The US dollar began consolidating earlier this month after trending lower
since the start of the year. We expected this phase to draw to a
close shortly. The Fed’s Jackson Hole Symposium (August 24-26) was going
to mark the end of the lull. The US employment data is released a week
later and the ECB meeting a week after
that. The FOMC meeting is a fortnight later.
The Jackson Hole gathering is an annual event. It is true that
there have been a few times, where officials used that forum to send a
meaningful signal to investors, but this is the exception. The topic this
year is “Fostering a Dynamic Global Economy.” It never
seemed particularly reasonable to us to expect ECB President Draghi to use this
forum, which he has not attended for a few years, to give some fresh policy
clues. That said, many, if not most, are expecting that the ECB will
announce it will continue to buy assets, but starting next year, it will do so at a reduced
pace. Currently, they are buying 60 bln euros a month, and it may be reduced
to 30 bln.
appears to have emerged to announce the
reduction the balance sheet in September to be
implemented beginning in Q4. A September hike has not been anticipated for several months, but a recent
WSJ survey found 75% of economists expect a move in December. NY Fed’s Dudley
recently indicated that he could support a hike at before the end of the year
provided the economy continues to evolve as the Fed expects.
We do not anticipate that Yellen will contradict this general view. In
the recent past, Yellen has argued for greater integration of women in the work
force to facilitate a more dynamic economy. The FOMC minutes came out
hard against legislative efforts to dilute bank regulations and this could be repeated at Jackson Hole insofar as of US banks have demonstrated in deed if not word that regulation is not necessarily antithetical to growth and profitability.
The Dollar Index pared its week’s gain ahead of the weekend and closed 0.4% higher. The
market attempted to push it through 94.00, and although some intra-day
penetration took place, it failed to closed above it and some profit-taking was seen, The five-day moving average
crossed above the 20-day average for the first time since late June, but the risk is of being whipsawed. The
technical indicators are out of sync. The RSI has been easing over the
past few sessions. The Slow Stochastics have turned down, while the MACDs
are still trending higher. A trend line is drawn off the Aug 2 low (~92.55),
the Aug 4 low (~92.70), and Aug 11 low (~92.94) will start the new week near
93.20.
The euro has also been trending
gently lower since August 2. The downtrend line off the recent high
comes in a little below $1.18 at the
start of the new week. The low for the move is near $1.1660 and was seen after the record of the
ECB meeting expressed concern about the “possible” euro
“overshoot” in the “future.” However, the euro did not close
below $1.1680, the 38.2% retracement of the leg up in the euro that began in
early July. The technical indicators appear aligned for further
consolidation.
The dollar fell against the yen for the past three sessions.
The two days of gains at the start of the week lifted the dollar to JPY111, the
high seen earlier this month, and those gains interrupted a four-day decline of
the previous week. By the end of the week, the greenback was flirting the
lower end of the range since last November. The dollar reached JPY108.60 before the weekend. The low from April was near
JPY108.10 and the low in June was near JPY108.85. The JPY107.85 area corresponds to the 61.8%
retracement of the rally since the spike low last November (~JPY101.20). In terms of a correction
of the entire Abenomics era move, the JPY106.60 area is the 38.2%
retracement.
Sterling tested a five-month trend line that comes in around $1.2840 in the middle of last week. Recall
that sterling closed well last week, but
there was no follow through buying, and despite a mostly stable tone in the
second half of last week, it was the weakest of the majors, losing about 1.1%
against the dollar and 0.6% against the euro. Initial resistance is seen in the $1.2925-$1.2975 area.
Support is seen the $1.2800-$1.2825.
Sterling is also poised to fall further against the euro.
The Canadian dollar was the strongest of the major currencies over the
past week, rising nearly 0.75% against the US dollar. The US dollar fell
against the Canadian dollar twice during the past five sessions, but those two
days more than offset the gains of the other three sessions. The slightly
firmer underlying July inflation measures
saw the Canadian dollar trade on both sides of the previous day’s range, with
the US dollar falling to a two-week low of CAD1.2575. The US dollar closed the below the previous day’s low, meeting the definition of an outside down day. Note that same pattern is also now on the weekly bar charts. The US dollar recorded an outside down week. Technically it is understood to be bearish. The dollar bounce that began around July 26 faded near CAD1.2770.
To boost the odds that this is the corrective
high, the CAD1.2550 area may need to be
convincingly violated.
The Australian dollar may have also completed its downside correction on
August 15 ahead of $0.7800, meeting a 50% retracement objective of the rally since
early July. Although the Aussie briefly poked above $0.7950, it
failed to sustain the move. The RSI and Slow Stochastics suggest the
market will likely succeed next week. The MACDs have turned higher but
likely will next week.
It peaked near $50.50 in early August and retested it on August 10, when it
recorded an outside down day.
The US 10-year yields steady last week, ending a two-week decline. The yield is about 10 bp lower than it had finished July. There is some congestion from May and June that extends
closer to 2.10%. If the Trump trade (or what at least one journalist
suggest is the Cohn trade) is being unwound,
recall that the US 10-year yield was averaging close to 1.80% in the month
before the US election last November. Before the weekend, the September
10-year note futures poked above 127-00. It has only done this two other
sessions this year and was rebuffed.
Some minor bearish divergence was
appearing in the technical indicators which did not confirm the end of the week
rally. A break of 126-00 may need
to signal anything of technical significance.
The loss on August 17 of 1.5% was the second largest
of the year. The S&P 500 gapped lower before the weekend and quickly
filled the gap. That initial pre-weekend loss was sufficient to fill another gap from mid-July. It also tested the year’s uptrend that we draw off a couple of
lows in January and the May low. It was near 2419 before the weekend and
near 2425 at the end of next week. From the high on August 8 to the
pre-weekend low, the S&P 500 pulled back almost 3%.
Many still
seem inclined to buy the pullback they have been anticipating. However, a
break of 2400 may see a loss of nerve. Of the technical indicators, the
Slow Stochastics have turned higher, and
the RSI looks set to do so. The MACDs are still moving lower, but are now
below zero, which was where it bottomed in April. The Russell
Value Index and Growth Index both fell last week for the second consecutive
week. The Value Index has fallen 2.75% over the two-week period, while the
Growth Index is off 1.70%.