Bearish Case for Dollar Thickens, but Bulls are Tough to Find

A surge in virus cases and record fatalities in several US states dampened the animal spirits at the end of last week.  However, few seem emotionally or materially prepared to resist the official efforts to generate favorable financial conditions to facilitate an economic recovery.  Most seem to be expecting more policy support to be forthcoming.  

The bearish technical case for the dollar appears to be growing.  It is a little disconcerting that it seems to have become the consensus view, and the gross and net long speculative euro positioning in the futures market is near two-year highs.  However, the speculative positioning in the other currency futures is not nearly as extreme.  Indeed, speculators are still net short sterling, Australian dollar, and Canadian dollar.  

Turns in the market often appear to have a cascading effect.  The turn does not happen all at once.  Given that the euro is the single most important currency in the world after the dollar, that is the real interest.  The Swiss Franc can sometimes be seen as its lead indicators. The Golden Cross (50 and 200-day moving averages) crossed down for last July.  The euro's averages crossed late last month, and at the start of last week, the 50-day moving average moved below the 200-day moving for the Dollar Index.  The moving average for the Swedish krona crossed in the middle of June, while the  Aussie's averages crossed on the last session in June. 

Sterling is a laggard, and the 50-day moving average is about 2.5 cents below the 200-day moving average.   And so is the Canadian dollar.  The New Zealand dollar's average look set to cross early next week, and Norwegian krone may take a little while longer.   We note that both the S&P 500 and the Shanghai Composite experienced the Golden Cross on the same day last week (July 9).  

Also, adding to the bearish technical outlook for the dollar was the advance in gold. It has rallied now five consecutive weeks and pushed above $1800 an ounce for the first time in nine years.   Nor has the greenback drawn much succor from the fact that the Fed's balance sheet has shrunk for four consecutive weeks, while the ECB's balance sheets jumped by more than 11% over the same period, which stands contrary to conventional wisdom.   

Dollar Index:  The Dollar Index fell for the third consecutive week.  The poor close warns of scope for additional near-term losses.  A note of caution comes from the lower Bollinger Band, which begins the new week near 96.35.  The Slow Stochastic is still trending lower, and the MACD looks poised to turn lower.  The first support area is seen between 95.70 and 96.00.  The year's low was set in early March around 94.65 and that, or the 93.90 retracement area, are more important targets. 

Euro: The euro set a four-week high near $1.1370 on July 9 and reversed lower to $1.1255, about 15-ticks ahead of the week's low.  However, the US market has been particularly keen to sell dollars, and they did so against ahead of the weekend and sent the euro back to $1.1325 into the close of European markets for the week.  The momentum indicators are still favorable. Resistance is seen around $1.14, and June's three-month high was about $1.1420.  A break of the $1.1170 area would undermine the bullish technical case.  The $1.16-$1.18 target for seems reasonable, though the Blomberg consensus for year-end is $1.1400.  

Yen:  The market rejected the dollar when it poked above JHPY108 in early July, and it kept selling the dollar last week.  It pushed it below JPY107 for the first time in a couple of weeks.  The Slow Stochastic is moving lower, and the MACDs are gently easing.  In May and June, the dollar found support a little above JPY106.00.  The lower Bollinger Band is around JPY106.55. 

British Pound:  In the last two weeks, sterling has recovered drop to around $1.2250 to approach the 200-day moving average near $1.2700.  The upper Bollinger Band is found near there too (~$1.2675).  The momentum indicators allow for additional near-term gains.  Last month's high was almost $1.2815.  However, that trendline that connects the March (~$1.32) and June highs starts next week a cent lower.  Support may be found in the $1.2500-$1.2520 area.  

Canadian Dollar:  The Loonie was the underperformer last week.  It was the only major currency that fell against the US dollar (~-0.3%).  The US dollar remains in a range against the Canadian dollar of roughly CAD1.3500 to CAD1.3700.  The range has been intact for a month, though it did fray the lower end of the range last week (~CAD1.3490 low).  The sideways movement has muted the momentum indicators.  In a weak US dollar environment, the Canadian dollar often lags behind the other majors.   The greenback is testing a downtrend line that connects the March, May, and late-June highs.  It appears to come in a little below CAD1.3590 at the start of the new week.  

