Be Careful of Playing for the Breakout

The US dollar rose against all the major currencies but the Japanese yen.  Its net loss against the yen, less than 0.1% was a fluke.  The dollar was confined to a 40 tick range against the yen for the entire week.  It appears to be the among the narrowest weekly ranges since at least 2000.  The dollar is at the upper end of its recent ranges against the euro, yen, sterling, and Canadian dollar.  The question for many participants is whether the dollar is on the verge of a breakout.  Our reading of the technical condition suggests that while the ranges may fray, they will likely hold.  

Dollar Index: Since the middle of last October, the Dollar Index has traded in a range between roughly 95.00 and 97.70. The 97.85 area corresponds to the 61.8% retracement of the decline from early 2017.  A convincing push above there would target 100.  The Dollar Index traded above 95.50 eight times but has closed above it twice--once last November and once last month. It tested the 95.50 level last week after the eurozone reported a disappointing PMI and the US reported a surge in retail sales and a drop in weekly initial jobless claims.  The MACDs and Slow Stochastics look constructive.  The five-day moving average remained above the 20-day moving average after looking poised to cross a few days ago. The upper Bollinger Band will begin the new week a little above 95.55 Initial support is seen in the 97.00-97.20 area.  

Euro: Bottom picking has been evident in the futures market in two of the past three weeks (last one ending April 16).  The bears have added to gross shorts for three of the past four weeks and at nearly 243k contracts, are less than 2k shy of the 2.5-year high set earlier this month.  The euro finished the week below its 10 and 20-day moving averages.  Despite the bearishness, the euro has consistently found bids below $1.12.  Over the past six months, it has traded below $1.12 five times and closed below it once--March 7 in responsive to a dovish ECB.  The MACDs appear to be turning lower, and the Slow Stochastics seem poised to do so.  Yet looking at the events calendar, we don't see an event that would be the trigger, and especially given market positioning.  In the options market, implied volatility has been drifting lower, meaning that options are being sold, while the put-call skew has seen the put premium disappear.  This would suggest that euro puts are being sold, ostensibly as a hedge on short euro exposure.  

Yen:  The dollar has straddled the JPY112.00 level for the past six sessions.  It closed with a 112-handle in four of these sessions, according to Bloomberg data, yet it has not convincingly broken this cap   The next target would be JPY114, but the MACDs and Slow Stochastics suggest the next move may be lower.  The trendline, drawn off the March 25 low near JPY109.70, comes in near JPY111.60 at the start of the new week and finishes the week a few ticks below JPY112.00. The correlation of the percentage change of the dollar-yen exchange rate and the 10-year US yield on a rolling 60-day basis had slipped from near 0.76 when FOMC met a month ago to 0.66 now, which is still in the upper end of where it has been over the past year.  The correlation between the exchange rate and the S&P 500, in contrast, is near 0.37 and is near its weakest in six months.   We are concerned that the long holiday, as Japan celebrates a new Emperor, can weigh on the yen, but is with closure a week away, most of the preparation may be passed.  Some worry that the thin markets during the holiday can make for erratic price action, but it does not appear that insurance is being bought in the options market as volatility has been falling, and the put-call skew is little changed.   

Sterling: Since moving back above $1.30 on February 20, the pound has tested it several times. It traded below it seven times but failed to close below it until the last two sessions.  The losses were recorded despite relatively constructive economic reports.  Last month's low was near $1.2950, and it would be the next downside target, and then $1.29.   Three-month volatility fallen sharply this month, from around 11% to less than 7%.  During this time of falling volatility, the put premium to calls has declined from approximately 2.4% to about 0.75% before the weekend.  If call options were being bought, as some have suggested, then volatility would have been expected to increase, not fall sharply.  It is more consistent with puts being sold then calls being bought, which is somewhat less bullish. 

