An Update for US
Dollar ,Euro ,GBP ,CAD ,AUD ,CRUDE
The technical
indicators warn that the US dollar is stretched, but the combination of
disappointing auto sales and jobs report may deny
it the interest rate support needed to facilitate a resumption of the bull
market. While there are many observers talking about the abdication of the US
from its global leadership role given the decision to pull out of the Paris
Accord and the TPP, we think the dollar’s performance can be explained by
changing perceptions about the pace of US economic activity, the direction of
inflation, and prospects for significant tax reform and infrastructure
spending.
There is a light US
economic calendar in the week ahead, and the quiet period ahead of the June
13-14 FOMC meeting means that investors are unlikely to
get much guidance from officials. The
focus will be squarely on Europe with the ECB meeting and the UK election.
The Dollar Index
finished the week at new lows for the year, and just above the 61.8%
retracement objective of the rally from the lows
seen in May last year (96.45). A
convincing break brings two technical levels into view. The first is around 95.20. It is a measuring objective of the old head
and shoulder pattern that had been formed between December 2016 and March
2017. The second is near 94.20. It is the 38.2% retracement objective of the
Dollar Index’s 2012-2014 lows near 78.60.
The euro appreciated
for the sixth week of the past eight.
Nearly three-quarters of the 0.7% gain on the week were scored
on the back of the disappointing US jobs report. Before the weekend, it posted its highest
close since last September, as works its way closer to the spike high last
November ($1.13). The strength of the
close warns of risk of a gap higher opening in Asia on June 5. Given the proximity of $1.1300, current
volatility, and momentum, an upside break cannot be ruled out. A break of $1.1300 could signal a move to
$1.1400-$1.1425.
The dollar has fallen
against the yen for five of the last six sessions. Before the weekend, it was trading on either
side of the previous day’s range (outside day) and closed below the previous
day’s low. Indeed, the early in the session it made a new high for the
week. Then in response to the jobs’
disappointment, it made a new low for the week. Support is expected in front of JPY110, and
a break could see JPY109.40-JPY109.60.
However, if US yields do not find better traction, a return to the
JPY108 area seen in mid-April is possible.
Sterling was
range-bound last week (~$1.2770 to $1.2920).
The outside up day posted in the middle of the week
did not see follow-through buying, but rather back-to-back inside days. The technical indicators look constructive,
but that may be a reflection of a heavy dollar.
Sterling continues to trade heavily against the euro. It fell on the cross for the sixth
consecutive week. The euro look to be
headed into the GBP0.8800-GBP0.8850 area that marked the highs in mid-January
and mid-March. Against the dollar, the
$1.3000-$1.3055 needs to be overcome to be anything technically
significant.
The US dollar snapped
a two-week decline against the Canadian dollar and rose 0.4% on the week. The
Slow Stochastics have turned higher, and the MACDs are
about to, but the price action itself is more worrisome. After reaching its best level since May 19,
which corresponded with a 38.2% retracement of the US dollar’s fall since the
May 5 key reversal, the greenback sold off before the weekend and settled on
its lows. Initial support is seen in the
CAD1.3450-CAD1.3480 area, but the potential is to re-test the May 25 low below
CAD1.3400.
A good part of the
technical damage inflicted on the Australian dollar as it declined in five of
six sessions was repaired on before the weekend with its
nearly 1% advance. It recovered off the
$0.7375 area on the back of the poor US jobs report, recouped half of what it
lost over those five sessions (~$0.7445). A weaker US dollar environment and
soft US rates can help lift the Aussie back into the $0.7500-$0.7700 area. Near-term potential extends toward $0.7525
and then $0.7600.
The US 10-year yield
fell nine basis points. It was the
second time in three weeks that a decline of that magnitude was recorded. A new low yield print was recorded (~2.14%)
since last November. With falling core PCE deflator, disappointing jobs and
auto sales, and doubts over the legislation of the economic agenda, there does
not seem much in the way of a further decline toward 2.0%. Though stretched,
the technical indicators for the 10-year Treasury note futures do not suggest a
top is imminent. The 127-04 area
corresponds to a 50% retracement of the sell-off since last November. The 61.8%
retracement is 128-03.
From the May 25 high
through the pre-weekend low, the July light sweet crude oil futures contract
fell more than 10%.
The contract briefly dipped below $47 before recovering, leaving a
possible bullish hammer candlestick in its wake. A move above $52 is needed to be of technical
significance. The technical indicators
point to continued risk on the downside.
There is little support below $46 until $44, where prices had spiked on
May 5. The price of oil has fallen for
four of the five months this year. After
falling 9.4% in Q1, it is off another 6%
in the first two months of Q2.
Neither weak macro data nor valuation
concerns have held back the S&P 500.
It is participating in what is a global rally. Although conventional wisdom was that
European equities would rally more than US shares, so far this year, the
S&P 500 has held its own. It is up
8.8%, just nosing ahead of the Dow Jones Stoxx 600 (~8.6%). The Nikkei 400, which the BOJ buys ETFs on,
is up almost 5.7% year-to-date. The technical indicators are not particularly
stretched. The note of caution comes from bumping against the upper Bollinger
Band. Last week began by breaking a
seven-day advance, but the week finished on a firmer note with new record highs.
