How Durable of a Dollar Top?

After pushing higher in the first part of last week, the US dollar reversed lower and saw follow-through selling ahead of the weekend.  The reversal saw all the major currencies but the British pound gain on the greenback last week. Although the ineptitude of Prime Minister May has weighed on sterling, the immediate reaction to her departure saw the pound fall as the risk of a no-deal exit rose.

As we discuss below, the technical condition warns that the corrective forces could continue through the week ahead.  Looking ahead of the macro calendar, this could persist until the run-up to the ECB meeting on June 6 and US employment data the following day.  Of course, these things are subject to change and fine-tuning.  The dollar remains supported by wide interest rate differentials and an economy that still appears stronger than Japan and most of Europe.  It strikes us that this is a short-covering correction for the major currencies rather than a turn in the underlying trend.

Dollar Index: A new two-year high was recorded on May 23 a little above 98.35 before it reversed lower and closed below the previous day's low.  This is a key reversal.  There was follow-through selling ahead of the weekend.  It approached the (61.8%) of the leg up since May 13 (~97.55).  The technical indicators are consistent with further losses.  The RSI has turned down.  There are bearish divergences with the MACDs, which did not confirm the new high, and the Slow Stochastics are crossing lower.  The 96.85-97.00 area is important.  It houses the 100-day moving average and that mid-May low, which is also a potential neckline of a double top.  A convincing break of the pattern has a measuring objective near 95.60.  A move back above 98.00 would indicate the correction is over.  

Euro:  In a mirror image of the Dollar Index, the euro recorded marginal new two-year lows on May 23.  The $1.1100 remained intact, where a large option was due to expire the next day, and the single currency staged a dramatic key reversal. The euro has risen in three of the past four weeks, and this has been sufficient to turn the technical indicators in a more supportive direction, with the bullish divergence in MACDs and the Slow Stochastics turning up.  Going into the final week of the month, it is up about 0.5%, leaving it in a position to snap a four-month losing streak.  If there is a double bottom in place near $1.1100, seen in late April and again last week, the neckline is the mid-May high near $1.1265.  The measuring objective would be near $1.1430, which is near the late February and mid-March highs.  That strikes us as too far.  The mid-April highs near $1.1325 and the 50% retracement of this year's decline, $1.1340 are more of what we envision.  We note that three-month implied volatility can slip closer to 5.0% in this phase, while the 100-day average is a little below 6%. 

Yen:  The dollar's recovery from the May 13 low near JPY109 fizzled in the first half of the last week near JPY110.60, near the 20 and 100-day moving averages, and the 50% retracement of the decline from the year's high near JPY112.40 on April 24. The technical indicators we look at did not generate strong buy signals during the greenback's recent recovery.  The five and 20-day moving averages did not cross.  The technical indicators are not generating strong sell signals but seem consistent with additional near-term dollar losses.   The dollar has fallen in five of the past six weeks.  A possible double top is in place.  The early March high was near JPY112.15 and the late April high was around JPY112.40.  The neckline would be the March low close to JPY109.70.  The measuring objective would be JPY107.00-JPY107.30.  The JPY107.75 corresponds to the (61.8%) retracement of the dollar's rally off the January 3 flash crash low.  Before there, the dollar may find support near JPY108.65 on a break of JPY109.  As the dollar weakens, implied volatility firms.  The three-month implied vol is near 6.6%, just above the 100-day average. 

Sterling:  The almost 0.5% gain ahead of the weekend was not quite sufficient to reverse the week's losses and prevent the extension of sterling's losing streak for a third consecutive week, and five of the past six.   Sterling has dropped nearly six cents since the start of May, but the possible hammer candlestick on May 23 may have marked the near-term low near $1.26.   The technical indicators are consistent with further correction.  Initial resistance is seen in the $1.2800-$1.2820 area.  Stronger resistance is seen by $1.29, which is where a (61.8%) retracement objective of this month's decline and the 20-day moving average are found.   Three-month implied volatility has been firming but given the risks, 7.7% vol seems low..  It is only one percentage point above the one-month implied vol and is two percentage points below the 100-day moving average.  

