Corrective Forces Still Dominate

After a run-up in risk assets from the middle of May, broad consolidation was the main feature of the capital markets last week.  Markets were calmer.  The three-month implied volatility of all the major currencies fell, led by the usually high-beta dollar bloc. The VIX, which measures the volatility of the S&P 500 snapped a five-day decline ahead of the weekend. The volatility of the Treasury market (MOVE) also eased.  The risk is of higher volatility into the end of what has been a historic first half. 

The continued support that central banks and governments are providing underpins risk assets.  However, a technical correction was signaled, and the momentum indicators warn it may not be complete. One symptom of this in the foreign exchange market is the fragmentation of some close currencies pairs.  The Norwegian krone was the best performer of the majors, rising about 1% against the dollar, while the Swedish krona was the second-worst of the major currencies, losing about 0.8%.  The Australian dollar's roughly 0.4% gain put it in third place (behind Nokkie and the yen), while the Kiwi was essentially flat in the middle of the pack.  And consider that:  The top two majors consisted of one risk-on currency and one risk-off currency.  We see this move as corrective in nature, and therefore, want to remain sensitive to downside targets and levels that would suggest what we think is the underlying trend is resuming. 

Dollar Index:  The Dollar Index reached 97.70 ahead of the weekend, its highest level in two weeks.  We had suggested it was retracing the drop that began on May 25 (~100.00), and at the high, it had retraced almost half of these losses.    The next upside target is in the 97.85-98.15 area.  The MACD and Slow Stochastic are trending higher, and the euro is near the middle of its Bollinger Band (i.e., close to the 20-day moving average).   A week and a half uptrend line starts the new week around 97.15, and a break of 96.80 would likely confirm the correction is over. 

Euro: The single currency was sold from about $1.1420 on June 10 to a little below $1.1170 before the weekend, and settled below $1.12 for the first time in nearly three weeks. Has the correction been completed, and is the euro ready to resume is recovery?  The $1.1215 area was our initial retracement objective.  The next target is closer to $1.1150, and as we suggested last week, a move toward $1.1025 cannot be ruled out yet.  The MACD and Slow Stochastic have only recently turned down from extreme levels.  The downtrend line off the month's high starts the new week near $1.1285, and the $1.1305-level is the midway point of the decline.  A move above there warns of a running start back to the highs. 

Japanese Yen: Despite gains in equities, the dollar could not sustain even modest upticks against the yen.  It finished the week near its lows and below JPY107 for the first time in six weeks.  Some attributed the yen's strength to real or anticipated repatriation related to Softbank's divestment of part of its stake in T-Mobile (~$20 bln).  For a week and a half, the dollar has barely ventured out of a JPY106.50-JPY107.50 range.  A half a yen range extension in either direction still leaves flat.  The momentum indicators signals are not clear, but on balance, buying into dollar weakness may be preferred. 

British Pound:  A relatively upbeat central bank, which boosted the bond-buying by the minimum expected (GBP100 bln), with a single dissent by the chief economist in favor of steady policy, signs of a thaw in UK-EU trade talks, and considerably stronger than expected rise in May retail sales (12%), were unable to lend sterling support.  It reached a high near $1.2690 on Tuesday (June 16) and finished the week below $1.24, seeing its lowest level (~$1.2345) since June 1.  We had thought sterling was also correcting the move that began on May 25, but with its pre-weekend losses, it surpassed the (61.8%) retracement objective (~$1.2410).  If instead, if it is correcting the larger move that began on May 15, sterling met the objective.  Still, the momentum indicators are falling quickly, and the trend line from the March and May lows was broken on a closing basis on June 18 and served as resistance on June 19.  It will start next week near $1.2475.  The next technical target on the downside is around $1.2280, and if that goes, a test on the mid-May lows near $1.2150 would come into view.

