Greenback's Advance Narrows

The US dollar was mixed last week.  After reaching a four-month high against the  yen near JPY111.40, it tumbled slipped below JPY109 by the end of the week, ending an eight-week advance with an exclamation point. 

The euro, on the other hand, saw, its push lower extended for the fifth week.  The euro has risen in only five sessions this month during which it posted an average gain of a little less than 0.3%.  The euro has risen in only three weeks since the end of February, and the average gain has been about 0.35%. 

The yen's gains do not appear driven by foreign demand for it or for Japanese assets.  The Topix and Nikkei lost more than 2% last week.  Japanese bonds firmed, and the yield fell to four basis points, the lowest in a month, but the foreign appetite for Japanese bonds is rarely robust in any event. Rather,  it is the yen's function as a funding currency that seems to lie behind its gains.  In recent days, it appears that it was the unwinding of short yen long Turkish lira positions that sparked a larger unwind of short yen cross positions.

At the same time, as we have noted previously, the correlation between US Treasury yields and the yen have improved.  In fact, the 60-day rolling correlation on direction (value) and return (percentage change) are the highest since the start of the year.  US 10-year Treasury yields fell.  The US yield fell 12 bp on the week, the largest decline since April 2017.   The 10-year yield has retraced half of its gains since reaching 2.71% at the start of last month.  The next retracement objective is near 2.87%. 

The 10-year yield peaked on May 18 near 3.13%.  The CFTC reporting period ended May 22 with yields near 3.05%.  The gross shorts were pared by almost 20k contracts, but with over 1.1mln contracts, the short position remains substantial.   The gross longs were practically unchanged, increasing by 3.4k contracts to 710.1k.

The technical indicators have turned down for the dollar against the yen.  The JPY108.50-JPY108.80 area houses several technical levels, including the 38.2% retracement of the gains since the dip below JPY105 in late March, the lows from earlier this month, and the lower Bollinger Band.   Stronger dollar support may be seen nearer JPY108.00.  On the top side, JPY109.80-JPY110.00 needs to be overcome to lift the tone.

The euro did not stop after reaching the $1.1700 area, where it retraced 38.2% of the rally since the start of last year.  A combination of market positioning, divergence, and political worries drove it below $1.1650 before the week's activity drew to a close.  The next target is the low from last November near $1.1550, and then the 50% retracement near $1.1450 comes into view. Technical indicators remain stretched but are showing no divergence.  Bounces of around a cent a being sold. 

Judging from the positioning in the futures market, speculators continue to be amazingly resilient.  The bulls added 6.6k contracts to the gross long position, lifting it to 226k contracts as of May 22.  This represents a nearly 10k contract increase over the past month.   The bears boosted the gross short position by 12k contracts to 116.2k. 

Sterling fell for the fifth week in the past six.  Despite the focus on the developments in the eurozone, sterling had the dubious honor of being the weakest of the major currencies, shedding nearly 1.2% against the US dollar.  It punched through the $1.34 area, which was the 38.2% retracement of the sterling's gains from the flash crash low in October 2016.  The 50% retracement is near $1.31, which dovetails with the objective of the big double top pattern  (from January and April in the $1.4345-$1.4375 area) that we saw in the $1.30-$1.31 range.  Like the euro, the technical indicators are stretched, suggesting it may be difficult for momentum to accelerate.  Previous support near $1.34 should now offer resistance.

 The Antipodean currencies managed to eke out minor gains against the greenback, but not the Canadian dollar.  Like sterling, it has fallen for five of the past six weeks.  The US dollar found steady bids in the CAD1.2730-CAD1.2750 area and bounced toward CAD1.30 ahead of the weekend.  The technical indicators are supportive of additional greenback gains.  The high for the year was set in mid-March near CAD1.3125.   Ahead of it is the downtrend line off the 2016 and 2017 highs that is found around CAD1.3085 are at the end of next week.   The Bank of Canada meets next week, but the odds of a hike have fallen to 1 in 4.  In our Q2 outlook, we had suggested a hike in Q3 was more likely than in Q2, but the odds of a July hike have slipped in the past week toward 60% from 70%. 

The Australian dollar gained 0.6%.  It was the third strongest major behind the yen and Swiss franc.  It briefly poked above $0.7600 for the first time since April 25, but it stalled in the face of the greenback and yen's broader gains.  The rally fizzled in front of the 50% retracement of the Aussie's slide since the key reversal on April 19.  A break of the $0.7500 area, which is a popular option strike, would confirm the upside correction is over.  We continue to track a large double top pattern in the Aussie from September 2017 and January 2018.  The neckline is at $0.7500.  It projects toward $0.6900. 

Rising US inventories and ideas that OPEC and non-OPEC producers will taper their output cuts as early as next month weighed on oil prices after new highs were recorded to start the week.  July light sweet crude rose to near $73 a barrel before falling to almost $68 ahead of the weekend.  The 4.8% loss was the largest since February.  The technical indicators have turned down,, and additional losses appear likely.  The five-day moving average will likely fall through the 20-day moving average next week for the first time since mid-March.  Initial support is seen in the $66.50-$67.00 band.  The weekly technical condition is particularly bearish with a key downside reversal on the weekly bar charts and bearish divergence with the RSI and Slow Stochastics, which did not confirm the high at the start of the week.  This suggests a more significant high may be in place.

The S&P 500 spent the past week, as it did the previous week, chopping around a 2700-2750 range.  The MACDs and Slow Stochastics are still headed lower.  The market closed higher on the week (~0.3%), but that may not be impressive given the fall in yields.  The 60-day correlation between the S&P 500 and oil and S&P 500  and US 10-year yields are also identical near 35%.  However, over the past 30 days, the correlation between yields and the S&P 500 has turned negative while the correlation between oil and the S&P 500 has been halved (to ~0.25).  

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