Dollar Correction Continues

The recent dollar's leg up was sparked by the divergence of the disappointing flash EMU PMI and the surge in March US retail sales on April 18.  By the time the US reported Q1 GDP on April 26,  the market had already discounted the rebound in the US economy.  After pushing back, the dollar again went bid ahead of the jobs data and again, rather than rally on the strong gain in employment, it reversed lower. 

The US dollar is in a correction phase.  It was unable to sustain let alone extend its rally despite better than expected data.  The correction will likely dominate the price action in the coming days.  

Dollar Index:  The 0,5% decline was the largest weekly loss since mid-March and the second biggest drop since the end of January.  The decline had begun at the end of the previous week when the bulls were only able to muster a marginal new high (less than a full tick or 1/100 of an index point) on the back of a 3%+ Q1 GDP report.  The profit-taking saw the Dollar Index fall from a little above 98.30 to a low in the middle of last week near 97.15, through the 20-day moving average (~97.40) and approaching the 50% retracement (~97.05) of the leg up that began fittingly on the first day of spring.  It reversed higher and closed above the moving average and in one fell swoop retraced half of what it had lost since the GDP high (~97.75).  It continued to recover and poked briefly about 98.00 before turning lower, falling through the previous day's low.  It missed recording a potential key reversal by missing closing below the previous day's low by 6/100 of an index point).  Still, the weekly close was weak, and the technical indicators are trending lower.  The next corrective target is in the 96.75-97.00 area.   A break of this area could spur another leg down of around 1%.  

Euro: New lows for the week (~$1.1135) was set before the euro recovered after the US jobs data, which did for the euro what better than expected EMU GDP and CPI failed to do. The bout of short-covering pushed the euro through $1.12, though it closed a touch below. It left a potential bullish hammer candlestick pattern in its wake.  The RSI and Slow Stochastics point a continuation of the upside correction in the days ahead.  The MACDs have flatlined. The initial hurdle is the 20-day moving average that begins the new week near $1.1230, a trendline connecting recent highs (late March, mid-April, early May) is found a little ahead of last week's high around $1.1265.  Above there the $1.1280-$1.1320, which houses retracement targets and last month's high come into view.

Yen:  Japan's markets were closed last week and will re-open May 8.  The dollar has not traded above JPY112 since the holiday began. The dollar tested JPY111.00 in the middle of last week and the rebound stalled by JPY111.70, where the 20-day moving average is found.  The heavy dollar tone ahead of the weekend saw the greenback slump back toward the week's low.  The technical indicators give scope for additional dollar losses.  The five-day moving average broke below the 20-day average for the first time since early April.  However, we suspect market participants will be reluctant to push the dollar much lower before the Japanese markets open.  Support in the JPY110.80-JPY111.00 area may hold even if frayed on an intra-day basis. 

Sterling: While the politicians and pundits try to decipher the meaning of the stunning local elections that saw the Tories lose over 1000 council seats. The hapless Labour Party not only failed to capitalize from the Conservative Party ruin and it too lost seats (82).  However, the markets sensed that the outcome will force a compromise and a softer Brexit (though the parties that did the best for unequivocally pro-Europe) and this coupled with the pressure on the greenback, saw sterling rally more than 1% for the first time since March 13, when the high for the year was recorded near $1.3380.  Sterling stalled early last week ahead of the 50% retracement of the subsequent losses (~$1.3125), backed off a little and then posted a big outside up day after the US employment data and closed on its highs (~$1.3175).  The 61.8% retracement objective from the March 13 high is within spitting distance (~$1.3185).  If this is successfully breached as the technical indicators suggest, the next target is around $1.3260 before the year's high comes back into view. 

Euro-Sterling: The euro slid against sterling ahead of the weekend.  It has risen only once in the past eight sessions.  Over the past two weeks, the euro has fallen from the upper end of its recent range (~GBP0.8600) toward the lower end (~GBP0.8500).  The euro has spent very little time below GBP0.8500 since May 2017. It finished last week a hair above it.    Initial support below it may be near GBP0.8470.  We think caution is advised. Recall the euro peaked at the start of the year above GBP0.9100.  The weekly technical indicators are either over-extended (RSI and MACDs) or already reversing (Slow Stochastics). The euro closed not just below the lower Bollinger Band, set at two standard deviations below the 20-day moving average, but it finished below three standard deviations (found ~GBP0.8510).

