Dollar Upticks Fragile Without Interest Rate Support

<br /> Dollar Upticks Fragile Without Interest Rate Support – Marc to Market<br />


The US dollar edged higher against most of
the major currencies over the past week. 
However, the fundamental backing is still
not solid, and it makes as wary of these upticks, even though we think a bottom
is being carved. Specifically, the US
interest rates still not finding much traction, and President Trump’s
legislative agenda still is encountering significant resistance within the
Republican Party.  
Since the end of April, the
Dollar Index has alternated between advancing and declining weeks.
  We suspect the pattern will continue
next week.  After this week’s upticks, it means a setback.  Over most
of this period the Dollar Index has been
confined to a roughly 96.50-98.00 range.  The Dollar Index peaked
in front of near 97.90 on June 20.  It can drift toward the lower end of
the range, which we expect to hold.  
The euro was confined to
narrow trading ranges last week and finished little changed against the dollar.
Since the middle of
May, the euro has traded in an $1.11-$1.13 trading range.  After starting
the week in Asia above $1.12, it was confined
to the lower half of the range in the past several sessions.  The sideways
trading has alleviated the extended technical condition we have been
monitoring.  In our macro view, we are concerned that a great deal of good
eurozone news has been discounted, and that the economic momentum slows and price
pressures ease.  The softening seen in the flash PMI is consistent with
this.  Next week, the preliminary estimate for June CPI will be reported. The signal may be obscured by a decline in the headline and a
small gain in the core.  
The dollar drifted lower
against the yen after peaking near JPY111.80 on June 20. Bid for the dollar
near JPY111.00 limited its descent. 
  However, without greater support
from the Treasury market, the greenback looks vulnerable, with an initial
target near JPY110.65.   As it spent a good part of the first half of June
below the 200-day moving average, we would not ascribe much significance to it
now, but note that it is found just below JPY111.00.  
Sterling’s technical
condition appears significantly superior to its fundamental backdrop. 
 The EU has the stronger hand in Brexit negotiations.
 The loss of the Tory majority may cost the government GBP 2 bln of
additional infrastructure and NHS spending to get the support of the DUP, with
which it agrees with on very few issues.  The Lib-Dems and Labour are
seeking to frustrate May’s ability to govern as if the Tories had a majority.
 On top of this, the central bank is as divided as it has been under
Carney, though some may recall that Carney’s predecessor was out-voted more
than once.
The MACDs and Slow
Stochastics are poised to cross higher for sterling.  Initial resistance is seen in the $1.2800-$1.2815 area.
  What looks like a resilient sterling is more a case of a weak dollar.
 The euro has risen around 5.5% against the sterling since mid-May and
near GBP0.8800 is within about 0.5% of the year’s high.   On a
trade-weighted basis, sterling is off 2%
this month.  We remain bearish sterling on a medium-term view.  
Despite the knee-jerk
reaction, the market is not convinced the softer May CPI reading before the
weekend offset the strength of the retail sales report the day before, and the
robust employment data. 
Next week’s April GDP figure will be a
reminder of the strength of the economy.   We suggested sterling’s
technical condition is better than its fundamental support; the Canadian dollar is the opposite.  Its technical
conditions appear fragile.  The
MACDs and Slow Stochastics are poised to
cross higher for the US dollar.   The greenback has shed around 4.5% since
early May. Bids near CAD1.3200 have lent support to the dollar.  On the
topside, CAD1.3350 has to be breached to signal anything important.  
The Australian dollar
snapped a four-day slide ahead of the weekend.
 It now looks poised to have a running
start at the $0.7630 area that blocked it earlier this month.  Speculative
positioning is neutral, but the technical resistance near $0.7700 is
formidable.  Raising hedge ratios into the rally may be preferable to increase exposure.  
The bears in the oil market
look tired, and for good reason. 
 They have beaten the price down more than 16% in the
unrelenting sell-off for the past five weeks.  Technically, the August
light sweet crude oil futures contract looks poised to trade higher over the coming
days.  After falling to nearly $42 a barrel in the middle of last week,
the contract faces initial resistance in the $44.00-$44.50 area and a stronger
cap near $46.00.  
US 10-year bond yields show
no compelling sign that they have bottomed. 
 The tone still seems fragile.
 The yield has not closed above its 20-day moving average since mid-May.
 The September 10-year note futures contract is moving broadly sideways.
  Nearby support is seen near
126-16.  A break of 126-00 would suggest a top of some importance may be
in place.  
The S&P 500 gapped
higher to start the week and spent the next two sessions filling the gap. 
 It has now built a little base near 2430.   The
technical indicators do not stand in the way of a push to marginal new highs.
 Below the surface that seems a rotation of sorts is threatening.
 Russell 1000 Growth Index rose 1.1% last week, snapping a two-week drop.
 Russell 1000 Value Index slipped 0.6%, ending a four-week advance.  


Dollar Upticks Fragile Without Interest Rate Support
Dollar Upticks Fragile Without Interest Rate Support

Reviewed by Marc Chandler

June 24, 2017

Rating: 5

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