Dollar Recovery Can Continue, while the 10-year Yield is Set to Rise

The US dollar appreciated against most of the major currencies
last week. 
 The Japanese yen was the chief
exception.  It rose about 0.5% as US yields remained heavy and equities were
mostly softer.  
The Dollar Index did not
fall in any session last week. 
 It has had one losing session over
the past nine, and that was the last day
in March when the Dollar Index slipped
less than 0.1%.  It finished the week a bit above thee 61.8%
retracement objective of the decline from last month’s peak (March 9) near 102.25, found just below 101.00     A trend
line from the January and March highs is found
near 101.40 by the end of next week.  It corresponds to the 50%
retracement of the Dollar Index decline from the January high, and near the upper Bollinger Band (~101.55 now).  The 61.8%
retracment of this larger move is found a
little below 102.   The technical indicators are constructive, and the five-day moving average crossed above the
20-day average for the first time since the Fed hiked rates in the middle of
The euro fell about 0.5%
against the dollar last week after falling about 1.35% the previous week.
  It has only risen in three of the
past ten sessions.  It has been sufficient to push the five-day moving
average back below the 20-day average for the first time since March 9.
 The Slow Stochastics are trending lower, but are approaching zero.
 The MACDs were turning lower at the end of last week and continued to
ease.  The RSI is drifting lower.  The trend line connecting the
January and March lows seen in the $1.0580, which is just above the lower Bollinger Band (~$1.0575), was teased ahead
of the weekend.  A break would target $1.0500-$1.0525.   We had
thought potential extended a little above $1.07 last week, but the euro did not
get much above $1.0685, where we would now recognize resistance.  The
euro’s slump is consistent with the wider interest rate differentials as US
yields edged higher and German yields eased.   
Three times over the past
five sessions, the dollar dipped below JPY110.30 to approach significant
support around JPY110. 
 This area held in late March as
well, but the inability of the sustain modest upticks keeps the greenback
vulnerable.  There have been 17
sessions since the Fed hiked and the dollar has closed lower in all but four.
 A break below JPY110 still appears as the pain trade, and optionality and
stops would likely be triggered, which could lead to an air pocket.  The risk of this lessened at the end of last week as the dollar staged an impressive recovery after initially falling to new lows for the week.  Japanese investors may be
taking advantage of strong yen to return to
global asset markets at the start of the new fiscal year.  On the upside,
the JPY111.20-JPY111.50 band needs to be
overcome, but only to set up a test on more formidable resistance around
JPY112.00-JPY112.20.   We think there is a reasonable chance that this recovery off JPY110 level can spur a return to the JPY114.00-JPY115.00 
Sterling lost a nearly than 1.5% last week, with half the losses coming after disappointing industrial
production, manufacturing output, construction, and a wider than expected trade
shortfall at the end of the week. 
The low,
near $1.2365, was recorded after the US employment data.   It is also the 50% retracement objective of the rally that began the day before the Fed raised rates last month.   The  61.8% retracement is at $1.23.  A move above the $1.2420–$1.2450 area would help stabilize
the technical tone.   Sterling finished the week below its 20-day moving
average for the first time since March 15.  The five-day average has not
moved below the 20-day average but
appears set to do so in the coming sessions.  
The Australian dollar’s 1.7%
decline eclipsed sterling as the weakest of the major currencies last week.
It has risen only four times over the past 15 sessions.  
  It had reached of $0.7750, the
highest since the US election on March 21 and subsequently has fallen to approach the March low was near $0.7490.  The technical indicators warn of
the risk of additional near-term losses.   The Aussie finished a little below the $0.7525 area which represents a
38.2% retracement of this year’s gains,
and the 100-day moving average is near $0.7515. The 50% retracement is found near $0.7455, and the 61.8% retracement is $0.7385. The 200-day moving average is
near $0.7550, and this is reasonable
resistance.  The $0.7490 area may represent the neckline of a double top
(February 23 ~$0.7740 and March 21 ~$0.7750.  If valid, the measuring
objective is near $0.7230.
The Canadian dollar rose on
the back of another month of solid job creation, which helped it resist US dollar strength ahead of the weekend.
  The Bank of Canada meets next week,
and although economic data have generally been
firm, the policy is on hold, while the
Fed’s minutes were somewhat hawkish and, judging by the Fed funds futures, is
gradually upgrading the odds of a June hike.  Bloomberg’s calculation puts
the odds at 55.6%, up five percentage points on the week, while the CME’s
interpolation puts the odds a little above 59%.  The technical indicators
are not generating strong signals, though the Slow Stochastics is still trending lower.  The CAD1.3325-CAD1.3345
support area held after the employment report.  A break could see
CAD1.3200-CAD1.3250.  On the upside, a move above CAD1.3450 would target
the year’s high near CAD1.3535. 
Oil prices rallied after the
US missile strike in Syria. 
 US President Trump said the picture
of the human tragedy from what strongly appears as Syrian use of chemical
weapons changed his views.  Previously, Trump had tweeted more than a
dozen times about the folly of attacking
Syrian President Assad’s forces.  Also, when Obama’s support was low, but
above where Trump’s is today, Trump cautioned
that Obama would strike Libya or Iran to distract attention.  Ironically,
Russia is accusing Trump of the same thing now.  To be sure, the rally in
oil prices started well before these incidents.  The May light sweet
crude oil contract has advanced in eight of the nine past sessions to approach
$53 a barrel, which corresponds to a 61.8% retracement of this year’s
 decline.  A downtrend line drawn
off the early January high ($57.50), and
the February highs (~$55.25-$55.30) is found
near $53.40 at the start of the new week and around $53.10 by the end of the
week. Support is in the $51.45-$51.75 band.  

A combination of forces,
including some safe haven demand after
the US military strike,  saw the US 10-year yield fall to a new low for
the year (a little below 2.27%) before recovering smartly following the US employment data, where disappointment was
shrugged off on ideas that the weather distortions skewed report.
  The 2.40%-2.42% yield is the next hurdle.  The June note futures staged a key reversal, making news highs
for the move and then sell-off through the previous day’s low.  Initial
support near 124-24 was approach before the weekend,
and a break could spur a move toward 124-00.  The 20-day moving average is
near 124-10 and 123-27 is the 61.8% retracement objective of the rally since the Fed’s March hike.  The
Slow Stochastics have turned lower, and
the MACDs are about to cross.  

For six weeks, the S&P
500 has alternated between advances and declines
and produced a small net decline. 
 It is not clear that the
consolidative phase is over, and the technical indicators are not now
particularly helpful.  The FOMC minutes indicated there was some concern about elevated equity prices, which could suggest that a pullback would not be disconcerting for the central bank.  The week’s
high was set on Wednesday near 2378.35,
but since then, it has been unable to rise above 2365.  Several large US banks
report earnings next week, which will surely draw attention.  Some
officials have cited profitability in the financial sector to counter claims
that Dodd-Frank is hurting US banks.  We suspect a break move above 2374
would be an early signal of another run at the record near 2401.  Initial
support is seen around 2350.  


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