Breakouts Need Confirmation

The dollar had a difficult week, falling against all the major currencies but the Japanese yen and appeared to break out of its recent trading ranges against the euro, Canadian and Australian dollars. Only a handful of emerging market currencies fell against the dollar.  Among these were the Chinese yuan, which, when everything was said and done, lost 0.1% against the US dollar.  The Argentine peso was the weakest currency.  It lost about half of one percent as its debt restructuring negotiations continued. That said, in places where the dollar appears to have broken out, we await confirmation. 

In the big picture, what the dollar decline, rally in equities, the outperformance of the Russell 1000 value companies over Russell 1000 growth companies in the last two weeks, the dramatic rally in the Mexican peso and Brazilian real (almost 9% and a little less than 6%, respectively) in May, and the narrowing of the premium that southern Europe pays over Germany, have in common is liquidity.  Investors are convinced that officials will continue to provide the one thing they can provide quickly and efficiently, liquidity.  Over the past two weeks, the market has become convinced that the ECB will expand its asset purchase program regardless of questions raised by the German Constitutional Court. Later in June, banks will have access to loans that pay them 100 bp to re-lend at a time the demand for credit is strong.  China, Japan, and India have all announced rates cuts, new spending, or both.  The Bank of England is expected to boost its bond-buying program later in June.  Several Fed programs that were announced, like the Main Street Lending Facility, are just being launched now.  

Dollar Index:  The Dollar Index closed below its 200-day moving average (~9850) in the last two sessions.  However, ahead of the weekend, it bounced smartly off of the 98.00 area, its lowest level since late March, and forged a potentially bullish hammer candlestick pattern.  The 97.80 area corresponds to a (61.8%) retracement of the explosive rally in March ( ~94.65 to ~103.00).  A move above 98.70 would stabilize the technical tone, and move above 99.20 would lift the tone.  The momentum indicators are getting stretched but have not turned higher.    The Dollar Index managed to close just inside the lower Bollinger Band (~98.45) before the weekend after closed below it in the previous session.  

Euro:  The euro rose about 1.7% against the dollar last week.  That is its best weekly performance in two months.  Stops were triggered on the break of the $1.1000 area and then above $1.1100.  However, as it approached the late March high (~$1.1165), the risk-reward considerations shift, and the euro fell to new session lows just before the weekend near $1.1070.   It still managed to settle above its upper Bollinger Band (~$1.1080).  The 200-day moving average seems to check rallies in April and in May until the very end.  It begins June a little above $1.1010.  A break below there, which also is roughly the halfway point of the recent bounce, would leave the single currency back within its former range.  On the upside, a break of $1.1165 signals a quick test on the $1.1200 area, and the next significant hurdle may be near $1.1265.  

Japanese Yen:  The dollar broke down to almost JPY107, a nine-day low,  ahead of the weekend before reversing higher as month-end adjustments appeared to have been made around the NY fix.  It jumped practically back to the week’s highs just shy of JPY108 before moving sideways again.  The 200-day moving average, the upper Bollinger Band, and a (38.2%) retracement of the decline from late March to early May are all found in the JPY108.20-JPY108.35 area. 

British Pound:  Sterling had its best week in May with about a 1.25% gain.  It sounds more impressive than it is.  Only two major currencies did worse, the yen and Swiss franc.  Sterling was easily the worst-performing major currency in May, falling more than 2%.  The next heaviest was the yen., which lost about 0.6%. Sterling overcame resistance near $1.2360 ahead of the weekend, which also marks the midpoint of May’s range ahead of the weekend, but could not sustain the momentum and quickly was able to be pushed back toward $1.2300.  Key support is seen in the $1.2215-$1.2230 area in early June.  

