Caution as Last Part of Corrective Phase could be the most Impulsive

We anticipated and have been tracking the corrective or consolidative phase in the foreign exchange market since shortly after the unexpected surge in US non-farm payrolls reported on June 5.  That phase may not be over yet, and the quarter-end adjustments are a wildcard. Many expect large equity sales after strong rallies that were all the more incredible given the deep contractions most economies are expected to report for Q2.  The MSCI indices for developed economies and emerging markets have risen by around 18% since the end of March.  However, our reading of the technical indicators suggests that this consolidative/corrective phase is nearly over, with one more push likely ahead, which could be the most impulsive.  It warns participants to be particularly mindful of reversal patterns in the price action.

The US dollar lost ground against most of the major currencies last week.  The notable exceptions were the Canadian dollar (~-0.45%), Norwegian krone (~-0.40%), and the Japanese yen (~-0.20%).  The weakening co-movement of the dollar-bloc, Scandi bloc, and safe-haven currencies seems consistent with the phase.  For the quarter, sterling is the only major currency unable to rise against the greenback.  It lost about 0.5% coming into the last few days of the period.  The Australian dollar easily gets top billing with its 12% advance, followed by the New Zealand dollar's nearly 8% appreciation.

Dollar Index:  The Dollar Index posted a key reversal pattern to start the week by rising above the previous day's range only to close below the previous day's low.  It sold off further the next day and reached the week's a little below 96.40.  It recovered sharply to almost 97.60 before consolidating ahead of the weekend.  The MACD is still trending higher, but the Slow Stochastic has begun to top out.  The 97.85 area corresponds to a (50%) retracement objective of the losses of the leg down from the May 25 high.  The next target is near 98.35, which corresponds with the 200-day moving average.

Euro:  The single currency finished the week near its lows.  The five-day moving average is below the 20-day average for the first time since mid-May.  The MACD is moving lower.  The Slow Stochastic decline is moderating, but it is not over-extended.  The initial retracement target was a little above $1.1210, and that has been modestly surpassed.  The next objective is near $1.1145, and we held out the possibility of $1.1080.  A move back through $1.1270 could be signal the downside correction is over.

Japanese Yen:  The price action reinforced the importance of support around JPY106.00.  Market talk linked the yen demand to flows related to Softbank's sale of T-Mobile.  The dollar recovered to almost JPY107.50, the upper end of its recent trading range.  It coincides with the 20-day moving average and the (38.2%) retracement of the leg down since June 5.  However, with the MACD and Slow Stochastic are turning up,  the hurdle will likely be overcome.  A band of resistance is seen in the JPY108.00-JPY108.40 area.

British Pound: Sterling has been unable to sustain even modest upticks and recorded a marginal new low for the month (~$1.2320) ahead of the weekend.  The five-day moving average moved below the 20-day average for the first time this month.  Initial support is seen near $1.2280, and a break signals a likely test on the $1.2075-$1.2100 area. The momentum indicators are moving lower, and the Slow Stochastic is just entering over-extended levels. Last week's high near $1.2455 is now an important ceiling.

Canadian Dollar:  The US dollar finished last week at its best level in nearly a month against the Canadian dollar, moving above CAD1.3700. Nearby support is seen by CAD1.3640.  The MACD and Slow Stochastic are trending higher, though the latter is more advanced. The greenback has fallen only in one of the past eight sessions.    Overcoming nearby resistance around CAD1.3730 could spur gains toward CAD1.3825-CAD1.3840 area.

Australian Dollar:  Buying interest was exhausted in lifting the Australian dollar from $0.6800 to $0.6975 in the first two sessions of the week. It drifted lower to finish the week near $0.6840. A break of $0.6775-$0.6800 could spur losses toward $0.6650, a retracement objective, and the 200-day moving average. The momentum indicators are pointed lower.

Mexican Peso:  The dollar reached near highs for the month against the peso ahead of the weekend above MXN23.00.  The risk-off mood, spurred by rising Covid-19 cases in the US, including Texas, which has halted its re-opening efforts, and the virus still seemingly out of control in Mexico (and Brazil) was more important than Banxico's 50 bp rate cut. The MACD is trending higher. The Slow Stochastic is about to cross into over-extended territory.  The MXN22.60 area should not offer support if the dollar is to extend its recovery.  The initial target is around MXN23.26, and then, near MXN23.80.

Chinese Yuan: The mainland market has been closed for the past two sessions, during which time the dollar crept fractionally higher (~0.1%) against the offshore yuan.  The dollar had tested the lower end of its recent range against the onshore yuan before the holiday around CNY7.05.  The upper end of the range is about CNY7.10 and the dollar test that in the week ahead.  The dollar is little changed against the yuan this quarter.  It settled Q1 near CNY7.0825.

Gold: Gold broke higher last week, above the $1750 that cap and the $1765.5 spike-high earlier this month.  It came back before the weekend to test the breakout and dipped to $1747.60 before bottom-pickers emerged and drove the gold to new session highs above $1768. The MACD is gradually rising, and the pace of the Slow Stochastic climb has moderated.  The high was set in the middle of the week, near $1779.5.  Above there, and the $1800 widely discussed target comes into view.

Oil:  August WTI reached almost $41.65 a barrel. It is the highest it has been since breaking down in March.  We identified that March breakaway gap that extended up to $42.15 as a key technical area. With equities selling off, ostensibly on macro concerns about the implications of the rise in new cases, oil prices could not maintain the upside momentum.  The August contract finished the week below $38 a barrel.  The momentum indicators failed to confirm the high, creating a bearish divergence.  The near-term risk extends toward $34.50-$35.00.

US Rates:   Despite the flood of supply, a curve flattened at lower absolute rates.  The 10-year yield fell about 7.5 bp to 63 bp, which is a six-week low.  The two-year yield eased three basis points to 16 bp.   The prolonged sideways move in the 10-year futures contract has rendered the MACD useless, the Slow Stochastics are stretched.  Ahead of the jobs data, the risk-reward suggest the 10-year yield is unlikely to fall below 60 bp.

S&P 500:  We put emphasis on the four-day island top created when prices gapped higher on June 6 and then gapped lower on June 11.   Another island top was created last week when the S&P 500 gapped higher on Tuesday and lower on Wednesday.  The subsequent sell-off took the benchmark just below 3016.  It is the lowest level since mid-June when it fell to almost 2966, which is the next target if 3000 goes. The S&P 500 closed finished the week below the 200-day moving average (~3021).  The lower Bollinger Band is near 2988. If the contagion spurs greater anxiety, and/or if quarter-end portfolio adjustments are as massive as some have projected, the downside risk may extend toward 2865-2915. The momentum indicators are headed south.   

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