Dollar Momentum

The US dollar fell against all the major currencies last week and reached the lowest level against the euro since October 2018.  The five-week slump in the Dollar Index is the longest since late 2017/early 2018.  Although we were early dollar bears, the downside momentum appears stronger than the momentum indicators suggested last week.  Even shallow dollar bounces have been sold.

By and large, as we will see below, the momentum indicators continue to suggest a consolidative or corrective phase may be near.  Yet, there does appear to have been a material shift in sentiment toward the dollar.  Speculators in the futures market have been net long euros, for example, since mid-March.  The change seems to be among asset managers,  judging from flow reports and surveys, and interpolating from the options market, some levered participants as well.   It also appears that the North American market is leading the current move.

The dollar's decline should not be exaggerated.  The year-to-date move has been modest.  The strongest major currency has been the Swedish krona, which often acts as a high-beta euro.  It has risen nearly 6% against the US dollar.  Despite intervention by the Swiss National Bank, in the face of US threats to cite it as a currency manipulator, the franc's 4.5% gain in second-place behind Sweden.  Meanwhile, Sweden's neighbor, Norway, sports the weakest of the major currency, with almost a 4.7% decline. Sterling's roughly 3.8% decline puts it just ahead of the Norwegian krone.  The dollar's modest decline is not a material factor for policy or trade, even if the momentum gets noticed.

Dollar Index: The downward pressure on the Dollar Index is evident in the fact that it has risen in four sessions this month, and once in the last 11 sessions, and none last week.  It is at its lowest level since October 2018 and finished the week on its lows.  For the better part of three weeks, it has been sliding down with the lower Bollinger Band (~94.55).  The next area of chart support is seen in the 93.75-94.00 area.  The momentum indicators are still falling but stretched.

Euro:  The euro will take a six-day advancing streak into next week.  It not only pushed above $1.15, but it crossed and settled above $1.16 as well at new highs for the move (~$1.1645).  The euro finished last month, near $1.1230.  Although some narratives link the euro's strength to the EU Recovery Plan, July will be the third consecutive monthly gain for the euro, the longest such move in three years.  The MACD is still trending higher, while the Slow Stochastic is arching, set to turn down in the coming days.  Rarely has there been a session in the last few weeks that the euro did not bump against or through the upper Bollinger Band.  Initial support may be in the $1.1550-$1.1580 band. 

Japanese Yen:  With the Tokyo market closed before the weekend for the Health and Sports Day holiday, foreign exchange dealers took the dollar below the JPY106 level that has marked the floor since March.  The JPY105.20 area marks the (61.8%) retracement objective of the rally from the March low (~JPY101.20), and a move below JPY105 would begin escalating the pain of yen strength on many Japanese companies.  The yen's strength, as exaggerated as it may be without Tokyo, coupled with the weakness in Asian and US shares ahead of the weekend, warning of the risk of catch-up on Monday.  Resistance now will likely be seen ahead of previous support around JPY106.65.

British Pound:  Sterling made new highs for the month, a little shy of the $1.28 level.  The June high, which is highest since the panic struck in March, was a tad above $1.28 and near the upper Bollinger Band (~$1.2810).  The next important chart point is not until closer to $1.30.  The momentum indicators are stretched but still moving higher.  Support is likely to be found near $1.2700.  The euro is firm against sterling.  It bounced smartly off the GBP0.9000 level tested following a reversal at the start of the week after reaching almost GBP0.9140.  The euro needs to take out the GBP0.9180-GBP0.9200 area to be meaningful.

Canadian Dollar: The US dollar convincingly broke below the CAD1.3500 shelf that had been forged ahead of the 200-day moving average (~CAD1.3515).  It fell to around CAD1.3350 before consolidating ahead of the weekend by straddling CAD1.3400.  The June low was near CAD1.3315.  The greenback fell every day last week for a 1.3% decline.  It finished last month by CAD1.3580. The momentum indicators just about to enter over-extended territory.  A possible head and shoulder pattern may have been carved since mid-June, and if valid, 1) it would project toward CAD1.3200, and 2) suggests the CAD1.3500 area offers resistance.

