Strong Dollar Optics, Less Clear-Cut Details

The dollar's performance last week is best understood as the fulcrum of the seesaw.  The major currencies that are perceived to be levered or growth and/or risk rose.  These are the dollar-bloc and the Scandis. The Swedish krona sold off before the weekend, perhaps as the market anticipates a weak CPI report that may reinforce ideas that the rate hike at the end of last year was not the start of a tightening sequence. 

Sterling actually led the advancers with a 1.2 gain.  It was firm all week but was bid higher on speculation that the new Chancellor of the Exchequer, often seen as the second most important person in the UK government, will support a more expansionary fiscal policy. It would, arguably, boost growth prospects take pressure off the Bank of England.

The euro, yen, and Swiss franc, and along with the Swedish krona, were on the other side of the teeter-totter.  The euro was the weakest of the majors, losing a little more than 1% on its way to its lowest level since April 2017.   The euro lost twice as much as the Swiss franc, so the cross fell to its lowest level since July 2015. 

Among emerging market currencies, eastern and central European currencies underperformed, while the Mexico peso edged out sterling to be the best performer last week.  The peso rose every session last week, unperturbed by the quarter-point rate cut.  Year-to-date, the peso is the strongest currency in the world, rising by a pinch more than 2% so far.  The JP Morgan Emerging Markets Currency Index snapped a four-week slide with an almost 0.3% gain. 

The two strongest technical indications are for a higher Canadian dollar and a continued recovery in oil prices.  Dips in the Mexican peso will likely see be seen as a buying opportunity for asset managers and hedge funds.  Recognizing that China heavily manages its currency, even if not by direct intervention, the political and economic considerations favor modest weakening fo the yuan.  

Dollar Index:  Two weeks into this month, and the Dollar Index has fallen once.  It sits at a four-month high near 99.15.  The MACD is getting stretched but moving higher.  The Slow Stochastic has begun leveling out.  It continues to hug the upper Bollinger Band.  The next immediate target is near 99.25 and then 99.65, last year's high.  There is also the psychological attraction of the 100-level.  The Dollar Index would have to fall through the 98.50 area to signal this leg is over.   Remember that the Dollar Index is not really a valid trade-weighted basket and instead is heavily weighted toward the euro, which has underperformed. 

Euro:  The euro fell out of bed in the first half of February.  It rose once above the previous session's high (February 13) by one-hundredth of a cent. It closed January a little below $1.11 and approached $1.0825 ahead of the weekend. The strength of the downside momentum is illustrated by the fact that it has closed underneath its lower Bollinger Band for the past three sessions.  There is an old gap on the daily and weekly bar charts from the 2017 French elections (first round)  that is found roughly between $1.0740 and $1.0820.  The MACD is stretched but trending lower, while the Slow Stochastic appears to be trying to bottom.  The $1.0900-$1.0925 area marks the nearby ceiling. 

Japanese Yen:  Last week's range (~JPY109.55-JPY110.15) was the narrowest weekly range this year.  The greenback is consolidating.  After rising in the first three sessions last week, it slipped in the previous two to finish a little higher for the second consecutive week.  The MACD and Slow Stochastic are tentatively rolling over though not from extended territory.  Initial support for the dollar is seen near the JPY109.45-JPY109.50 area that houses a (38.2%) retracement of the month's gain and the 20-day moving average.  Below there support is pegged in the JPY109.00-JPY109.20 band. 

British Pound:  The increased possibility of a stimulative budget helped sterling recover back above $1.30 for the first time in five sessions on February 13, spurred by the naming of a new Chancellor of the Exchequer.  Sterling rose in every session last week, something it has not done since April 2018.  The MACD and Slow Stochastic look to be turning higher. A move above the $1.3085-$1.3100 area opens the door to retest the month's high near $1.3215, provided the $1.30-level holds.  The euro lost 2.25% against sterling last week to trade below GBP0.8300 and is approaching last year's low (mid-December) near GBP0.8275. While the technical indicators suggest there is scope for additional near-term losses, it has closed below the lower Bollinger Band for the past two sessions (~GBP0.8325). 

