New Month, New Trends?

The dollar fell against all the major currencies and most of the emerging market currencies last week. The Dollar Index fell by 1.3%, the biggest loss since the last week of March, and posted its lowest close in nearly three weeks ahead of the weekend. There seemed to be a change in the market after key equity benchmarks, like the MSCI ACWI Index of both emerging and developed markets put in a recovery high in the middle of last week. The S&P 500 also peaked at mid-week, meeting the (61.8%) retracement objective of the drop from the record high since on February 19. 

It is possible that this is a function of month-end considerations and the long-holiday weekend.  However, we were concerned that some moves, like the Australian dollar, sterling, and the equity market were approaching highs. We are predisposed to view the price action then as signaling more than a calendar effect. 

Dollar Index: The Dollar Index fell in the last five sessions of April before stabilizing on May Day. Last month's low was just above 98.80, and ahead of the weekend, and before it recovered, the Dollar Index slipped a through it. The lower end of the range may be nearer 98.25, the late March lows, and 98.35, where the 200-day moving average is found. The upper end of the range is around 101.00. Interim resistance is likely in the 99.60-100.00.

Euro: The single currency rose 1.4% last week, offsetting and more the losses of the previous two weeks. It pushed above $1.10 ahead of the weekend for the first time since April 1 but settled near $1.0980. The 200-day moving average is around $1.1035. The MACD and Slow Stochastic have turned up. The five-day moving average is crossing above the 20-day. It will be disappointing if there is no follow-through buying. The late-March high near $1.1165 is an important technical hurdle. 

Japanese Yen: A six-day dollar decline against the yen ended on April 30, with a (~0.5%) bounce. However, it gave it nearly all back the following session, on May 1. Nevertheless, the damage was done, and the greenback fell for the fourth consecutive week,  matching the longest losing streak in eight years. The technical indicators are not generating robust signals. Initial resistance is seen near JPY107.50. Support is seen in the JPY106.00-JPY106.35 band. 

British Pound: Sterling appears to have negated the possible head and shoulders pattern by retesting the head near $1.2645. This area also corresponds to the 200-day moving average and the upper Bollinger Band. It was repulsed and finished the week below $1.2500 albeit slightly. The MACD appears to be rolling over from close to its best level of the year, while the Slow Stochastic is trending higher. On balance, we still are still more inclined to see the path of least resistance is lower Support is seen first near $1.2430 and a convincing break could spur a near-term decline of another cent. 

Canadian Dollar: It was a week of two halves. The US dollar fell and set a marginal new low for April (~CAD1.3850) before rebounding smartly on the back of sell-off in stocks. The greenback's high for the week was set on Monday near CAD1.4120. Ahead of the weekend, it reached CAD1.4110 before settling just below CAD1.4090. The MACD looks like it wants to turn higher, while the Slow Stochastic is still moving lower. Follow-through US dollar buying early next week would target the CAD1.4265, the high from the second half of April. A move above there could be a bullish technical signal that could point to a retreat of the mid-March high near CAD1.4670.

Australian Dollar: The Australian dollar impressive rally peaked on April 30 near $0.6570 as it tried stretching the six-day streak into a seventh session. It posted a minor reversal pattern and sold-off sharply ahead of the weekend and settled just above the session lows of $0.6410.  The MACD is set to turn lower. The Slow Stochastic is set to turn lower, without confirming last week's high. The is a potential bearish divergence. Losses will likely accelerate on a break of the $0.6375-$0.6380 area. The April 21 low near $0.6250 is the first important technical target and then $0.6200 beckons. The 38.2% retracement of Aussie's recovery from the March 19 spike to almost $0.5500 is found near $0.6165. 

Mexican Peso: The dollar's five-day rally ended with a three-day drop. The sellers pressed their luck for a fourth session, and after making a new low near MXN23.6440, near a month-long trendline, the dollar reversed higher and rose a little above MXN24.87 ahead of the weekend. The upper end of the six-week range is less well-formed but somewhat above MXN25.00. We suspect this large consolidation pattern will ultimately resolve itself with an upside breakout, but the technical indicators are far from clear. The MACD looks poised to turn higher, while the Slow Stochastic is turning lower after the losses in the first part of last week. 

Chinese Yuan: Before the May Day holiday, the dollar has weakened to a two-week low below CNY7.0500. The offshore yuan traded at a two-week low a little above CNY7.05. However, before the weekend when the mainland was closed, the dollar jumped to CNH7.14, taking out a month-long downtrend. The 0.75% gain is the biggest rise since March 19. We suspect this was not an official protest of reports that the US was looking to retaliate against China over the novel coronavirus. Instead, we suspect that speculators see the report and a recent op-ed piece by Mitt Romney as a hardening of the US position toward China and judge the relationship will become more strained, especially in this political cycle. Some asset managers seeing the same thing could choose to hedge in the freer offshore market. The dollar peaked in the offshore market on March 19 around CNH7.1650. 

Gold: The precious metal is consolidating in a roughly $50-range on either side of $1700 and it finished last week in the dead center. The five and 20-day moving averages converge there too. The MACD and the Slow Stochastic warn of the downside risk. Gold has been alternating on a weekly basis between gains and losses since late March. Last week it fell by 1.7%. On a 30 and 60-day rolling correlation between the percentage change in gold and the percentage change in the S&P 500 remains positive (~0.30 and ~0.20 respectively).

Oil: The price of light sweet crude oil (WTI) rose each month in Q4 19 and has fallen in each of the first four months of 2020. The yawning gap between supply and demand has likely peaked. Demand will slowly pick-up as the lockdowns ease. Supply is already being reduced. OPEC+ cuts were formally implemented on May 1, but reports suggest several producers had already begun reducing output in late April. Meanwhile, output has been falling from others not party to the agreement, like the US, Canada, and Brazil. The June contract tested $10 a barrel early last week and rallied in three sessions to almost $20.50 ahead of the weekend. The (50%) retracement of the decline from the April high ($33.15) is found near $19.80. The next retracement (61.8%) is around $23.30.  Ahead of that, resistance may be encountered in the $21.60-$22.00 band. The momentum indicators support continued recovery.  

US Rates: The US 10-year yield has stabilized. It finished outside the 0.60%-0.66% range once in the past 12 sessions. The volatility of the bond market, captured by the MOVE index finished last week around 48%, the lowest of the year. It peaked above 160% in March. As the June note traded sideways, the momentum indicators have moved lower. Continued range trading appears to be the most likely scenario. If the denied reports that the possibility of defaulting on Chinese debt was discussed is unable to inject fresh volatility into the market, the horrific jobs data at the end of next week, which is universally expected, might not provide a fresh catalyst. The Eurodollar curve is inverted. The June 2020 contract implies a yield of about 36 bp. The next contract that implies a higher yield is not until December 2022. Even, then the first contract to be above 50 bp is December 2023. This gives a sense of how long investors expect the Fed to sit on the zero-bound.  

S&P 500: The benchmark rallied nearly 12.7% in April, its best monthly showing in more than three decades, and nearly recouped March's decline. The high was recorded in the middle of last week (~2955), surpassing the (61.8%) retracement of the decline since the record high was set in February. However, the S&P 500 was sold in the last two sessions. Unless the gap created by the sharply lower opening on May 1 is filled early next week, the bearish implications will dominate. The gap is found between roughly 2869 and 2892.50. The gap is also technically important because it was through a near-term trend line. The momentum indicators lend more credence to this bearish view. The MACD appears to set to turn lower and the Slow Stochastic did not confirm last week's high. Initial support is seen near 2815 and then 2790, but a conservative corrective target is near 2660.   

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