More Backing and Filling for the Greenback to Start July

The powerful combination of the US policy mix and the divergence with most other central banks drives our constructive medium-term outlook for the dollar.  However, the technical indicators warn that there is still scope for some more backing and filling before the rally can resume on more sure foot.   

The greenback had a strong quarter, appreciating against all the major currencies.  The Canadian dollar's 2.25% decline made in the strongest of the other majors and is consistent with the Loonie's tendency to outperform in a strong US dollar environment.  The Swedish krona suffered the largest loss among the major currencies, depreciating by 7% against the dollar and about 1.5% against the euro.  It lost nearly 3% against the Norwegian krone as the trajectory of monetary policy diverged.   

In the last week of June, the Dollar Index traded on both sides of the previous week's range and closed in the lower end of that range.  The marginal new high was not able to convincingly overcome the 95.50 area, which stands in the way of a move to 96.00, where the 50% retracement of its slide that began at the start of 2017 can be found.  The RSI and MACDs did not confirm the new highs recorded this month, leaving bearish divergences in their wake, and the Slow Stochastics have already turned down.   The 94.15 area may be tested in the coming days, and a break signals the risk to 93.00.  

The euro retested the lower end of June range, which is mostly $1.15-$1.18.  There were a few intraday moves above the upper end of the range, but euro has not closed above $1.18 since mid-May.  Bullish divergences are seen in the RSI and MACDs, and the Slow Stochastic is moving higher.   A move above a band of resistance between $1.1680 and $1.1720 would signal a test and likely penetration of the June high near $1.1850.  Last week's 0.25% rise was the euro's second consecutive weekly gain, and it rose in four of the last five weeks of the quarter.   It lost 5.25% in Q2, the first quarterly decline since Q4 16.  

The US dollar trended gently higher against the yen through the second quarter.  There were only two weeks during the quarter that the greenback registered a loss.  It rose a little more than 4% between the end of March and the end of June, after falling 5.6% in the previous three-month period. The greenback finished June at the upper end of the month's range (~JPY109.20-JPY110.90).  In the bigger picture, with the exception of activity around the end of Japan's fiscal year (end of March), the dollar appears to be in a well defined broad trading range between JPY108 and JPY114.00.  It is finishing Q2 just below the middle of that range.  The 50-day moving average  (~JPY109.80) is rising, and although it was frayed in recent days, the dollar has not closed below it since mid-April.  The technical indicators are mixed.  

Sterling's nearly 1% bounce ahead of the weekend was not sufficient to avoid the third consecutive weekly loss (-0.4%).  The technical indicators are favorable.  The RSI and MACDs did not confirm the new lows, and the Slow Stochastics have turned higher.  The next technical target is found near $1.3250, which is where a two-week downtrend comes in at the start of next week and 61.8% of the down move from the key reversal when the ECB meeting in mid-June is found.  At the lows for the week, $1.3050, sterling met the measuring objective of the large double top pattern from January and April.  The 5.8% decline on the quarter is the largest decline since Q2 16, which featured the UK referendum, and ends a five-quarter advance.  

The market initially took Bank of Canada Governor Poloz' s comments to be dovish insofar as he noted the implications of rising trade tensions and how Canada's new mortgage rules will impact.  However, we understood Poloz suggest the despite this the removal of more accommodation (rate hikes) are still necessary.  His reference to the central bank's May statement seemed to support this, and the market came around, lifting the odds of a July 11 hike above 70% from near 50%.   The market retested previous week's high near CAD1.3380.  The failure to attract new buying set up a potential double top  (neckline ~CAD1.3265), which projects toward CAD1.3130.  This area was tested in the broad US dollar pullback ahead of the weekend.  It coincides with the 61.8% retracement of the leg up that began with the ECB meeting on June 14, and the 20-day moving average. The technical indicators warn of a further US dollar pullback, and a return to CAD1.30 ought not surprise.  

The Australian dollar's nearly 0.7% gain before the weekend cut the weekly loss (~0.5%), but it fell for a third consecutive week.   The Aussie lost 2.2% in June and 3.6% for the quarter.  It found a base in the second half of last week in the $0.7330 area.  The technical indicators are favorable, and a small bullish divergence is evident on the daily RSI.  The Slow Stochastics are turning higher, and the MACDs are poised to do so in the coming days.  The initial target is $0.7440-$0.7460, and then $0.7500.   The central bank meets next week, but it is widely understood that policy is on hold for some time still.  

Oil prices surged 8.4% last week on top of the 5.7% the week before.  It appears to be the biggest two-week rally in more than a year and a half.  Supply concerns dominated.  The US reported a larger than expected drawdown of inventories. US inventories fell for the third week and over this period dropped by 20 mln barrels.  US oil inventories fell in all but one week in May and one week in June.  Refiners have boosted their operations, and US exports reached 3 mln barrels a day.  The other main supply issue is the US effort to get other countries to stop buying Iranian oil, even though the US is the only one to pull out of the nuclear agreement with Iran.  Many have their sights set on $79.30 which is the 61.8% retracement objective of the drop that began in mid-2014, and the psychologically imported $80 level.   Initial support is now pegged near $72. 

US 10-year Treasury yields fell for a third week.  The yield eased 3.5 bp last week and at the close was off nearly 30 bp from the peak around 3.12% on May 18.   Last week's range was roughly 2.82% to 2.90%.  At the end of the week, it was near the lows despite the rally in stocks and oil prices.  In late May the yield spiked down to 2.76%.  Despite strong growth being posted this quarter, our fear that the US economy is near a cyclical peak appears to be catching on. The flattening of the yield curve can be consistent with this assessment, but on the other hand, there are still around $8 trillion of bonds with a negative yield.  Treasuries have relatively high nominal yields, positive real yields and a favorable US dollar environment,  The technical indicators on the September note futures warn that the up move is nearly over.  A further rally toward the March and May highs near 121-00 may offer a low-risk selling opportunity.  

The S&P 500 gapped lower on Monday.  It entered the gap at mid-week but failed to close it.  A small gap remains, and it can be found on the weekly bar charts between about 2746.1 and 2752.7.  On June 28, the S&P 500 recorded the low for the month near 2692 but recovered to close near 2717.  Ahead of the weekend, the S&P 500 gapped higher (~2724.3-2727.1) but was filled in late turnover that saw the index surrender most of its gains and close on its lows.   While the 2700 area has emerged as important support, a convincing break could spur losses toward 2640.   We remain concerned that one of the big buyers of US equities, namely US companies, typically reduce the share buybacks going into earnings season.   

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