When is the Trend not Your Friend?

The US dollar remained firm last week.   The strongest of the majors was the Norwegian krone, and it rose less than 0.2% against the greenback.   The volatility is continuing to compress.  The one-month euro and yen implied volatility is a little below 5%, which puts it at five-year lows.   Another important characteristic of the foreign exchange market is that speculators are long dollars, which in the futures market is expressed as short the currency contracts.  Non-commercials (speculators) are net short all the major currency pairs.  The speculative net short position is the largest since 2016.  They are net short the most yen contracts in three months and the most Australian dollars contracts in five months. 

Dollar Index:  The Dollar Index posted its highest close in a month ahead of the weekend.  It continues to bump against 97.50, and above it is the high from the end of last year and early March, 97.70.  The Dollar Index has risen in nine of the past 11 weeks.  It has rallied from two-month lows on the last day of winter through the end of the month and traded mostly in a range of roughly 97.00-97.50 last week.  The technicals are stretched but have not turned.  A break of 96.80 may begin to worry late longs.   We continue to look for an eventual upside breakout yet given the recent run, and the technical condition, a strong acceleration seems unlikely.  This warns against chasing the dollar higher here. 

Euro:  The single currency has risen twice in the last 12 sessions.  It has lost about two cents over this run.  It has not been above $1.13 since March 26, which was also the last session it closed above $1.1250. Dips below $1.12 have been bought.  The technical indicators are stretched, and the Slow Stochastics and MACDs appear poised to turn higher. We expect the euro to test $1.10 here in Q2, but in the near-term, the risk-reward may favor fading weakness.  Much bad news seems to have been discounted, and a dovish hold by the ECB is widely expected.  Market positioning is extreme.  Shorts will want to be careful.

Yen:   The dollar has risen against the yen in nine of the past 12 sessions.  On a closing basis, it rose 0.85% over the period.  It is approaching the JPY112.00 area where it stalled in early and mid-March.  The Upper Bollinger Band is just above there around JPY112.10. On the other hand, the technical indicators are not stretched and show strong momentum.  Underlying financial asset drivers (stocks and bonds) also have been dollar-supportive.  The Japanese economy is struggling, and the Tankan Survey saw little near-term improvement, while as the quarter has progressed the Atlanta Fed's GDP tracker has risen from below 0.5% at the start of the month to 2.1% as of April 2 (before the US jobs report and consumer credit.  The risk is that the yen may underperform in a broader dollar correction.

Sterling:  Sterling has risen in five out the past dozen sessions, It lost about 0.5% against the dollar, outperforming the euro and yen over the streak.  Over the past week, it was mostly confined to a $1.30 to $1.32 range.  The dip below $1.30 was bought, and sterling has not closed below it since February 18.  It is also where the Lower Bollinger Band is found.  The downtrend from the mid-March high came in near $1.3200 the middle of last week and is near $1.3130 at the end of the week ahead.  A long extension (one year or longer) may be good for sterling even if the cloud of uncertainty remains.   The Slow Stochastics look set to turn higher, the MACDs are continuing to point lower.

Canadian Dollar:   The US dollar has risen in eight of the past 12 sessions against the Canadian dollar.  Over this time, on a net basis, the greenback has risen from about CAD1.3300 to CAD1.3380.   The diverging employment reports helped the US dollar finish on the highs for the week.  This is still part of the range affair that extends to the late March highs near CAD1.3450, which is just above the Upper Bollinger Band.  The early March highs are closer to CAD1.3470.  The technical signals are mixed not robust in any case.  Continued range trading seems like the best bet.

Australian Dollar:  A narrow trading range has been established and the five and 20-day moving averages converge within a few ticks of $0.7100.  The 100-day moving average is found near $0.7145 and the Aussie has not closed above it since February 26. It has not traded below $0.7000 since January 4 as it was recovering from the flash crash (that saw it trade to nearly $0.6740). The technical indicators look mildly supportive, but here too continued range trading may be the most likely scenario. 

Mexican Peso:  The dollar finished at its lowest level in two-week ahead of the weekend against the peso. The Trump Administration pulled back from threats to close its Southern border and the broad risk-on mode may have also contributed to the greenback's 1.8% decline against the peso last week.  It unwound the previous week's gains.  An uptick in Mexico's March CPI next week will keep the central bank from being able to reduce interest rates, even though the February industrial output remained below year-ago levels for the fourth month.    A convincing break of MXN19.00 would target the lows from March 20 near MXN18.75.

Oil:   The May WTI contract advanced by almost five percent in its fifth consecutive weekly gain. The price has only fallen three weeks this year.  It posted an outside up-day ahead of the weekend, whereby it traded on both sides of the previous day's range and closed above the previous day's high.  It approached the $63.45 Fibonacci retracement objective (61.8%) of the sell-off that began in early Q4 just shy of $76 a barrel.  The head and shoulders bottom we have been tracking since mid-January projects toward $67. The close was just inside the Upper Bollinger Band. Similarly, the technical indicators are stretched, which is not new, but none seem to be signaling a top is at hand.

US Yields: The 10-year note yield rose nine basis points last week.  It was the first weekly increase since the first week in March.  The yield had reached almost 2.55% immediately following the employment report, after having dipped below 2.34% o March 28, which looks like a climactic low.  The yield curve is flat but not inverted.  The yield pulled back and finished near session lows below 2.50%, with arguably a little pressure after Trump called for a new round of QE.  One might expect that with the nominations of Moore and Cain to the Board of Governors, who frankly seem ill-qualified as for the posts in an administration which prides itself on disruption and flaunting propriety and decorum, that more dovish Fed policy would be discounted.  This is not the case.  The January 2020 Fed funds futures contract implies an average effective rate of 2.23%.  This is the most since March 21.   It is 17 bp above the low print on March 27.  The June 10-year note yield was in a consolidative move last week between 123-06 and 123-27 in the past four sessions.  Although the RSI seems to be poised to turn higher, the MACDs and Slow Stochastics are still headed lower. 

S&P 500:  The S&P 500 rose a little more than 2% last week.  It drew near 2900 and is poised to test the record high set last September near 2941.  It has fallen in only three of the past 15 weeks, since the 7% drop in the week before Christmas.    Momentum appears strong.  It began the week on the lows and finished on its highs.  The S&P 500 gapped higher on April 1, and because it is also on the weekly bar chart, it may have added significance.  The gap is found roughly between 2836 and 2848. Technical indicators are stretched as the Q1 earnings season is about to begin.  A poor quarter is widely anticipated, and expectations have been guided lower.  With the quarter seemingly written off by policymakers and investors, the forward guidance offered may color the market's response.  Boeing announced a cut in production of its still-controversial 737 Max.  The plane reportedly has 600k parts and hundreds of suppliers.  Just like Boeing orders impact macro data, such as durable goods orders and shipments, these new measures will likely also have knock-on effects in both micro and macro data.  

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