  high through the 2011 and 2014 highs was approached in Q1, but it has held.  It is found near $1.26 in May.  

The euro has broken out of the nearly four-month-old trading range and quickly moved to the 50% retracement objective of the leg up that began last November (~$1.2055).  The $1.20 level may offer psychological support, but the 61.8% retracement is found near $1.1935.  The technical indicators are stretched and the recovery ahead of the weekend may signal a new phase.    We suspect the tide has turned, and rather than buy dips, the short-term players will sell euro bounces.  The $1.2230 area may provide such an opportunity.  In the futures markets, longs were liquidated (~10% of speculative gross long position).  Some bears covered, so the gross short position eased.  

We suggested that the dollar traced out a head and shoulders bottom pattern in March.  It took out the neckline in early April (~JPY106.65-JPY106.80), which we thought projected to JPY110.  The dollar gained 1.3% against the yen last week to extend its advancing streak to five weeks, the longest rally since November-December 2016.  It made new highs every session last week but encountered resistance a little above JPY109.50 and proceeded to sell-off ahead of the weekend and closed below the previous day's low.  The potential key reversal suggests that stretched technical condition may ease.    The Golden Week holidays will thin Tokyo participation in the coming days, also may lend itself to some consolidation.  Initial support is seen near JPY108.50.  

Sentiment is fickle, and it turned quickly against sterling.  Disappointing economic data, including the first look at Q1 GDP (0.1% vs. 0.4% Q4 17), and comments from BOE Governor Carney took a toll, spurring the market to slash the odds of a rate hike next month.  As recently as mid-month, the OIS was pricing in around an 85% chance of a hike.  Ahead of the weekend, the odds stood at 23%. 

Sterling set its post-referendum high on April 17 near $1.4375.  It briefly traded below $1.3750 ahead of the weekend.  While the euro and yen recovered in the North American session, sterling remained trapped in its trough.  Sterling has fallen in eight of the past ten sessions to end an 10 of 11 session advance in the first part of the month.  A break of the early March low just above $1.37 would suggest the possibility of a double top pattern that would project to $1.30, which is near the lows seen last October-November.   Initial resistance is seen near $1.3850 and then $1.3900.  

The US dollar tested important resistance near CAD1.29 twice last week.  The area corresponds to the 61.8% retracement of the US dollar fall from late March high (~CAD1.3125) to the mid-April low (~CAD1.2530).  As the greenback's gains were pared in North America ahead of the weekend, support near CAD1.2830 was tested.  The may be additional support near CAD1.28 but the CAD1.2750, which also houses the 38.2% retracement of the recent leg up, may be more important.   

The Australian dollar staged a key reversal on April 19 after poking through $0.7800.  It has not looked back since and recorded a new low for the year (~$0.7530) ahead of the weekend.  However, the Aussie recovered and recorded new session highs.  Initial resistance is seen in the $0.7600-$0.7620 area.  The technicals look constructive for the Australian dollar within the dollar bloc.  

Light sweet crude oil for June deliver consolidated in recent days after gaining 10% in the past two weeks.  Initial support has been found near $67 a barrel and participants have been reluctant to push it through $70 (contract high set on April 19 at $69.55).   The MACDs and Slow Stochastics are rolling over.  A break of the $65.70-$66.00 area would suggest the consolidation is morphing into an outright correction.  If this is the case, then the price of oil could ease toward $59-$60.  The risk that the US leaves the agreement with Iran is thought to be adding a few dollars to the price of oil.  We suggest between the new yuan-denominated oil futures contract in Shanghai, and other countries willing to barter suggests a new US sanction regime might not be as effective as previously.  

The US 10-year yield probed the air above 3.0% and found it lacking.  It finished the week less than a single basis point higher.  We see three main forces pushing up US rates: the Fed, rising inflation expectations, and supply considerations.  These are not about to go away, yet many fund managers suspect that there is value there.  The yield can fall to 2.90% without being disruptive, but much below 2.85% could challenge medium-term outlook.  The June note futures bounced off 119-00 in the middle of the week.  It made a marginal new high for the week ahead of the weekend.  Initial resistance is around119-28.The 50% retracement of this month's loss is found near 120-05, and the 20-day moving average is near 120-08.   The 61.8% retracement is 120-14.   

The S&P 500 rose in four of last week's five sessions for the first time in nearly two months but closed ever so slightly lower on the week.    The 3%-handle on US Treasury yields spurred some consternation, but strong earnings growth appeared to be offset.  The S&P 500 is caught between two gaps.  The overhead one was created by the lower opening on April 19 (2702.8-2703.6).  The downside gap was made when the S&P 500 gapped higher on April 26 (2645.3-2647.1).  The technicals are not providing strong signals.

The better relative performance of value over growth that has recently materialized has continued.  The Russell 1000 Growth Index slipped 0.2% over the week.  It is up about 2% year-to-date.  The Russell 1000 Value Index eked out a small gain and rose for the third consecutive week.   It is off about 2.3% for the year.  

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