Canadian Dollar:  The greenback has been mired in the June 16 range (~CAD1.3500 to CAD1.3625) for the last few sessions.  The momentum indicators continue to favor the Big Dollar.  Perhaps a close above the 20-day moving average (~CAD1.3600) would help recharge the recovery.  On the other hand, it requires a move through CAD1.38 to signal anything important.  On the downside, a break of the CAD1.3460-CAD1.3480 area warns the US dollar's downtrend may be resuming. 

Australian Dollar:  The Australian dollar has also been consolidating within its June 16 range (~$0.6835-$0.6875) for the last few sessions.  The sell-off to start the week, violated the trendline off the March and May low, but follow-through selling fizzled near $0.6785, the (50%) retracement objective of the leg up since May 25.  The momentum indicators suggest the correction may not be over.  A move above $0.6915 would suggest a new test on the $0.7000 area. 

Mexican Peso:  The dollar closed higher against the peso for the second consecutive week.  Except for a couple hours on June 16, the greenback stayed on the MXN22-handle last week.  The momentum indicators are giving conflicting signals.  The MACD is pointing higher, while the Slow Stochastic is leveling off.  The upper Bollinger Band (two standard deviations above the 20-day moving average) is near MXN22.8550.  The near-term trend line begins the new week a little below  MXN22.24.  Banxico is widely expected to deliver a 50 bp rate cut next week.  Assuming the central bank says nothing to discourage expectations for additional monetary stimulus, Mexico's cetes (bills) that pay a little less than 5% will continue to saw funds.

Chinese Yuan:   The US dollar traded quietly between CNY7.07 and CNY7.10 last week.  It finished near the lows, but the dollar's better tone in North America suggests a breakout might not be imminent.  And even if it does, it is still stable in a CNY7.05-CNY7.12 range.  Although the PBOC cut the 14-day repo rate by 20 bp, the benchmark one-year Loan Prime Rate may be unchanged at 3.85% when it set on June 22 via submissions by banks.  Reaffirmation of the commitment to the Phase 1 trade deal may have blunted some harsher rhetoric from the US.  

Gold:  The precious metal firmed above $1745 before the weekend, which is the upper end of its range ($1700+/- $50).  It posted its highest weekly close since mid-May. The momentum indicators caution against playing for a breakout.  Recall in mid-May, gold pushed to $1765 and reversed lower.  The MACD is neutral, and the Slow Stochastic looks poised to turn lower.  That said, many are looking for a move to $1800.  In the Great Financial Crisis, gold bottomed around Lehman's demise, but it did not get above the March 08 high a little above $1000 until Q4 09. 

Oil:  August WTI poked above $40.60 ahead of the weekend and reversed lower.  It was almost a repeat of the June 8 price action, however, this time it closed more than a dollar above the intrasession of seen near $38.60.  News that Arizona and Florida reported the Covid cases since the crisis began weakened hopes that an increase in demand and the heightened compliance with OPEC+ cuts. The momentum indicators are not generating a strong signal, with the MACD not confirming the high and the Slow Stochastic leveling off after pulling back from the overextended territory.  The stop on shorts is clear, at the potential double high near $40.70. A  move through there would bring it into a band of resistance that extends from around $41.25 to $42.20   On a pullback, the $34.60 area is important, and a break of it would confirm the double top and suggest a measuring objective around $29.50.  

US Rates:  The US two and 10-year yields were virtually unchanged last week at 18 bp and 70 bp, respectively.  The Federal Reserve and foreign central banks continue to buy Treasuries on a weekly basis.  The Treasury's high cash balances should begin easing when Q3 gets underway, but in the short-term, it is raising more money than it is spending.  Consider next week's deluge.  It will raise about $155 bln in coupons and around $170 bln in bills.  That said, our near-term bias is toward lower rates.  

S&P 500:  Two bearish technical developments drive our view.  The first is is the four-day island top that is marked by the gap lower opening of June 11.  The gap was entered last week but not closed.  The top of it is near 3181.50.   The second was the downside reversal after making a marginal new high since June 10 and entering that gap a bit more.  It broke below the previous session's low (3093.50) but settled a little above it.  Initial support is near 3060 and if it does not hold 3020-3040 beckons.  

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