There were some technical indicators that suggested there was an
opportunity for the US dollar to stage a recovery. However, the poor
retail sales data and lack of upside surprise on CPI closed that window of opportunity and left
the dollar vulnerable to losses to start the new week.
Although June inflation and consumption data are unlikely to have much
weight in the Fed’s decision in September, the
market’s reaction was to take US rates lower and reduced the perceived
chances of another rate hike this year. The implied yield on the
December Fed funds futures contract fell to its lowest level in nearly a month
(1.225% vs. the current effective rate of
1.16%). The relatively light US economic calendar next week means that there may not be data of sufficient gravitas to negate the sense that the US economy is stuck in a low gear.
The Dollar Index finished the week at its lowest level since last
October. The possible double bottom pattern that had appeared to be forming was dashed as it did not rise above the
neckline before breaking down to new lows. Support near 95.00 is mild but is stronger closer to
94.00. The poor close warns of a gap lower opening in Asia on Monday. A move above 96.20 is needed
to suggest a bottom is in place. The Dollar Index has been alternating
between weekly gains and losses since the beginning of May. The pattern
is at risk if it cannot advance next week. Given the light US economic
calendar, its fate may be in the hands of ECB President Draghi who holds his customary press conference after the central
bank meeting.
The euro made the high for the year just below $1.1490 in the middle of
last week. The technical indicators are
mixed as the euro has been straddling the $1.1400 level for two weeks in mostly tight ranges. Last years high was
set near $1.1615, and this
represents the next target. The 2017 high was a cent higher. There
is the talk of leveraged accounts buys $1.20 strikes.
The pullback in US rates may have been the spur that snapped a four-week
dollar advancing streak against the Japanese yen. The
greenback’s slide in after reaching almost JPY114.50 on July 11, met the 38.2%
retracement target (of the advance from the June 14 low near JPY108.85) that is found near JPY113.35. The 50%
retracement comes in around JPY111.65. The technical indicators seem to
be generating powerful signals warning that the downside may be greater.
The euro reached almost JPY130.80 on July 11 and finished the week below
JPY129. The technicals look poor too,
and the initial target may be JPY127.50-JPY128.00.
After testing $1.28 at midweek on
the back of Deputy Governor Broadbent aligning more with Governor Carney who is
reluctant to raise rates now than the dissenting hawks, sterling finished the week at new highs for the year. It
surpassed the 38.2% retracement of the losses suffered since the $1.50 level
was seen last year on the day of the referendum. The 50% retracement is
$1.3430. Sterling recorded an outside up week. We see initial
potential toward $1.3250 next week.
We had seen sterling strength as largely a function of the weaker US
dollar, but recognize that it has recovered smartly against the euro since the
middle of last week. The euro approached GBP0.8950, but then reversed
course and finished the week near GBP0.8760. We have suggested a break of
GBP0.8750 would signal a test on GBP0.8700. A more serious test for euro
is last month’s low near GBP0.8650, which corresponds to a 50% retracement of
the euro’s rally since the May 10 low below GBP0.8400.
The Australian dollar appreciated every day week and gained 2.8% against
the US dollar. The rally carried the Aussie to its best level since
April 2016. A move now above $0.7850 would encourage participants to set
their sights on the $0.8000 and possibly
the 2015 high near $0.8165. The rally in recent days has been strong, and the closes have been near session
highs. The technical indicators warn against fading the powerful
momentum. In a previous note,
we pointed out a bottoming pattern in the Australian dollar against the New
Zealand dollar. The pattern appears to have been confirmed, and the initial target is near NZD1.0750.
Given the position of the technical indicators, this initial target, which
corresponds with a 61.8% retracement of the decline since mid-March, can be
overshot and a move toward NZD1.0800-NZD1.0850 may be reasonable.
The Canadian dollar performed well last week, gaining 1.6% against the US
dollar. It was the third consecutive weekly loss for the dollar and
the fifth decline in the past six weeks. The Canadian dollar was helped by the rate hike, softer US rates,
and higher oil prices. Technical indicators are getting stretched, but
only the Slow Stochastics look set to cross higher. Canada reports June
CPI figures next week, and the base
effect warns of reduced price pressures. However, the US dollar does not
see support until closer to CAD1.25.
The August light sweet crude oil futures contract rallied every day last
week. The near-term technical outlook is constructive, and we see
scope toward $47.30-$48.50. OPEC’s monitoring committee meets on July 24
and pressure is mounting for Libya and Nigeria to participate in some output
restraint going forward given the levels of output reached in Q2. On the
downside, initial support is seen in the
$44.50-$45.00.
The 2.40% level proved to be formidable a cap on the US 10-year yield,
and even before the soft retail sales and as-expected CPI, the interest rate
was slipping. A break of the 2.20%-2.25% band would be seen as
a likely signal a return toward the low from late June near 2.12%. The
September note futures contract rallied before the weekend and met to the tick
the 50% retracement of the decline from
the June 14 high (127-08). The 61.8% retracement is at 126-10, which is
the next immediate target. The technical indicators are aligned and
favor the upside.
The S&P 500 gapped higher in the middle of the week and set a new record high before he weekend. The gap has not
been entered, let alone closed, and is found
between 2429.3 to 2435.75. While the gap may be a force to attract prices,
the momentum indicators are strong and favor additional near-term gains.
The earnings season has already begun but
picks up in the week ahead. There was disappointment over the bank earnings reports, and ahead of the weekend, and financials were the only sector to lost ground (~0.5%). For the first time in a month, both the
Russell Value and Russell Growth Indices advanced last week (0.75% and 2.1% respectively).