Dollar has Legs or at Least One

Even though the conflict in Syria can rapidly escalate, investors were feeling more comfortable with risk over the last few days.  The US trade rhetoric was toned down several decibels, and this helped.  US President Trump saw signs of concessions from China's President Xi speech.  Trump suggested that negotiations were underway and that an outcome in which there are no new tariffs implemented is still possible  NAFTA negotiations were also promising.  

Equities rallied and the currencies that often do well when short-term participants have a greater appetite for risk, like the dollar bloc, did well, and the currencies used for funding, like the yen and Swiss franc did relatively worse.  Sterling's rise is also notable.  It will carry a six-day advancing streak against the dollar into next week, and rose to new highs since last May against the euro.  

The Dollar Index has been in a range of 89.00 to 91.00 for two months.  It is a little below the mid-point.  The protracted sideways movement neuters the technical indicators.  There does seem to be an underlying bid that was not there at the start of the year.  Over the past 11 weeks, the Dollar Index has fallen in only three, including last week's 0.35% decline.  That net-net it has not gone anywhere is a worrisome sign.  It does not appear to be a function of the bulls buying from the bears and accumulating a long position.  It seems to be more the case that some shorts were reduced, but that the bears remain content and the bulls are not prepared to make a strong stand. 

The euro, which is the single biggest component of the Dollar Index also remains in a range.  The bottom is near $1.22 and the top near $1.24.  There were a few violations last month but attempts to play a breakout were quickly punished.   The fact that the euro has gone nowhere in the face of widening differentials (two-year spread has widened from 200 bp to nearly 300 bp over the past six months), fairly consistent downside data surprises this year, and the ECB pushing unusually hard against hawkish comments by one of the national central bank governors, speaks to its resilience.  Three-month implied volatility has now completely unwound the run-up in the middle of Q1 and below 6.5% is the lowest since mid-January.  There may be some more scope for a near-term decline, but it has not been below 6% since 2014.  

The dollar is performing better against the yen.  It bottomed (~JPY104.55) on March 26, with a key reversal, which created bullish divergences in some of the technical indicators.  It appears that the dollar has formed a head and shoulders bottom pattern against the yen.  The neckline was broken on April 5 just below JPY107, but follow-through was limited, and as recently as April 10, the dollar probed JPY106.6.5 on an intraday basis.  However, by the end of the week, the dollar was at matching its best level since February 21.  The head and shoulders pattern projects toward JPY110, but we suspect the JPY108.00 area may prove sticky.  

Sterling continues to march steadily higher.  It closed below $1.40 for the first time in several weeks on April 5, but sellers on the breakout were quickly burned.  Sterling has not looked back.  Before the weekend it reached its best level since the post-referendum high was set on January 25 (~$1.4345).  The high posted on the day of the referendum was around $1.50.  The euro slid to its lowest level since last May against sterling (~GBP0.8630).  However, it appeared over-extended and closed below its lower Bollinger Band for the past two sessions. The pre-weekend price action also may be a potential (euro) bullish hammer.  The GBP0.8700 area may at least initially cap a euro recovery.  

In contrast to the eurozone, the British economic data have surprised on the upside consistently in recent weeks.  This has underscored the market's confidence that the BOE will hike rates next month.  Investors lean toward another hike in Q4.  At the same time, the UK's confrontation with Russia, which also pushed Brexit off center stage, has reduced the risk of a political crisis after next month's local elections.  

The US dollar traced a nearly textbook perfect head and shoulders top against the Canadian dollar in March after rallying in February.  The neckline (~CAD1.28) broke on April 3 but was still flirting with it on April 9.  Still, playing for the breakout worked here, and the US dollar fell to CAD1.2545 in the middle of last week before consolidating.  The measuring objective of the pattern is near CAD1.2475.  The weekly technical studies suggest further US dollar losses are likely, but the daily indicators are warning the market is stretched.  Initial US dollar resistance is seen near CAD1.2650.   

The easing of trade tension helped accelerate the Australian dollar's recovery.  It has strung together the first back-to-back weekly advance since January.  It had taken the better part of two weeks to carve a low near $0.7630. As recently as April 9 it was near $0.7650.  Before the weekend it briefly traded above $0.7800 for the first time in nearly a month.  It was rebuffed ahead of the 61.8% retracement of the leg down that began in the in middle of March.  The technical tone would deteriorate if the Aussie were pushed back below the $0.7740 area.  

We had previously noted that the Australian dollar was testing a three-year-old uptrend against the New Zealand dollar (~NZD1.05).  The trendline has remained intact even if marred, and the technical tone is improving.  A move now above the 20-day moving average (~NZD1.06) could boost confidence that a durable low is in place.  Short-term participants see the Kiwi is as more immune from the trade wars than the Aussie, making the cross a trade play.  

Oil prices exploded higher over the past week.  Both WTI and Brent rose by over eight percent, the most since late 2016.  The market shrugged off the larger than expected US crude build, and instead went with the geopolitical story and output restraint in OPEC and non-OPEC that has seen global stocks approach the objective of the five-year average.  The geopolitical concerns include a possible escalation in Syria, the harder line that is emerging that could lead to new sanctions on Iran, and loss of output in Venezuela.  Brent's premium over WTI has widened to most in three months.  

The technical indicators had warned of the risk that support near $62 would break, but it did not, and those technical indicators have turned higher.  It shot through the 50% retracement objective of the decline that began in 2014 (~$66.90), which had held back the continuation futures contract this past January.  The next retracement objective is near $76.50.  

The US 10-year yield rose for the second consecutive week, but this was only sufficient to push it back into the lower end of the old 2.80%-2.95% range. The safe-haven bid may have diminished in recent days.  The media and policymakers seem ambivalent about foreign ownership of US Treasuries.  On the one hand, the fact that foreign participation appears light at the recent auctions is disconcerting for some.  

On the other hand, we are told that foreign officials buy US Treasuries so that their currencies do not have to appreciate and they can reap more of the benefits from trade. Others spin dark fantasies weaponizing large holdings of US Treasuries, such as China's, or in the past, Japan's which remain nearly as large.   At the same time, the deficit is growing and projected to be around 4% of GDP this year and 5% next year, suggesting strong US borrowing needs.  

The June 10-year note futures contract has been heavy for the past two weeks, and the poor close before the weekend suggests further losses are likely in the days ahead.  The contract closed below the 20-day moving average for the first time since March 21, and the five-day moving average is set to cross below the 20-day.  However,  is still drifting in a fairly narrow range of 120-121.  Bond market volatility (MOVE) is at three-month lows.  

The S&P 500 rose nearly 2% last week.  The VIX eased a little more than a percentage point to finish at its lowest level in a month, a little below 17.5%.  Investors drew cautious ahead of the weekend, as tensions over Syria were running high.  The technical indicators are aligned for additional gains, and the five-day moving average is poised to cross above the 20-day for the first time since March 21.   

Although we are not convinced yet of its veracity, some see a possible head and shoulder bottom with a neckline a little below 2675.  The  S&P 500 reached 2680 before the weekend but reversed and proceeded to take out the previous day's low (~2654) before settling a bit higher 2656).  The 2678 area corresponds to a 50% retracement of the last leg down that began in the middle of March near 2802.   A move much below the 2635 area now might be seen as a failure and reinforcing the upper end of the new trading range. 

The Russell 1000 Growth Index rose 2.1% last week and is back positive for the year (1.6%).  The Russell 1000 Value Index rose 1.75% last week and is down about 3% year-to-date.   

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