Canadian Dollar:   The US dollar has traded between CAD1.33 and CAD1.34 this month.  There have been no exceptions to the upsides and a few exceptions to the downside, including last week's push to nearly a one-month low following slightly firmer than expected Canadian CPI report (~CAD1.3275).  The sideways trend has neutralized the technical indicators, though the Slow Stochastics are turning up.  The upper Bollinger Band will begin the new week near CAD1.3430, while the high from late March was nearer CAD1.3450.  We continue to monitor the uptrend line connecting the Feb and Oct 18 lows to the Feb and March 19 lows.  It is found near CAD1.3210 next week (and CAD1.3300 in early June).  The Bank of Canada meets April 24.  There is little doubt that the overnight rate will remain at 1.75%.  The issue is the shade of neutrality.  

Australian Dollar:  For almost three months, the Australian dollar has traded between $0.7000 and $0.7200.  There have been two minor exceptions, counting the middle of last week, when stronger Chinese data and a robust Australian employment report saw the Aussie briefly poke above $0.7205 before the bears made a stand and pushed it to nearly $0.7135.  The MACDs and Slow Stochastics are about to turn down.  Initial support is seen in the $0.7100-$0.7120 area.  Upticks toward $0.7200 ahead of the Q1 CPI may offer an attractive opportunity for tactile Aussie bear.  

Mexican Peso: The dollar began the week with the first back-to-back gain since this month, but it did not is signal a reversal.  The dollar finished the week below MXN18.80, having tested the six-month lows.  (~MXN18.7480).  The downside momentum has eased, and the Slow Stochastics are set to cross higher.  Resistance is seen near MXN19.00, and the 20-day moving average is a little higher (almost MXN19.03), where the 38.2% Fibonacci retracement of this month's decline is found.  Above here opens the door to MXN19.10-MXN19.20.  

Oil: June WTI edged to a marginal new high after posting an outside up day in the middle of the week.  The follow-through buying lifted the contract to $64.72 before it closed below $64 and consolidated ahead of the long holiday weekend.  It managed to close the week a nickel higher and extending its streak to seventh consecutive week and nine of ten.  The technical indicators are stretched as one would expect.  Recall that $64 a barrel level corresponded with a 61.8% retracement of the Q4 18 sell-off.  Our technical objective, based on the head and shoulders bottom projects $67-$68 a barrel.  A pullback to $63.15-$63.20 was bought last week.  Speculators in the futures market trimmed gross long positions in the week ending April 16 for the first time in two months.

US Rates:  The US 10-year yield firmed to the 2.60% level that we identified as significant.  It is the lower end of the range that had prevailed until the break down in mid-March.  It is also where a downtrend line connecting the highs from last November and March is found.  A convincing move above there allows for 2.80%.  After rising 16 basis points over the previous couple of week, the 10-year yield eased about half a basis point last week, while the two-year yield eased one basis point. The June 10 note contract was sold from also 125-00 at the end of March to a low of 122-20 after the strong retail sales and jobs data. The subsequent bounce took it to 123-07, where a downtrend line from late March is found.  There is near-term potential toward 123-20.  The market expectations for Fed policy have adjusted in recent weeks.  The implied effective Fed funds average had fallen to about 2.05% at the end of March. The current level is 2.40%.  This implied almost two cuts had been discounted.  Last week the yield closed at 2.275%.  This is consistent with about a 50% chance a one cut. If further adjustment is to take place, the first week of May, which sees the FOMC meeting and the April jobs data.   

S&P 500:  The S&P 500 gapped on April 12 and peaked on April 18 at 2918 before staging a potential key reversal. Follow-through selling the next day saw it fill the gap (and a little more) before rebounding and to close the holiday-shortened week a little above 2905.   A break of 2870 with conviction may signal that the record high set last September (~2941) is safe (for the time being) and a more serious corrective/consolidative phase as at hand.  Our technical target for a  pullback is the gap created by the higher opening on April 1 (~2836.0-2848.6).

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