Near-Term Dollar Outlook: What the Charts may Say

The dollar had a challenging week.  The Chair of the Federal Reserve confirmed as much as possible a rate cut at the end of the month. The market understood this as a validation of its expectations and pushed the implied yield of the January 2020 fed funds futures contract down six basis points to 1.715%.  The low, and what we have suggested is peak dovishness, was 1.555% on June 20. As the central bank meetings are awaited later in the month, the most likely near-term scenario may be range-trading.  The technical condition suggests this is reasonable against the major currencies, even the Canadian dollar, against which it made new lows for the year ahead of the weekend.

Dollar Index:   Powell helped push the Dollar Index off three-week highs (~97.60) in the middle of last week.  A band of support is seen around 96.50-96.70, and the upper end was approached before the weekend.   The MACDs and Slow Stochastics are poised to roll over in the coming days, which favors selling into strength.

Euro:  The $1.12-$1.13 range continues to confine most of the price action and the broader range of $1.11-$1.14 saw only two minor violations in Q2.   In a mirror image of the Dollar Index, of which it is the single largest component, the euro's MACD and Slow Stochastics are trying to turn higher. The strong close ahead of the weekend suggests potential to test the 200-day moving average, which begins the new week near $1.1325.  

Yen:  The dollar was threatening to punch through JPY109, which is an important technical area, but Powell's testimony reinforced the cap and sent the greenback through JPY108.  If JPY109 is the ceiling, where is the floor?  Initial support is pegged in the JPY107.50-JPY107.80 area, which was also tested before the weekend.  Stronger support is seen around JPY107.00 and last month's low near JPY106.80.   The positioning of the technical indicators warns of the downside risks.

Sterling:  A new low for the year was recorded on July 9 ($1.2440) and subsequent recovery was not impressive, but it found better footing ahead of the weekend and closed at new highs for the week (~$1.2580).  The technical indicators are trying to turn higher.  Immediate resistance is seen around $1.2615 and then $1.2650/ Up until now, the most critical driver arguably has been the broad direction of the dollar.  However, some demand may come from the cross against the euro.  Recall, sterling has fallen for what appears to be a record, ten consecutive weeks.  The momentum has stalled with the euro near GBP0.9000, and technical indicators like the RSI and MACDs are showing potential bearish divergences.  

Canadian Dollar:  The US dollar closed at its lowest level against the Canadian dollar since last October (~CAD1.3030).  A band of support is seen between CAD1.2960 and CAD1.3000.  We are becoming more cautious on the downside.  The fundamental story still seems to be in place, but the technical indicators have not confirmed the recent US dollar losses.  Consider too that the Canadian dollar has appreciated by a little more than 4% against the US dollar this year and all but around 0.3% have come since the end of May.  This month's high around CAD1.3140 will be a formidable cap for the greenback on a technical bounce. 

Australian Dollar:     The Australian dollar was one of the biggest beneficiaries of Powell's apparent validation of market expectations.  The Reserve Bank of Australia itself cut rates at back-to-back meetings (June and July).  The market is confident that the RBA will not adjust policy again next month (August 6).  The market expects another rate cut will be delivered in Q4.  The market seems to think that the Fed could cut rates twice before the RBA moves again.  The Aussie is poised to challenge the high from earlier this month (~$0.7050, a two-month high), but the more important target may be near $0.7100, where the 200-day moving average and the (61.8%) retracement of the decline from this year's high set in late January, can be found.  

Mexican Peso: The dollar spiked sharply higher against the peso on the unexpected resignation of Mexico's Finance Minister, but spent the week unwinding those gains. The dollar went from around MXN18.90, the lower end of its range to a little more than MXN19.38, and closed the week at MXN18.99, a marginal loss on the week.  The technical indicators suggest the scope for additional near-term dollar losses may be limited.  A range between MXN18.80 and MXN19.20 may continue to confine the bulk of the price action.  

Oil: The price of WTI for September delivery rose 4.7% last week as a large drawdown in US inventories, geopolitical tension with Iran, and the shuttering of capacity in the Gulf of Mexico due to weather to a two-month high.  Ahead of the weekend, it met the (61.8%) retracement of the decline from the late April high (almost $66 a barrel) at $60.20.  The technical indicators suggest there is scope for additional near-term gains, and the next chart point to note is near $62.  

US Rates:  The US 10-year yield rose nine basis points last week, the largest gain in three months.  The generic yield rose for the second consecutive week, which is also something not seen since early April.  The five-day moving average of the September note futures contract has fallen below the 20-day moving average for the first time since late April.  This underscores the sense that the rate adjustment that saw yields fall nearly 65 bp since the Q2 high a little above 2.60% is over.  This was warned by the bearish divergences we have noted in the technical indicators, where RSI, MACD, and Slow Stochastics did not confirm the highs in the futures market and are trending lower. That said, there is unlikely to be a significant back-up in yields and suspect the 2.20% area may provide the cap. The implied yield on the January 2020 fed funds futures contract fell 6.5 bp last week to 1.71%.  This compares with the current effective average so far this month, around 2.40%.  The market apparently saw nothing Powell or the higher than expected CPI and PPI that persuaded them that the Fed would not cut rates three times in over the next four meetings.  

S&P 500:  US stocks had wobbled in May, falling four weeks in a row, but returned to the winning track in June.  The S&P 500 advanced about 0.8% last week to new record highs, and closing the weekly strongly.  It will take a four-day winning streak into next week.  The S&P 500 gapped higher on July 10 in response to Powell's written remarks.  It remains open and has technical significance.  It is found roughly between 2981.90 and 2984.60.  While we had targetted the 3030 area, the start of the formal earnings season and the stretched technical reading, including a potential bearish divergence in the Slow Stochastics, suggests investors proceed with caution. 

Disclaimer