The divergent performances
make it challenging to talk about the G10 currencies last week. The Canadian dollar led the advancing
major currencies with a 1.2% gain last week. It and the Australian
dollar rose above last month's highs. On the other side was the Japanese
yen. The more than 20 bp backing up of the US 10-year yield, the biggest
weekly advance in two months, lifted the dollar by more than 2.8% against the
yen. That is the biggest weekly gain since March 2020. For its
part, the euro was little changed on the week, unable to extend its two-week 3%
upside correction.
The seeming lack of
direction may have been partly the result of the weak ADP private sector job
estimate, which proved wide of the mark. Then there was a leading US banker,
who had talked up credit a week or so ago, came back and warned of a
"hurricane" hitting the economy. Another argued that the Fed
does not have the tools to fight inflation, which will stay high for
years. Meanwhile, a clear consensus for 50 bp Fed hikes this month, and
next has emerged.
Atlanta's Fed's Bostic idea
of a pause in September never had much backing from his colleagues or the
market. The
September Fed funds contract moved from pricing around a 1 in 3 chance for a
50 bp rather than a 25 bp move in the last full week of May to a 2 in 3 chance
now. And the bulk of the movement took place before the stronger than
expected US employment report. US financial conditions have been
tightening since last September, and housing and the labor market appear to be
moderating but not sufficiently to give policymakers much comfort.
Dollar Index: The prospect of a hawkish ECB meeting on
June 9 is coupled with narrowing the 2-year interest rate differential
between the US and Germany (down more than 50 bp in the past two months to
approach 2%, the least since early March). From mid-May to the start of last
week, the Dollar Index fell by around 3.5%. That move looks
complete. The MACD is still falling, but it is stretched. The Slow
Stochastic is curling up from oversold territory. Ideally, there would be a three-legged recovery in the Dollar Index from a technical perspective. Last week, the first leg up met the (38.2%) retracement objective (of the down
move since the May 13 high near 105.00). With the help
of the stronger than expected US jobs report, it backed off and held the previous low (~101.30)
for the second leg. The third leg will be signaled by rising above the
102.70 area, which would target the 103.15-103.60 area.
Euro: The euro's rally from a five-year low in
mid-May (~$1.0350) faltered at an important technical area. The
$1.0785-$1.0800 band contains retracement objectives and the downtrend line
connecting the February and March highs. The MACD is overextended, while
the Slow Stochastic is turning down. The $1.0600-$1.0625 band needs to hold to
continue the consolidation. However, a break of that area could signal
another 1-2 cent pullback. Given the momentum indicators, we would be
suspicious that any move above $1.08 would be a false break.
Japanese Yen: The May PMI confirms that the Japanese
economic recovery continues, and the core CPI is at its target. Yet,
the BOJ has made it clear that it is not about to change its monetary
policy. The rise in the US 10-year yield back toward 3.0% from around 2.70%
at the end of May coincided with the dollar pushing to almost JPY130. The
20-year high set in early May was near JPY131.35, and there is little to stand
in the way of a retest. The momentum indicators turned higher in late May
and continue to trend up and have more scope before getting stretched. The five-day moving average crossing above the 20-day moving average for the
first time since mid-May also captures the dollar's upside momentum. A
break of JPY128.50-JPY129.00 would suggest a range affair rather than a
trending market.
British Pound: Sterling looks vulnerable. The
Slow Stochastic has rolled over from overextended territory, and the MACD looks
poised to do the same. Sterling upside momentum stalled around the (50%)
retracement objective of the decline from the late April high (~$1.31). The retracement target was about $1.2625. It closed above it a couple of
times in late May but fell to $1.2460 in the middle of last week. The bounce
from there was worth about a cent before sellers re-emerged. A break of that
area sets up a test on $1.2400, which may offer more formidable support. We
would be suspicious of gains above the $1.2660 area as a possible false
break.
Canadian Dollar: The Canadian dollar rose over 1.1% against
the US dollar last week. It was the third consecutive weekly advance, the longest since last October. The rise was the largest weekly gain of
the year. The greenback posted an outside down day last Thursday, rising above
the previous day's high and then settling below its low. There was a little
follow through USD selling after the job report, but it was minimal, and the
greenback settled higher on the day, ahead of the weekend. The MACD is still
falling, but the Slow Stochastic looks poised to turn higher. The test for the
US dollar bottom pickers is the CAD1.2675-CAD1.2700 area. A move above
there could target CAD1.28 initially.
Australian
Dollar: The
Australian dollar also posted an outside up day on June 2. There was also
a little follow-through ahead of the weekend that saw it briefly poked above
$0.7280. However, it reversed lower and settled near session lows. The momentum indicators have turned down. Speculation of a more
aggressive move by the central bank on June 7 may limit the aggressiveness of
the move, but a move toward $0.7100 initially and maybe, $0.7050 seems a
reasonable scenario. The swaps market has a 30 bp hike discounted, but a
Bloomberg poll of economists found a median forecast for a 45 bp hike. Meanwhile, the formal decision to hike the minimum wage (5.1%) as the new
government promised in the recent election is expected before the end of the
month.
Mexican Peso: The dollar began the week with a
drop to new two-year lows against the Mexican peso near MXN19.3150. By the
middle of last week, it had bounced to around MXN19.7715. That was the first
leg of what we anticipate to be a three-part dollar gain. The second part
was the setback to MXN19.50 ahead of the weekend. We suspect the third
part will be evident next week as the greenback trades higher. Initially,
the MXN19.77 area may be targeted, and the MXN19.80-MXN19.82 may stall
gains. Above there is potential toward MXN19.80-MXN19.82. The Slow
Stochastic has curled up though it is still overextended. The MACD is
leveling off and is near its lowest level in nearly two months.
Chinese Yuan: Chinese officials showed greater
acceptance of larger yuan moves starting in April than it has for several
years. The broad dollar strength and significant disruption of the
Chinese economy as a consequence of the zero Covid policy weighed on the yuan, and
officials did not stand in the way. Like it did more generally, the
greenback pulled back from over CNY6.80 to about CNY6.6450 in about two weeks. China's onshore market was closed Friday when the dollar strengthened against
the major currencies. The offshore yuan was little changed. Shanghai and Beijing are re-opening, and last month likely represented the low
point. One implication is that portfolio flows may be less adverse. Consider that the Shanghai Composite, for example, rose in nine of the last 11
sessions. A new trading range may be the most likely scenario, like CNY6.60-CNY6.75.
Disclaimer
Reviewed by Marc Chandler
on
June 05, 2022
Rating:
