Dollar's Upside Correction to Continue

A phase in the markets that began in mid-May ended last week with a dramatic sell-off in stocks and risk-assets in general.  The Federal Reserve confirmed what investors already knew.  After all, the implied interest rates for the December 2021 fed funds futures implied a negative yield at the start of the month, and a rate hike was not reflected in the derivatives markets until 2023.  

It may not have been what the Fed said or did, but simply the old "buy the rumor sell the fact" trigger of what we have suggested the charts implied:  the bull run in the risk assets was getting stretched.  Nor can the increase in the Covid cases as stay-at-home orders are rescinded really be much of surprise.  After all, the virus has not been cured, and shutting down the economy was a way to avoid overburdening the public health infrastructure.  Moreover, some assets markets had rallied, like the equities and currencies in Latam, as cases and fatalities increased. 

Although markets stabilized ahead of the weekend after the drama on June 11, we suspect that corrective forces will carry over into next week.  Below we suggest some corrective targets while being sensitive to levels that would indicate the trend moves have resumed.   

Dollar Index: The MACD and Slow Stochastic indicators have begun to turn higher. The 97.35 area was overcome ahead of the weekend—the next target immediate target 98.00.  The 200-day moving average and the (61.8%) retracement of the leg down since the May 25 high (~100.00) are found near 98.40. A convincing move above there would be significant.  A break of the 96.20-96.30 area would likely signal the end of the corrective bounce.  

Euro: The single currency peaked in the middle of the week a little above $1.1420 and pulled back to nearly $1.1210 before the weekend.  The euro tried to rally after the June 11 drop and made it up to  $1.1340, stopping shy of the area (~$1.1350-$1.1375) that would have signaled the resumption of the rally. The Slow Stochastic did not confirm the high, and the MACD is turning lower. The next important target is near $1.1150, and then, possibly, a test on the 200-day moving average (~$1.1025). Three-month implied volatility has begun trending higher, and the risk-reversals (skew between calls and puts) have also started increasing.  This suggests that euro calls are being bought and may reflect rolling spot positions into calls by levered accounts.   

Japanese Yen:  After reaching almost JPY110.00 after the US employment data on June 5, the dollar backed off in the first four sessions last week before stabilizing ahead of the weekend. The greenback found bids near JPY106.60. A break would signal a test on JPY106, which is more significant support. It recovered to around JPY107.60 ahead of the weekend. The Slow Stochastic is still headed lower while the MACD is still overextended after pulling back but looks to have flattened out. The JPY107.85 area is the first retracement objective (38.2%), and a move through there would signal an extended correction. The dollar would likely enter the JPY108.15-JPY108.55, which houses the other retracement objectives and the 200-day moving average.  

British Pound:  Sterling peaked in the middle of last week a little above $1.28.  The trendline drawn from last December's election high and the March high came in near $1.2855.  It sold off on June 11 and was unable to sustain upticks ahead of the weekend, falling to $1.2475 area.  The other important trendline is drawn off the March and May lows and begins next week around $1.24, which is also near the (61.8%) retracement objective of sterling's rally since May 25.  A break could signal a move toward $1.2180. The MACD and Slow Stochastic have turned down. It takes a move back above $1.2650 to stabilize the technical tone.

Canadian Dollar: The price action of the US dollar in the middle of last week seemed to be a bullish hammer candlestick forewarning of the bounce that lifted the greenback to CAD1.3665 before the weekend.  It had made a three-month low near CAD1.3315 on June 10.  The MACD and Slow Stochastic have turned higher.  The CAD1.3680 area corresponds to the (50%) retracement of the decline since the May 22 high (~CAD1.4050) and the 20-day moving average.  A move above there targets the CAD1.3800-CAD1.3830 area.   On the other hand, a break of the CAD1.3450-CAD1.3470 warns the US dollar's down move has resumed.  

Australian Dollar:  The drop in recent days from around $0.7060, the high for the year set on June 10 to $0.6800 ahead of the weekend, is likely to be only the first leg down in the Aussie's long overdue correction. A move lower would violate an uptrend line drawn off the March panic lows.   The MACD and Slow Stochastic have turned lower.  If it is correcting the rally that began on May 15, then it met the initial (38.2%) retracement target. The next retracement target (50%) is around $0.6735, but we suspect the next retracement objective (61.8%) near $0.6655, a little below the 200-day moving average ($0.6665) may offer stronger support.  A move above the $0.6950 undermines this bearish technical view.  

Mexican Peso:  The dollar put in the lows for the week prior to the FOMC meeting and on June 11.  However, its recovery ahead of the weekend was sharp as it retraced half of the week's loss in one fell swoop. That retracement objective was near MXN22.2050, held on a closing basis. A break of the MXN22.00 area would suggest the dollar's downtrend has resumed. Nevertheless, the technical indicators suggest the upside correction of the dollar has just begun. The first leg of the correction was to almost MXN22.95, and the second one could target the MXN23.60 and possibly the MXN24.00 area.  

Chinese Yuan: Chinese officials say that they want a stable currency, and many doubt them.  Nevertheless, they have achieved it.  The yuan fell almost 1.7% in Q1, which covers both the trade agreement with the US and the pandemic.  So far this quarter, it is flat.   However, this month it has gained about 0.75%, and the PBOC's fixings seemed to be aimed at moderating the dollar's decline.  The dollar did fall to around CNY7.0550 last week, its lowest level since the end of April. As we have suggested, the technical indicators favor corrective dollar gains in the days ahead, and this could see it could rise toward CNY7.12.   

Gold: The precious metal bounced off the $1670 area seen after the US employment data and reached almost $1745 when risk assets got hammered. It consolidated ahead of the weekend.  Broadly speaking, gold remains in a two-month range of $1650 to $1750. The MACD and Slow Stochastic have room for another probe of the highs.  In mid-May, when it pushed through the top, it got as far as $1765.40 before reversing lower.  Above there, the bigger target is $1800.  From the middle of March through the middle of May, the 30-day correlation between gold and the S&P 500 (percentage change) was positive, and it has switched to its more common relationship.  

Oil: Two candlesticks bookend last week's oil trade. The July contract began the week with a brief look above $40 a barrel and then beaten back, leaving a shooting star. Ahead of the weekend, the contract slipped below $34.50 before recovering smartly, leaving a bullish hammer candlestick.  Nevertheless, the momentum indicators have turned lower and are still in overextended territory.  This suggests that upticks are not to be trusted.  The $37.50 area may offer a nearby cap.  A break of that $34.50 area could signal a pullback toward $32.

US Rates:  After rising every day in the first week of June, the US 10-year yield fell for the first four sessions last week before stabilizing on Friday.  The yield fell almost 20 bp last week.  It had been flirting with 90 bp after the employment data, having reached 65 bp in the equity carnage on June 11.  The momentum indicators on the futures contract are positioned for additional gains.  However, the economic data that will likely be reported will likely fan hopes of an accelerating recovery. Most of the decline in the 10-year yield was not matched by the short-end, and the 2-10 year yield curve flattened by almost 18 bp last week.  

S&P 500:  The gap lower on June 11 is a critical technical development, leaving a four-day island top in its wake.  The gap (~3123.5-3181.50) may not be filled any time soon.  If the S&P 500 is retracing the last leg up from the middle of May, then it met the 50% target near 3000 (200-day moving average is 3015), overshooting it a little on an intraday basis ahead of the weekend.  The next retracement target (61.8%) is near 2945.  If instead, it is correcting the move off March's low, the initial retracement objective (38.2%) is near 2835.   The MACD and Slow Stochastic have just turned lower, suggest the deeper correction may be more likely.  

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