Canadian Dollar:  The US dollar briefly traded through both sides of the narrow CAD1.34-CAD1.35 trading range that has confined the price action over the past month.  The sideways, even if choppy price action, has rendered the technical indicators of little value.  The recent economic data will boost likely boost the Bank of Canada's confidence that it can stand pat.  The continued weakness in non-oil exports and the slowdown in the US economy are among its biggest risks as the employment and consumption have remained strong despite the ongoing adjustment in the housing market. 

Australian Dollar:  A shelf has been carved near $0.6865. An outside up day was recorded on May 23.  What prevented it from being a technical key reversal is that the Australian dollar failed to make new lows for the move.   Nevertheless, the outside up day saw follow-through buying the following day. It stopped ahead of the weekend at $0.6935, the (38.2%) retracement of the leg down from May 7.  A move above the $0.6960 area, where the 20-day moving average and the 50% retracement objective are found would likely spur additional short-covering toward $0.7000 ahead of the Reserve Bank meeting on June 4.  The market has grown increasingly confident of a rate cut (almost 90% discounted) and at least one more in H2 (though has begun pricing in a third cut as well).  

Mexican Peso:  For the better part of the past two months, the dollar has been in an MXN18.80-MXN19.20 range.  The relatively high real and nominal exchange rates, a credible central bank, and government, which outside of energy, has pursued a more pro-business agenda than many expected, underpins the attractiveness of the peso for levered participants.  However, the peso still is a proxy for risk-taking appetites and emerging markets in general. The peso seems particularly sensitive to S&P 500 volatility.  The correlation of changes in both is near 0.44 over the past 60 sessions.  It has not been above 0.50 in three years.  

Oil:  The futures contract for July delivery of light sweet crude oil spilled nearly 7% last week for the largest loss of the year.  The surge in US inventories and growth concerns overshadowed the elevated tensions off the coast of Iran.  There are also reports that China may be breaking the US embargo.  The sell-off through $58 met the (38.2%) retracement of the rally since the lows from last December.  The next retracement objective (50%) is a little below the early March low near $55.30.  The 1.25% bounce before the weekend failed to lift the July contract back into its Bollinger Bands.  Corrective pressure may extend back to the $59.80-$60.00 area. 

US Yields:  Since Trump's tweets that marked the end of the tariff truce, the US 10-year yield has tumbled 20 bp to finish last week at 2.32%, three basis point below the rate the Federal Reserve pays on reserves and the lowest since December 2017.   The technical studies on the June note futures contract are mixed.  The MACDs show plenty of room, while the Slow Stochastics are have not confirmed the push to new highs.  The next important yield area is around 2.25%, while 126-00 area basis the June contract is a (50%) retracement objective of the decline from July 2016 to last October.  The implied yield of the January 2020 fed funds futures has fallen 17 bp since the end of the tariff truce.  At 2.07%, it is consistent with a 25 bp cut in the current target range and a 30 bp cut in the interest paid on reserves.  

S&P 500: For the third week since the resumption of the trade conflict with China, the S&P 500 fell.  Last week's nearly 1.2% decline brings the cumulative loss of 4%.  It is still up about 12.8% for the year.  Huawei alone purchased over $11 bln of goods and services from US companies.  Reports suggest that as many as a fifth of US companies in China are considering shifting production elsewhere (though few seem to be bringing it back on-shore.  Capital investment from Boeing and automakers is evident from the recent durable goods orders.  The S&P 500 gapped lower on Monday and then gapped higher on Tuesday to close the earlier gap.  After consolidating Wednesday, it gapped lower on Thursday.  It entered the gap but failed to close it ahead of the weekend.  That leaves a gap between Friday's high (~2841.4) and Wednesday's low (~2851.1).  The 2777-2800 is important support (including May's low and the 100- and 200-day moving averages) and a break, which we anticipate, would bring our target of 2700-2720 into view. 

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