Breakouts Mostly Averted, so Far

The dollar, the Treasury market, and the S&P 500 were threatening to break out of the trading ranges. But the escalation of tensions between the US and the PRC gave reason for investors to pause ahead of the long holiday weekend in the US and UK, especially in the context of the National People's Congress session in China and unpredictable, but seemingly increasingly hostile rhetoric from President Trump. The tensions are likely to rise further in the period ahead, and these may be difficult to model. When was the last time a US official brought up the 1995 kidnapping of the Panchen Lama as Secretary of State Pompeo did last week? There are measures China could take to de-escalate the situation but appears to be choosing to further antagonize. 

If the proposition that the tensions between the two will remain heightened in the political cycle is fair, then investors can respond by being more cautious, or they become less sensitive to it, within bounds. Implied volatility throughout the capital markets has not returned to where it was in mid-February, but it has eased considerably. The disruptive elements of the competition may put a floor under volatility.  

Dollar Index: The basket approached 99.00 in the middle of last week and looked poised to challenge the lower end of a nearly three-month trading range near 98.50, where the 200-day moving average is found. A move above 100.00 is needed to signal a test on the upper end of the range seen a little shy of 101.00. The high so far here in May is about 100.55, which coincides with the upper Bollinger Band. 

Euro:  The $1.1000 level was briefly breached for the first time in three weeks, but a wall of sellers lurked in front of the 200-day moving average (~$1.1015). Ahead of the weekend, it retreated to the middle of its well-worn range around $1.0880. Although support may be seen near $1.0850, it takes a break of the $1.0775 area to be anything of note.  

Japanese Yen: The dollar poked above JPY108.00 for the first time since April 23 and stopped short of the 200-day moving average (~JPY108.30). It was pushed back to the JPY107.30 area ahead of the weekend. Like, the euro, initial support is around the middle of the range. In this case, it is about JPY107.00, which is also where the 20-day moving average is found.  

British Pound: Sterling enjoyed a two-day bounce off around $1.2075, its lowest level since late March, but buying interest dried up as the $1.23 level was approached. Sterling spent the rest of the weak drifting lower, hitting almost $1.2160 ahead of the weekend, a (61.8%) retracement objective of the bounce. Technically, it appears that unlike the currencies we have looked at so far, sterling is no longer rangebound, but is trending lower. We target the $1.1800-$1.1850 area. 

Canadian Dollar: The US dollar was approaching the CAD1.3850 area, the lower end of the two-month trading range. It finished the week near CAD1.40 after the risk-appetites waned, and despite a much better than expected March retail sales report when excluding autos (-0.4%, less than 1/10 of the decline anticipated by economists). The upper-end of the range is not horizontal, as in the other rangebound pairs, but is shaped by the downwardly sloping trendline off the late March high and catching the April and May highs. It is found near CAD1.41 at the start of the new week.  

Australian Dollar: The highest level since March 9 was seen last week as the Aussie stretched to about $0.6615. It failed to close above $0.6600 and fell back to nearly $0.6500 before the weekend. On May 15, it had closed below the 20-day moving average (~$0.6435), but that proved to be a false break, even though it was the first such close since early April. The 20-day moving average begins the new week near $0.6490. A month-long trendline will come in around $0.6435. It might take a break of $0.6400 to lend credence to ideas that a top is being formed.  

Mexican Peso: The dollar fell every day last week against the Mexican peso and has now fallen in three of the past four weeks. The fundamentals are still poor, and the economy was contracting before the virus struck. The IMF expects it to be among the hardest hit and yet its policy response has been among the smallest. Its high real and nominal rates attract savings. The dollar surpassed the (38.2%) retracement objective (~MXN23.00) and appears headed toward the (50%) retracement near MXN22.15. The technical indicators are stretched but have not turned. Consider looking for a reversal pattern before trying to pick a dollar bottom.  

Chinese Yuan: The dollar rose to almost CNY7.1440, its best level since last October, ahead of the weekend. The general pattern holds: the yuan tends to weaken when tensions with the US escalate. The issue is how much is this a signal from Chinese officials. The next question is to what extent is it taking the offensive as in purposely driving it or defensively and not acting forcefully enough against the market pressures. The dollar reached a high last year around CNY7.1850. The dollar has risen in five of the past six weeks against the yuan, including the last three. The yuan has weakened against other emerging market currencies too.  

Gold: Gold had hit a multi-year high in late April a little above $1747. It reached a new high of nearly $1765.50. It pulled back to around $1717 before new buying emerged. After gaining over $40 the previous week, it lost about $9 last week or about 0.5%. Neither the MACD nor the Slow Stochastic confirmed the new highs. However, it remains firm. In the first half of May, it was straddling $1700. It has not been below there since May 13. We still see the next important target near $1800.  

Oil: The rally in the July light sweet crude futures contract stalled ahead of the weekend, snapping a six-day rally that carried it from about $25.70 to a little over $34.60. The retreat extended to a little below $31.00, and strong buying lifted it to finish above $33.00. The momentum indicators are stretched, and the MACD has begun leveling off. The next important technical area is found between around $34.70 and $35.20. A break of $30 could spur a test on the $28 area.  

US Rates:  The US 10-year yield threatened to rise above 0.75 bp, which it has not done since April 14. But, here too, the range held and the yield returned to the middle of its recent range.  The June note futures contract continues to trade comfortably in a 138-00-140-00 range. Since hitting a record low near 10 bp on May 8, the two-year yield has not been below 13 bp or above 19 bp. The Fed funds futures strip from June 2021 to February 2022 continues to imply negative rates. These contracts are generally thinly traded, which may help explain their stickiness.  

S&P 500: After rising 3%+ at the beginning of last week, ostensibly in response to constructive news on the development of a vaccine, the S&P 500 consolidated and finished the week with around that 3%+ gain. It proved reasonably resilient ahead of the weekend, rising 0.25% and continuing to knock against the upper Bollinger Band around 2985. Still, a move above 3000 is needed to rekindle the bullish momentum. A break of the 2900-2920 area could see selling pressure, pushing the index to the bottom of an old gap that is found near 2860.  

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