Canadian Dollar:  The US dollar fell to a marginal new low ahead of the weekend, near CAD1.3715, its lowest level since March 12.  It reversed higher and closed well above the previous session high (CAD1.3790), creating a potential key reversal.  The momentum indicators have not turned, but they are stretched or nearly so. A move above CAD1.3840 would be constructive, while additional resistance may be seen around CAD1.3880.   The price action here seems to make it a better candidate than the Australian dollar to fade what appears to have been a breakout.  

Australian Dollar:  The Aussie largely coiled most within Tuesday’s range (~$0.6535-$0.6675) for the last few sessions, though it did make a marginal new high (~$0.6685) ahead of the weekend, which also corresponds to the March high, and the upper Bollinger Band. The Aussie was sold in the North American morning on Friday, easing to about $0.6620 before catching a good bid that lifted it back toward session highs.  It gained nearly 2% last week, which was the seventh weekly gain in the past eight.  On the topside, if the breakout is genuine, the Aussie’s next challenge may lie near $0.6775-$0.6800.  On the downside, a break of $0.6500-$0.6525 would be significant. 

Mexican Peso: The dollar fell against the peso in all but six sessions in May.  The peso was the strongest currency in the world in May, gaining 9% against the US dollar.   The fact that the Mexican stock market is one of the few markets to have declined in May suggests another source of demand.  Mexico’s 10-year bond yield fell almost 50 bp in May (capital gains) on top of the high yield (more than 6%).  Mexico’s two-year yield is near 5.1%.  The one-month cetes pay closer to 5.3%.  The dollar is fell to almost MXN22.00 ahead of the weekend.  The technicals are stretched, and the Slow Stochastic looks poised to turn higher.  Outside of interest rates, which is another element of our liquidity story, the fundamental case for Mexico is not there. 

Chinese Yuan:   Escalating tensions saw the dollar climb to nearly CNY7.1780 in the middle of last week.  It had not been that high since last September. It slipped over the previous two sessions and saw the CNY7.1325 area before the weekend.  When everything was said and done, the yuan was virtually unchanged on the week.   The top of the previous range (~CNY7.10-CNY7.1250) may offer support.  However, after Trump announced plans to remove Hong Kong’s trade privileges and leave the World Health Organization, the dollar fell against the offshore yuan from around CNH7.16 to almost CNH7.13. 

Gold:  The correction that brought gold down from the multiyear high near $1765.40 on May 18 to about $1694.30 looks to have been completed.  It closed the week above the recent downtrend line that came in around $1722.   The impulsive nature of the $20 advance in the last two sessions warns of a run at the high.  

Oil:  Despite the unexpected build in US oil stocks and Russia balking at the need to extend the maximum OPEC+ output cuts past June, the price of July light sweet crude oil rose 6.5%, the fifth consecutive weekly increase.  Over this advance, it has risen from about $21.20 on April 24 to almost $35.50 at the end of May.  The more than 61% rally in the calendar month is a record.  The MACDs are trending higher still, but the Slow Stochastic has flatlined and looks to be turning lower.  However, the momentum is strong.  Look for a reversal pattern before picking a top.  

US Rates:  The 10-year note yield was confined to the previous week’s range (~62 bp to 74 bp), and did not close above 70 bp during the holiday-shortened weeks.   It closed the month at 65 bp,  more or less the middle part of the trading range.  Looking at the September futures note, technically higher prices (lower yields) looks like the most likely near-term scenario.  The Treasury market is quiet and stable.

S&P 500:  The benchmark finished the week on a firm tone, recovering from early weakness to close on the session highs set late in the session.  The market seemed to rally after President Trump talked about taking away Hong Kong’s special trade privileges and denying visas to Chinese officials.  It seemed to be relieved that harsher measures were not taken, and ostensibly the trade deal is still intact, though each passing day seems to make it less likely that China can fulfill its obligations. The S&P 500 continues to press against the upper Bollinger Band, which will start the new week and month near 3058.  A close below 3000 would be disappointing and could be a warning that the momentum is faltering.  On the upside, the next technical area is 3100-3110.  


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