Australian Dollar:  After several tests, the Aussie poked briefly above $0.7000 for the first time in a month, but there were no follow-through gains, and it returned to $0.6925, the lower end of the week's range ahead of the weekend.   The MACD has flatlined, while the Slow Stochastic appears to be curling down.  Before the weekend, the Aussie closed below its five-day moving average  (~$0.6960) for the first time this month.  Key support is not seen until the $6780-$0.6800 area, but a break of $0.6900 would disappoint some bulls.  

Mexican Peso:  The dollar has fallen in eight of the past ten sessions against the Mexican peso, over which time it shed about 2.2%.  The greenback was turned away from MXN22.90 early last week and posted an outside down day ahead of the weekend (trading on both sides of the previous day's range and then settling below that low).  A trendline drawn off the February low (~MXN18.56), the June low (~MXN21.46), and the last week's low (~MXN22.15) starts the new week near MXN22.35.  

Chinese Yuan:  The dollar's seven-day slide that took it below CNY7.0 for the first time since March, stalled ahead of the weekend.  It managed to settle just above that once key level, which is essentially the middle of this year's range.  Some link the yuan's rise to underweight foreign investors having to chase the stocks market higher.  Even with the nearly 2% pullback at the end of last week, the Shanghai Composite netted a 7.3% gain, and the Shenzhen Composite rose 10.25%.  The yuan outperformed most emerging market currencies and the dollar-bloc currencies, sterling, and the Norwegian krone.  Chinese officials have succeeded in keeping the yuan fairly steady against the US dollar.  

Gold:  The buying enthusiasm faded in the middle of last week as the yellow metal reached $1818.  It consolidated within Wednesday's trading range during the last two sessions.  The momentum indicators are look poised to turn lower, which has made us cautious.  A month-long trendline begins next week near $1790, and a break could signal a set back into the $1750-$1765 area.  Gold has rallied from around $1670 in early June, and some consolidation should not surprise. 

Oil:   The September WTI contract has advanced in eight of the past ten weeks, during which time it has risen from below $30 to almost $42.  However,  the contract slipped to nine-day lows (< $38.80) ahead of the weekend, before staging a smart rebound and closed near new session highs of almost $41 barrel. Neither the MACD nor Slow Stochastic is generating a strong signal. The June high near $41.75 is the next obvious target, which is also about the middle of this year's range,  and there is the gap from March that extends toward $42.50.  Although violated intraday, the trendline off the late May low (~$32.20), mid-June low (~$35.00), and late June low (~$37.30) may still be valid and begin next week near $39.50.  

US Rates:  Fears that the new outbreaks will have a material impact on the economy encouraged lower yields and appeared to help ensure a strong reception to the US 30-year bond auction.  Most foreign investors prefer shorter maturities, but indirect bidders showed up in force even with yields new two-month lows.  The US 10-year yield fell to almost 56 bp at the end of last week, its lowest level since mid-May.  The same story holds for the two-year yield.  It approached 13 bp for the first time since mid-May.  The record-low was just above 10 bp, but the five-year note yield did register a new record low of almost 25 bp ahead of the weekend, before bouncing back to nearly 30 bp.   A near-term low in rates may have been seen, but the upside continues to appear limited.  

S&P 500: The S&P 500 spent the week alternating between gains and losses to net about a 1.5% increase that keeps it knocking on the 3200-cap ahead of the three-month-plus high set in early June near 3233. The lack of transparency with Q2 earnings season getting underway in earnest has been cited by many observers as a challenge, but that assumes earnings matter right now.  The market does not appear to be trading with much of a focus on the April-June period.  Admittedly, the advance of the S&P 500 seems narrow. Nevertheless, the price action remains constructive.  Many keep looking for European stocks to outperform the US, but if it is going to happen, it has not begun yet.  In the past two weeks, the S&P 500 has gained about 5.70%, while the Dow Jones Stoxx 600 is up 2%.  

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