Dollar Party but the Yen wasn’t Invited

The US dollar rose against all the major currencies last week and was bid to new multi-year highs against the euro, Scandis and the New Zealand dollar ahead of the weekend.  The Dollar Index looked above 99.00 for the first time since May 2017.

The greenback’s gains in August were the most pronounced against the New Zealand dollar and the Norwegian krone, both of which fell by more than 4%.  The Australian dollar and Swedish krona fell about half as much.  On the other hand, the yen was the strongest of the majors gaining nearly 2.2% and surpassing the Canadian dollar as the strongest of the year (~3.2% vs. 2.5%).  The Swiss franc was the only other major currency to gain on the dollar in August (~0.3%).  The rise in sight deposits suggests the Swiss National Bank intervened repeated in recent weeks.

The euro’s record 14-week advance against sterling ended in the middle of August and it has pulled back now for three consecutive weeks.  The euro fell each session last week for the first time in three months.  The 1.45% loss recorded was enough to offset the gains seen earlier in the month and finished 0.85% lower in August.  The euro has risen only one month this year, and that was in June.  It has lost about a nickel so far this year.  Sterling was essentially flat against the dollar in August.  It has risen three months this year against the dollar and four months against the euro. 

Among emerging market currencies, the Argentine peso was the poorest performer (~-7.3%) amid government efforts to “reprofile” its debt and the rating cut by S&P to “selective default.” It brought the month depreciation to a little more than 26%.  Eastern and Central European currencies, including Russia and Turkey, were also under pressure last week, falling 1-2%.  The Chinese yuan fell by about 0.85%.  A 10-day slide ended briefly on August 29 with a small gain before falling again ahead of the weekend.  It depreciated by roughly 3.8% for the month.  It was virtually flat to start the month.

Dollar Index:  A two-year high was recorded in the last session, and the technical indicators suggest scope for additional gains.  The 1.35% gain last week, the biggest weekly advance since June 2018, speaks to the momentum.  When resistance around 99.00 is convincingly overcome, the next target is 100.15 and then 100.50.  A break below 98.00, which corresponds to the 20-day moving average, would signal a correction. 

Euro:  Immediately after the London fix on the last day of August, the euro was pushed through $1.10 for the first time since May 2017.  It fell each session last week and in 12 of the 14 sessions.  The 1.45% drop last week was the largest since February 2018. The MACDs and Slow Stochastics have not fallen below the lows set at the start of August.  A euro bounce now could leave create a bullish divergence, but ahead of the ECB meeting on September 12 bottom-pickers may keep their powder dry.  Moreover,  with the break of $1.10, the next technical target is in the $1.0820-$1.0860 area.   Prior support that may extend a little above $1.10 may now act as resistance.  A move above $1.11 may help stabilize the technical tone, and last week’s high was near $1.1165. 

Yen:  With a couple of exceptions, the dollar traded between JPY105 and JPY107 in August, and on the wide, it was about half a yen more on both sides.  The decline in interest rates and heightened volatility in the equity market often are associated with yen strength.  Yen’s strength is not desired by Japanese officials, but given the state of trade talks with the US, it cannot truly contemplate intervention like the SNB.  The MACDs and Slow Stochastics did not react to the dollar’s plunge on August 26 to three-year lows (~JPY104.45) and have been trending higher since the middle of August.  A move above JPY107 would target JPY109, with intermittent resistance seen near JPY108.20. 

Sterling:  In the game of chicken, described by Thomas Shelling, a way to convince one’s adversary that they will not turn first is to throw the steering wheel out the window.  What the spins are cast aside, this is Prime Minister Johnson’s gamble–that seeing his willingness to crash, that they will move to avoid a calamity. Sterling bottomed on August 12 a little north of $1.20 and gradually climbed to fulfill the (38.2%) retracement objective (~$1.2290) of the sell-off from the July 28 high around $1.2735.  After briefly trading above $1.23 on August 27, it retreated for the last three sessions and closed the week a little less than 1% lower.  It is testing a trend line drawn off the August 12 low.  The next targets, The MACDs and Slow Stochastics are crossing lower.  A break of the $1.2130 area would re-target $1.20.  Below $1.20 and chartists will have to take another look at the flash crash low from October 2016.  There still may still some disagreement over the low that was plumbed.  Bloomberg has it at $1.1841, its lowest level since 1985. 