Canadian Dollar:  The US dollar reached its highest level against the Canadian dollar since the January 3 flash crash in response to the slightly softer neutral stance of the Bank of Canada on April 24. This was two days before the US GDP surprise and six days before Canada reported an unexpected contraction in February GDP and seven days before Markit reported that Canada's April manufacturing PMI fell below the 50 boom/bust level for the first time since at least mid-2018.  After reaching a high around CAD1.3520, the greenback retreated into the upper end of its previous range (~CAD1.3300-CAD1.3400).  The US dollar recovered to almost CAD1.3500 on the knee-jerk response to employment data before reversing lower and closing below the previous day's low for a bearish outside day.  The low was a little above CAD1.3400, and the 20-day moving average is just below.  The technical indicators suggest the dollar's downside is the path of least resistance. A break below last week's lows (~CAD1.3375) could signal losses to CAD1.3300-CAD1.3330. 

Australian Dollar:  The US jobs data saw the Australian dollar make a new low by a 3/100 of a cent before recovering.  The low was near $0.6985, and the short-squeeze carried it back to $0.7025 before settling a little below $0.7020.  It was the third consecutive weekly loss, but the chart pattern and technical indicators suggest the suggest there is scope for additional corrective gains, leaving aside the RBA meeting.  The Aussie appears to have carved out a double bottom around $0.6985.  The neckline is $0.7070, and it needs to rise above there to confirm the pattern, which would have a minimum objective of $0.7150.  That is a bit more than the (61.8%) retracement objective of the decline since the two-month high was set on April 17 a little above $0.7200.  The RSI has turned up, and the MACD and Slow Stochastics are poised to do so in the coming days.  

Mexican Peso:  The dollar's 1% loss against the peso ahead of the week was the largest decline in a month and third largest decline so far here in 2019.  That loss though unwound the week's gains up to that point and a little more.  The weekly loss of 0.1% may understate the greenback's soft, technical tone. After recording a bullish shoot star from a low below MXN18.80 in the middle of last week, the dollar advanced to almost MXN19.18 before reversing lower, posting an outside down day ahead of the weekend. The technical indicators warn that the dollar may test the lower end of its recent range, which extends toward MXN18.75.  

Oil:   WTI for June delivery fell 2.15% last week to a little below $62.00. It was the first back-to-back weekly close of the year.  As we noted, the June contract met the longstanding objective of the head and shoulder bottom carved out in the Dec-Jan period.  We estimated the measuring target in the $66-$67 area.  Since $66.60 was reached on April 23, prices have trended lower.  The technical indicators give the room for further losses, but important psychological and chart support is seen around $60.  Note that the 50-day moving average begins the new week a little below $61 while the 200-day moving average is a touch below $60.80.  The June contract closed below the lower Bollinger Band on May 2 but closed back above it (~$61.82) after spending the pre-weekend session consolidating the week's losses.  

US Yields:   The two-year generic yield rose five basis points last week to 2.33%, and the generic 10-year yield edged up a little less than three basis points to 2.525%.  The two-year yield is in a 2.20%-2.40% range.  The 10-year yield appears to be in a roughly 2.45%-2.60% range. The Q1 GDP deflator was halved and hourly earnings growth disappointed.  The technical indicators for the June futures contract are mixed. The RSI is constructive, but the MACDs remain in a trough, and the Slow Stochastics have turned down.  The clear uptrend from last November is near 123-07 by the end of the week ahead.  The implied yield of the January 2020 fed funds futures contract rose 2.115% in the immediate response to the FOMC statement to 2.265% after the employment data.  Net-net, it rose six basis points more or more than twice the two-year note yield.  The effective fed funds rate eased four basis points since the FOMC meeting, but at 2.41% it remains above the new rate of interest on reserves (2.35%). 

S&P 500:   The S&P 500 posted a key downside reversal in the middle of last week: making a new record high near 2954 and before turning lower and closing below the previous day's lows.  Follow-through selling saw a test on 2900 where bids were discovered.  It recovered well after the jobs data and managed to post its second-highest close on record, less than 20 cents below the record.  The technical indicators are mixed.  The RSI is bouncing, the MACDs are pretty flat, and there is a bearish divergence with the Slow Stochastics that did not confirm the new record high.  A shelf in the S&P 500 has been built over the past three weeks in the 2890-2900 area.  

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