Are We on the Cusp of New Leg up in Risk Assets?

The consolidative/corrective phase in the capital markets appears to be drawing to a close.  The June PMI readings confirm a significant improvement is underway and that many high-income economies are on track to return to positive growth in Q3.  At the same time, the extent of government and central bank support is unprecedented. 

The dollar fell against all the major currencies last week, save the Japanese yen.  All five of the best performers (NOK 2.1%, NZD 1.6%, AUD 1.0%, GBP 1.0%, and CAD 0.9%) appeared to take out downtrend lines that were in place since around June 10.  What is striking about the dollar's slump is that it took place as the Federal Reserve's balance sheet was shrinking for the third consecutive week and the unsecured overnight rate in the eurozone fell to new record lows, often cited as dollar-supportive.  

The same is true of the JP Morgan Emerging Market Currency Index.  It snapped a three-week downdraft with a 1.1% rally that lifted the benchmark above the downtrend line begun with a key reversal of June 10.  The greenback had been trending higher against the Mexican peso since then as well and last week's 2.7% decline pushed it below the trendline.

Equity benchmarks also did well last week. The MSCI Asia Pacific has made the most convincing break higher.  As an aside, it may appear notable that Hong Kong's Hang Seng rallied 2.4% last week despite the protests against and the first arrests under the China's new security laws and the US beginning to remove some of Hong Kong's special trade privileges.  The Dow Jones Stoxx 600 and the S&P 500 rose above their respective downtrend lines but the move thus far is not yet convincing. 

Dollar Index:  The Dollar Index made a three-month low on June 10 (~95.70) and reached 97.80 on June 30.  It was sold back to the trendline near 96.80, which is almost a (50%) retracement of its three-week advance on July 2 after the employment data.  The trendline begins the new week a little below 96.90.  The ascent of the MACD is slowing and the Slow Stochastic has turned down.  A convincing break of the trendline signals an immediate test on the 95.70 area. 

Euro:  With a few exceptions, Europe's single currency has been confined to a $1.12-$1.14 range for a month.  Within that range, it has appreciated for the past two weeks by a cumulative 0.5%.  It poked through the middle of the range after the US jobs figures but met good selling that pushed it back to almost $1.1220.  The downtrend line, drawn off the June 10 high (~$1.1420) begins the new week near $1.1275.  The MACD is still trending lower while the Slow Stochastic has turned higher.  The charts and risk-reward calculations suggest buying the euro on dips toward the lower end of the range and even on marginal penetration. 

Japanese Yen:  Since testing key support near JPY106 on June 23, perhaps fueled in part by Softbank's divestment of T-Mobile, the dollar rallied above JPY108.00 for the first time since June 9.  However, the greenback encountered a wall of selling and saw it posted a key reversal in the middle to last week and fell to about JPY107.35.  Follow-through selling over the past couple of sessions has been virtually non-existent.  The price action reinforces the technical significance of the JPY106-JPY108 range, which mostly confined the greenback is Q2.  The MACD has been muted by the sideways action and the Slow Stochastic has turned higher. Our correlation work shows a weakening of the yen and S&P 500 co-movement in recent weeks, but it looks set to re-couple shortly. 

British Pound:  Sterling's downtrend since June 10 ended and the subsequent bounce to $1.2530 retraced half those losses.  It is where the corrective upticks in the previous week had run out of steam. This area needs to be taken out to be convincing, and the next retracement level (61.8%) is at $1.26. The MACDs have flatlined near zero in recent days, while the Slow Stochastic curled up.   Initial support is seen a little below $1.2400.

Canadian Dollar:   The US dollar had set a nearly four-week high on the last Friday of June near CAD1.3715.  There was no follow-through buying last week and the greenback was sold in four of five sessions to about CAD1.3540.  The uptrend line off the June 10 low was frayed on June 30 and successfully penetrated to kick-off the second half.  With closes near the low more often than not in recent sessions, the Slow Stochastic has turned down from its highest level in Q2.  The uptrend in the MACD has flattened.  The CAD1.3480-CAD1.3500 offers important technical support.  It houses the 200-day moving average, the low from the second half of June, and the halfway mark of the greenback's bounce from June 10.  The next retracement level (61.8%) is near CAD1.3470.