Canadian Dollar:   The US dollar’s seven-week advance against the Canadian dollar is the longest march higher in four years.  The Canadian dollar slipped 0.2% last week, making it the best performing major currency against the US dollar.  It gave back about a third of this year’s gain in August, leaving it up about 2.45%, year-to-date.  That said, the US dollar has risen against the Canadian dollar in six of the first eight months of the year.  The US dollar’s recovery from June through mid-July slide against the Canadian dollar has stalled in front of the (61.8%) retracement (CAD1.3355).  It got the closest on August 7 around CAD1.3345.  It has gone practically nowhere since and remained in the range seen in the first half of the month over the last few weeks. The range-bound activity is rendering the technical indicators not particularly helpful.

Australian Dollar:  The Australian dollar fell for its sixth consecutive week against the US dollar, over which time it has lost two cents.  Like the Canadian dollar, the extremes for the month were set earlier in August, and range trading between $0.6700 and $0.6800 has been featured.  The triangle pattern that appears to have been carved in recent weeks is usually seen as a continuation pattern, and that would mean, lower.  Below $0.6700, there is little to hang one’s hat on until the 2008-2009 lows seen near $0.6000 and $0.6210 respectively.  The technical indicators are giving contradictory signals with the Slow Stochastics turning down and the MACDs trending gently higher since early August. Initial resistance is seen near the 20-day moving average (~$0.6765), which the Aussie has not closed above in a little over a month.   

Mexican Peso:  The dollar reached new highs for the year near MXN20.26 on August 29 before snapping a six-day advance ahead of the weekend.  The 0.4% decline on August 30 pared the weekly gain to 0.8% and ensured the weekly winning streak to the seventh consecutive week. It has risen by a little more than 5.5% during the streak. The dollar is testing a trendline drawn off the June 2018 (~MXN20.96) and December 2018 high (~MXN20.66).  It came in near MXN20.22 last week.  The dollar penetrated it on an intraday basis, but not on a closing basis.  The trendline is found a little above MXN20.21 at the end of next week.   On the downside, it takes a break of MXN19.75, the (38.2%) retracement of the August rally and the 20-day moving average to maybe tempt the carry-crowd to return.  The RSI and MACDs are turning lower.  The Slow Stochastics are flat in over-extended territory. 

Chinese Yuan: After allowing the dollar to push above CNY7.0 on August 6, Chinese officials limited the advance to CNY7.07 until August 22.  In the following week, it allowed the dollar’s rally to accelerate to CNY7.17.    It is difficult to know what Chinese officials intend but interrupting a 10-day decline by a one-day advance (August 29, 0.3%) is not enough to break the one-way appearance.  We anticipate a consolidative phase and expect the dollar to find support in the CNY7.10-CNY7.12 area.  

Oil:  October WTI rallied 5.5% Tuesday-Thursday last week before profit-taking set in and prices pulled back a little more than 2.8% ahead of the weekend.  The 200-day moving average turned prices lower three times in August, most recently on 29th, when it approached $57.  Support is seen in the $52-$53 area.   The technical indicators are mixed.  Falling US inventories and an approaching storm may have supported prices, but with higher US and China tariffs to start, many have demand concerns.  The price of oil fell 6% in August, trimming the year-to-date gain to a little less 15%.  

US Rates:  The US 10-year yield slipped about four basis points to finish the month below 1.50%.  In fact, the 10-year yield fell every week in August for a total of a 57 bp.  It was the second month this year (June being the other) that yields fell every week.  One has to go back to 2008 to see another year that had two such months.  The technical studies of the September 10-year note futures have not confirmed the recent highs.  Initial support is seen near 130-16 and then 129-28. We note that the US 30-year yield closed below 2.0% and talk of extra-long maturities did not derail its rally.    The implied yield of the January 2020 fed funds futures contract rose six basis points last week to 1.54%.  The current effective average, which is what the contract settles at, is 2.12%, implying 66 bp of easing is discounted.  The market appears to be saying that two more cuts are a done deal, and the data dependency is on a third one.  The two-ten year curve was inverted all last week, reaching minus five basis points on August 27 and finished the week less than a basis point inverted.  

S&P 500: The benchmark rose four of five sessions last week, and its 2.8% net gain snapped a four-week tumble.  The technical indicators appear supportive, but the S&P 500 spent August chopping several times between roughly 2830 and 2950. Note that the upper end of the range corresponds to the (61.8%) retracement of the sell-off from the record higher on July 26 to the lower end of the range.  It opened at 2937 ahead of the weekend, and it looked like the market was going to making a serious run at the upside, but buying faded near 2940 and close was around 2926.  The technical indicators look constructive, but the gap created by the higher opening on August 29 may draw prices. The gap is found between 2890.0 and 2905.7.  The five and 20-day moving averages are converging in that gap (2897.3 and 2893.0).


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