Dollar Momentum Slows

The market is showing euro and sterling bulls little mercy. It seems that only the briefest and shallowest upticks are seen before new lows are seen.  The fact that the several bilateral dollar exchange rates are going through 200-day moving averages puts in on many medium-term investors radar screens for the first time in a year.

The dollar move has accelerated.  The Dollar Index rose about 1.3% last week, the third weekly advance, but to put this run in perspective, it has risen in 11 of the past 14 weeks.

Such a move, we find, is typically a result of both sides moving, as there is good news in the US and less so from Europe and Japan.  With fiscal stimulus soon to hit a US economy that is near full employment and the inflation target, the Fed can be confident of the direction of policy in a way the ECB with a preliminary core CPI reading of 0.7% (the trough was 0.6% in 2015) and no improvement with the April PMIs.

The BOJ has not even begun discussing an exit.  If doubts grow about next year's inflation forecast, as we suspect they will, there may be pressure to do more, rather than less.

The Bank of England meets next week. Expectations for a rate hike have all but evaporated.  In fairness, the expectations for an increase have simply been pushed further back.  However, given the decline in sterling, not just against the dollar,  but more broadly on a trade-weighted basis, a rate hike would, by and large, neutralize the easing of financial conditions that has been spurred through the exchange rate.

The euro met the 61.8% retracement (~$1.1935) of the rally off last November's low (~$1.1555) ahead of the weekend.  Before returning to that low, several chart points are seen in the $1.17-$1.18 area.  The dollar bears may try to make a stand there, perhaps on ideas that central banks will shift reserves from dollars to euros, as some have suggested.  

The current leg down in the euro began April 19 with an outside down day.  During this run, it has taken out the previous day's high once.  It has not closed above the five-day moving average since April 18.  It is found just below $1.20. The 200-day moving average comes in near $1.2020, and a retest should not surprise.  

The dollar was stymied at the JPY110 level.  Many short-term participants were looking for a push into the JPY110.30-JPY110.40 area to get short, but the figure held tough.  Note that the 200-day moving average is near JPY110.20. With the slippage in US rates, the 10-year yield off 10 bp from its peak, increased equity market volatility, and Japanese markets closed for holidays at the start and last two days of the week, the greenback was pushed to JPY108.65 before bids took it back above JPY109.00.

The recovery ahead of the weekend may have left a dollar bullish hammer candlestick pattern in its wake.   Our reading of the technical indicators suggest that another attempt on JPY110 is possible, but unlikely to prove very successful.  This is to say that the technical indicators do not indicate an upside breakout for the dollar against the yen is at hand.

Sterling was sold through its 200-day moving average (~$1.3540) for the first time in a year before the weekend and finished a hair below it.  The low for the year is the next important chart point (~$1.3460).  We identified a potential double top in sterling (~$1.4340-$1.4370), and with the neckline (~$1.3710) yielding, the associated measuring objective is seen in the $1.30-$1.31 area, which also corresponds to the lows from last November.   We look for sellers to see a bounce into the $1.36-$1.3650 area as a new opportunity.

The Australian dollar posted a key reversal on April 19 after approaching its 200-day moving average (~$0.7800) and did not look back until reaching nearly $0.7470 on May 1.  It has been consolidating since and reached a  the four-day high near $0.7560.  Initial resistance is seen around $0.7600.  Longer-term, there also appears to be a double top in the Aussie near $0.81.  The neckline is at $0.75, which while penetrated has not been sufficiently convincing.  The measuring objective is near $0.69.

The Canadian dollar has been moving sideways.  The US dollar has been with few exceptions confined to a CAD1.28-C AD1.29 trading range for nearly two weeks.  The 200-day moving average, incidentally, is found near CAD1.2640.  The technical indicators are mixed and not generating a consistent signal.  Perhaps that suggests a break out will not be sustained.  The Canadian dollar has been among the better major currency performers during this US dollar advance.  It the greenback corrects low, the Canadian dollar will likely suffer on the crosses.

Light sweet crude for June delivery has also been moving sideways for the better part of three weeks.  The range is mostly  $67-$69 a barrel. The dollar's appreciation has not weighed on prices arguably because it has been offset by concerns that the US will put new sanctions on Iraq.  Prices surged over the past two sessions, and a new high was seen ahead of the weekend just shy of $70 and look poised to move higher before the US decision on Iran due at the end of next week.  

The US 10-year yield fell to almost 2.90% after the disappointing employment report.  It had been turned back from 3.0% in the middle of the week.  The bears are sitting with a large short position in the futures market, but appear patient.  There is a record gross short speculative position of 1.077 mln contracts.  They grew by minor 8.5k contracts in the latest CFTC report that covers the week through May 1.  They are confident that the fiscal stimulus will produce larger deficits, more inflation, and higher yields.  Bottom pickers have gradually been adding to gross longs.  They rose by 25k contracts to 631k, and are up 65k contracts over the past month.   In the note futures, a push higher in the June contract met resistance in front of 120-00, the highest since April 19.

The S&P 500 once again recovered from a test on the 200-day moving average (~2615).  On the other hand, the bounces from the tests have been of smaller magnitude, and this is weighing on some sentiment.  The market has been chopping sideways since late March (~2570-2700). The gains ahead of the weekend still left it down 0abojut 0.25% on the week.  It is the second week of losses, which were preceded by back-to-back weekly gains.  Within a range, the rule of alternation means that after the lower end is tested and it holds, the upper end should be approached. 

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