Dollar Pressing Against Key Levels

The dollar gained against most of the world's currencies last week. With a few sessions left in July,  the greenback has advanced against the major and all but a handful of emerging market currencies. It rose to new highs for the year at the end of last week against sterling.  The risk of a no-deal exit has increased with the new UK's new Prime Minister making demands that the EC is not prepared to grant.  

The dollar is testing key levels against other major currencies that could signal a technical breakout.  The euro made a marginal new low for the year last week, but the $1.1100 level held, perhaps helped by the defense of some options.  The dollar knocked on JPY109, an important barrier whose break could confirm a bottom is in place and signal scope for additional near-term gains.  The US dollar had recorded the lows for the year against the Canadian dollar on July 19 a little above CAD1.30 and before the weekend tested CAD1.32, the end of and band of resistance, which if broken could spur a move toward CAD1.3350-CAD1.3400.  

Dollar Index:  A six-session advancing streak is in tow to start the new week.  There were two seven-day rallies in Q1.  It is testing the 98.00 area for the first time in two months.  The year's high was near 98.35, and the resistance area extends toward 98.50.  A convincing break would target 100.00.  The cyclical high was set in early 2017 a little above 103.80.  The technical indicators are getting extended, and the Dollar Index closed above its upper Bollinger Band for the first time since last April.  We would be inclined to fade the breakout.  Initial support is now seen near 97.50.  

Euro:  Ironically, the only day last week the euro rose was on the day of the ECB met.  Still, the euro finished the week as the second-best performer, losing nearly 0.85% against the US dollar (the Canadian dollar fell about 0.80%).  The Slow Stochastics and MACDs are over-extended, and the euro closed just inside its Bollinger Band.  A break of $1.11 would target $1.10, but here too we are cautious about chasing it. On the upside, the recent price action reinforced the significance of old support becoming resistance in the $1.1180-$1.1200 range.  

Yen:  With one exception, the dollar has spent June and July bouncing between JPY107 and JPY109.  Advancing in five of the past six sessions, the dollar is testing the upper end of the range.  The JPY109 area is significant from a technical point of view.  A break above it would signal a move toward JPY111.00.  Initial support is near JPY108.30.  An implication of this is that the euro, which tested JPY120 last week, its lowest level since April 2017, outside of the flash crash this past January, is likely carving out a low. 

Sterling:  The pound closed below $1.25 last week for the first time in nearly two and a half years.  The underlying dollar strength, the prospect of a no-deal Brexit, and anticipation of more dovish BOE rhetoric took its toll.  It extended its slide against the euro for an unprecedented 12th week.  Sterling has risen against the dollar in only four weeks since the middle of April, but the technical indicators are not as over-extended as one might assume.  It closed just inside the lower Bollinger Band (~$1.2380). While there may be some chart support near $1.2350, there is not much to hang one's hat on until $1.20. On the upside, a move above the 20-day (~$1.25), which has not occurred since July 1 would be the first sign of potential stabilization. 

Canadian Dollar:   The US dollar rose from the year's low near $1.3030 on July 19 to CAD1.32 ahead of the weekend in six-consecutive advancing sessions.  However, the upside momentum has faded.  Consider that in the first half of the streak, the US dollar appreciated by about 0.85%.  In the second half of the streak, the greenback appreciated by 0.25% on a closing basis.  The band of resistance we identified extended to CAD1.3220, but the US dollar met strong selling in front of CAD1.3200 as it poked above the upper Bollinger Band for the first time in two months. The CAD1.3100 area should offer initial support.

Australian Dollar:  The Australian dollar has also fallen for six consecutive sessions, but the momentum profile is different than the Canadian dollar. In the first three sessions, the Aussie fell 1%, and in the second three sessions, it fell by 1.15%.  It made a marginal new low for the month ahead of the weekend, just above $0.6900.  A break of $0.6900 opens the door to the June low near $0.6830, which was the lowest level since the flash crash low by $0.6440.   The momentum indicators pointing firmly lower, but the Aussie closed the week below its lower Bollinger Band.  

Mexican Peso:  The US dollar continues to chop around a MXN18.85-MXN19.20 range, with occasional violations but without much longevity.   The wide interest rate differential makes it not only expensive to be short the peso, but it draws flows into the peso.  Mexico pays a little less than 8% to borrow pesos for one year (cetes).  The US one-year T-bill pays about 2%.  The 600 bp premium that Mexico offers protects an investor against a dollar rally to almost MXN20.20.  One of the costs of high-interest rates, besides a relatively strong peso, is a significant headwind for the economy.  At the end of next week, Mexico is expected to report that its economy contracted in Q2 for the second consecutive quarter, meeting a rule of thumb rather than a technical definition of a recession.  

Oil:  Light sweet crude for September delivery has risen in five of the last six sessions. It is still is more than two dollars a barrel lower since the end of June. July is looking like the second monthly decline in oil prices this year. Last week was one of consolidation as prices remained within the previous week's range.  Conflicting forces rather than a new equilibrium seem at work.  The US reported the sixth consecutive weekly drawdown of oil inventories. Concerns over demand seem heightened as the IMF shaved its world growth forecast and Draghi said the economic outlook for Europe was getting "worse and worse." Meanwhile, the UK sending negotiators to Iran and the US and China resuming talks was said to boost optimism.  The technical indicators are not generating a strong signal, but there may be a modest bias higher.  A move above the $57.60 area would lift the tone.   

US Rates:  That the Fed will cut rates on July 31 goes without saying at this juncture.  Even after the Q2 GDP figures, which not only showed strong consumption but a pick-up in price pressures as well. The market is discounting a 21.5% chance of a 50 bp move according to the CME's model and a 16.5% chance according to the Bloomberg model.  The January 2002 fed funds futures contract, which is a useful gauge for year-end expectations, implies a 1.74% yield.  It stood at 1.675% a week ago and 1.655% at the end of June.  This implies two 25 bp rate cuts are fully discounted and the market is pricing in nearly a two-third chance of a third cut.   After falling for eight consecutive weeks through the end of June, the US 10-year yield has edged higher in three of the past four weeks.  It spent last week consolidating in a 10 bp range (~2.0%-2.1%).  The technical indicators of the 10-year September note futures are mixed.  

S&P 500:  The S&P started the week on the lows and finished the week on its highs, as in new record highs.  Sufficiently favorable earnings on balance and the anticipation of easier Fed policy seemed to provide the justification.  The S&P 500 gained 1.65% last week and has rallied in six of the past eight weeks.  Barring a significant slide at the start of next week, the S&P 500 will likely close the month higher as it has done every month this year but May. It is the best performing G7 bourse so far this year with a 20.7% gain.  It has not taken out the previous week's low since early June. Last week's low was near 2976.7.   The VIX may be offering a note of caution, though caution has not been rewarded.  The VIX is just above 12%.  It rarely has spent much time lower.   

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