Australian Dollar: The Aussie shot up through $.0.7180, its highest level since April last year.  A little profit-taking was seen in the previous two sessions, and the Aussie found bids ahead of the $0.7050 area, now expected to be support.  It managed to hold to a solid 1.4% gain for the week to extend its streak to the fifth consecutive week and put it into positive territory for the year.   A couple hundredths of a cent decline in the face of the nearly 4% drop in the Shanghai Composite illustrates a more significant point we have made about the decoupling of the two.  Still, the technical indicators are flashing a yellow sign as they have failed to confirm the new highs.

Mexican Peso:  The dollar's roughly 0.8% decline against the peso last week gave back the previous two weeks of gains and maintaining the broadly sideways trading range since mid-June.   The greenback has given up nearly 3/4 of the prior month's 3.6% gain.  The Slow Stochastic appears curling higher, while the MACD has almost flatlined.  The lower volatility makes Mexico attractive for carry trades, but the strength of the Swiss franc and yen discourage their use, leaving the dollar as arguably the cleanest expression.  A near-term downtrend line from earlier this month held before the weekend and begins the new week near MXN22.60.  The month's low so far is about MXN22.15.

Chinese Yuan:  The dollar posted a key upside reversal against the yuan in the middle of last week, making a new low for the move (~CNY6.9650) before shooting up and closing above the previous day's high.  Follow-through buying was seen in the last couple of sessions, and the dollar finished the week near CNY7.02, a two-week high. Linking the yuan's weakness to the political tit-for-tat consulate shutdowns does not necessarily mean manipulation by Chinese officials.  The operative channel could be the equity market where the Shanghai Composite has fell by a little more than 4% over the past two sessions, and the Shenzhen Composite shed 5%.  The momentum indicators favor dollar gains, but with the greenback's losses before the weekend in North America warns of the likelihood of a lower fix.

Gold: The rally continued with the yellow metal rising every day last week, reaching nearly $1906.50 at the end of last week.  It will take a six-day rally into the last week of July.  Its resilience in the face of the heavier tone in the equity markets will support the arguments seeing it has a hedge to equities.  There are two obvious targets.  The first is the record high from 2011 a little above $1921, and the other is the round, psychological level of $2000.   It is difficult to talk about resistance in never-before-seen prices, but if our view of interest rates and the turn in the dollar cycle is fair, then $2500 might not seem unreasonable.

Oil:  After rallying to start the week and selling off in the second half, the September WTI contract finished the week little changed a little below $41 a barrel.  The week's high was about $42.50, which closed the breakaway gap created in the March disruption.  Around $41.70, the contract reached the middle of this year's range.  Before the next retracement (61.8%) near $46.35 comes the 200-day moving average (~$44.35).  The MACD did not confirm the high.  The Slow Stochastic did but has still turned lower.  This month, September WTI has not closed below its 20-day moving average ($40.60) and offered support ahead of the weekend.

US Rates:  Disappointing preliminary PMI on the heels of the first increase in weekly jobless claims, and the end of the S&P 500 three-week rally saw the 10-year yield slip to 55 basis points at the end of last week, the lower end of the range since March. Still, it managed to close around 58 bp to end a four-day decline.  The focus is on the Federal Reserve meeting and the negotiations over the next fiscal package, while the virus sets the general parameters.  The 10-year yield has drifted lower for the past three weeks after finishing June near 65 bp.  The two-note yield has been in a three basis point range this month (~13.5-16.5).  The effective (weighted) average fed funds rate, which the futures contract settle against, has quietly crept higher. Both last week and the previous week, the effect rate rose to 10 bp.  Recall that as recently as June 1, it was at five basis points.  The secured overnight financing rate is also trading firmly around 12-13 bp at the high over the past two weeks. Many are linking it to the Fed's decision to lift the minimum bid rate for its repo facility earlier this month. 

Disclaimer.