Canadian Dollar:  The US dollar began the week rising to new four-month highs near CAD1.3330. It fell about 0.5% in the next two sessions before consolidating in the last two.  The greenback snapped a four-week advance by slipping about 0.4% against the Loonie.  The 3.4% rally in oil prices and the nearly 1.7% advance of the CRB Index last week (the first weekly advance this year) coupled with the risk appetite reflected in rising equities seemed to help fuel the Canadian dollar's recovery.  This is consistent with our reading of the charts.  The technical studies suggest the greenback's pullback has just begun.  Initial support has been encountered near CAD1.3235, and below there, in the CAD1.3215-CAD1.3220 area, the 20- and 200-day moving averages are found as is the (38.2%) retracement of the rally since January 22 low (~CAD1.3035).   A break of these supports will boost our confidence that the US dollar may return toward CAD1.3100-CAD1.3150. 

Australian Dollar:   The Aussie extended its recent losses to see its lowest level in a decade (~$0.6660) at the start of last week before bouncing to $0.6750 in the middle of the week.  It spent the previous two sessions consolidating at lower levels.  A break of the $0.6680-$0.6700 area now would suggest a durable low is not in place.  The low from the Great Financial Crisis was near $0.6000, and a secondary low was near $0.6250.  Still, the MACD and Slow Stochastic are turning higher, and the latter did not even confirm last week's new low.   A close above the 20-day moving average (~$0.6755 to start the new week), something not done since January 6 would lend support to those thinking the Aussie may be bottoming.

Mexican Peso:  The dollar has not bottomed against the peso.  Our MXN18,50 target is being approached.  A convincing break leaves the greenback with little support until the MXN18.00 area.  The MACD and Slow Stochastic are not generating strong signals but also have not confirmed last week's lows.  Note that speculators in the futures market have taken some profits recently.  The net long position, which reached a record at the end of January, has fallen for the past two weeks (through February 11).  Gross longs have fallen for three weeks.  Even after Banxico's 25 bp rate, Mexico's high real and nominal interest rates attract asset managers and levered accounts (some of whom use the yen, Swiss franc, and perhaps, more recently, the euro to fund the peso position). 

Chinese Yuan: Since returning from the extended Lunar New Year holiday, Chinese officials have accepted roughly a CNY6.95-CNY7.0260 range for the dollar.   The logic of the situation, i.e., a negative economic shock, easier monetary policy, and a push not to miss economic growth targets seems most consistent with a weaker yuan.  A move toward CNY7.05 would be unlikely to raise the American's ire.  

Gold: The price of the yellow metal rose by about $14.5 last week (~0.9%) after falling $18.7 (~1.2%) the prior week.  The MACD is trying to turn-up from a decline that began last month around the escalation of US-Iran hostilities. The Slow Stochastic is curling up.  Gold found support around $1550 after spiking to a little above $1611 in January. The month's high near $1592 is the next hurdle for gold, which finished last week at $1584. 

Oil:    The April light sweet crude oil futures contract ended a five-week 20% plunge with a 3.5% bounce.  The contract appears to have put in a double bottom (~$49.50-$49.60), and the neckline is about $52.35.  The high before the weekend was roughly $52.55, but the close was a few cents below the neckline.  The measuring objective of the double bottom is around $55.50, which corresponds with the 200-day moving average (~$55.70) and the (38.2%) retracement objective of the decline from last month's spike (~$65.00).  The MACD and Slow Stochastic have turned higher.  

US Rates:  The US 10-year yield is consolidating and was virtually unchanged last week, a little below 1.60%.  It was confined to roughly a 10-tick range of 1.54%-1.64%.  The technical indicators of the March note futures contract favors lower yields (higher prices).  A move above 131-08 in the futures contract warns of a retest of the highs seen at the start of the month (~132-00, around where it peaked last October too).  In yield terms, that means a return to 1.50%.  Even after Powell's testimony before Congress and a number of other Fed officials noting how well the economy is doing, the market continues to price in more than one rate cut this year.  The implied yield of the December fed funds futures contract is 1.25% compared with the average effective rate of 1.58-1.59%.  

S&P 500:  A small gap still exists after the S&P 500 gapped higher on February 11.  The gap is only pennies (3352.26-3352.72) but seems indicative of the strength of the market.  Of the past 19 weeks, the S&P 500 has fallen in four, and three were last month.  The MACD has been trending higher since early this month, but the Slow Stochastic is flattening near where is has peaked previously.  The 3385 area may need to be surmounted to sustain the recent momentum.  It is interesting to note that the S&P 500 dividend yield is 1.78% at the end of last week.  

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