Australian Dollar: The downtrend line off the June 10 high was violated in the middle of last week.  The Aussie settled above it for the past two sessions and found support at it ahead of the weekend.  The downtrend line begins the new week a little below $0.6900.  The statement following the central bank meeting on July 7 may pose some headline risk, but the momentum indicators favor more gains.  The Slow Stochastic has turned up and the MACD seems poised to follow suit in the next day or two.  A move above $0.6960 could signal a retest of the high from June near $0.7065.  

Mexican Peso:  The dollar will carry a four-day slide against the peso to start the new week.  The dollar's 2.75% slide snapped a three-week 6.6% rally. After setting new highs for the month on June 30 (~MXN23.23), the dollar reversed lower.  The subsequent losses surrendered roughly half of the gains scored since the June 9 low (~MXN21.4650).   The momentum indicators favor additional dollar losses.  The MACD has just turned down and the Slow Stochastic is has rolled over in the last couple of sessions.  The next retracement target (61.8%) is found near MXN22.14 but the near-term potential may extend toward MXN21.90.   The upside should be capped now in the MXN22.75 area.

Chinese Yuan:  The dollar rose in the last four weeks of May against the Chinese yuan and has spent the last five weeks alternating between gains and losses. Net-net the dollar fell a little more than 1% in June after rising 1% in May, leaving it virtually unchanged since the end of April (CNY7.0665). The CNY7.05-CNY7.10 range still seems in effect.  Still, if the dollar weakens broadly as our reading of the charts suggests, the dollar could drift a bit lower against the yuan.  The 200-day moving average, for example, is near CNY7.0440 and the June 10 low was closer to CNY7.04. 

Gold:  On July 1, gold made new multiyear highs a little below $1790. It has found support near old resistance around $1750.  Even though prices remain firm, the new highs have been marginal and difficult to sustain.  The momentum indicators seem to be warning of greater downside risk than upside in the near-term.  A break could see late longs cut fuel a pullback toward the $1715-$1730 area. 

Oil:  August WTI pulled back a bit ahead of the weekend, but still managed to finish the week above $40 a barrel for the first time since early March. It made a high last week near $40.75.  Last month's high was closer to $41.65.  The old gap from March beckons around $42.55.  The MACD has been trending lower since around June 10 and has not confirmed the recent highs.  The Slow Stochastic is turning higher but also did not confirm the highs in price.  A drop through the $39 a barrel level could mark a near-term high in place and further consolidative work.   

US Rates:  The US 10-year yield rose about three basis points last week to 0.67%.  It was the first week in four that yields rose.  It is a net two basis point increase from the end of May.   The 60 bp area looks like a solid floor.  The near-term range looks capped around 70 bp and the 20-day moving average is a little higher.  The yield spent a few days after the May employment data (in early June) above 80 bp.  The five-year yield fell to new record lows at the end of June of almost 26 bp.  It finished the week just below 40 bp. Many participants will be keeping on eye on the Fed Funds rate and Secured Overnight Financing Rate, which have been creeping higher.  The effective Fed Funds rate on July 2 was nine basis points and because of the holiday weekend, it counts as four days for the monthly average (which is what the fed funds futures contract settles at) after averaging about five basis points in May. For the first time in 12 weeks, foreign central banks liquidated Treasuries from the custodial account kept at the Federal Reserve.  About $8.5 bln of Treasuries were sold.  Separately, for the first time, a foreign central bank used the Fed's repo facility and offered a group of emerging market central banks.  Some suspect that it may have been Brazil.  

S&P 500:  Last week began with a dip slightly below 3000 before buying emerged to lift the S&P 500 to almost 3166 after the US employment data on July 2.  In doing so, the benchmark took out the downtrend line off the June 8 high (~3233).  The employment data spurred a gap higher opening that was subsequently filled in late pre-holiday activity.  The four-day island top from early June that signaled the corrective phase remains intact.  Once again the index entered it but failed to close it.  It is near 3181.50.  The poor close may see a further pullback and initial support is seen around 3100 and then 3080.  Both the MACD and Slow Stochastic are turned higher.   

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