Will Sideways Movement Alleviate the Overextended Greenback?

Gold sold off, and US yields rose as we anticipated, but this did little for the greenback, which fell against all the majors but the Japanese yen and New Zealand dollar.   Although the US dollar fell to new six-month lows against the Canadian dollar and rose to three-week highs against the yen, it remained mostly range-bound.  The sideways movement is correcting the overextended momentum indicators.

What looked like double tops in several of the foreign currencies last week, including the euro, sterling, and the Australian dollar, now look like ranges. The highlights of the price action was a three-week high in the dollar against the yen, just above JPY107 where it met consistent offers since the middle of the week, and the greenback’s slump to 7.5-month lows against the Canadian dollar (a little below CAD1.32).  Most emerging market currencies stabilized, and the JP Morgan Emerging Markets Currency Index edged a little higher after falling about 1.65% over the previous two weeks.  The Turkish lira made a new weekly low close even though the central bank has effectively raised funding costs to almost 11%.

Dollar Index:   The recovery faltered near 94.00 last week, which is also the month’s high. The 20-day moving average is falling and now is near 93.75.  The Dollar Index found support near 93.00 though the recent low was near 92.50. The momentum indicators are continuing to recover from sold extended readings as prices move sideways.  A convincing break to the upside targets the 95.50 area, while a break to the downside would initially target the 91.80-92.00 area.

Euro:  A two-cent range between $1.17 and $1.19 confines the euro.  Despite the consolidative tone, the euro gained (~0.3%) on the week, which was the eighth consecutive weekly advance.  The momentum indicators are tracking lower, suggesting the consolidation may persist.  The euro has not closed below its 20-day moving average, which is also the middle of the Bollinger Band for over a month.  It begins the new week near $1.1735. Three-month implied volatility edged higher for the fourth straight week and closed a little above 8%.  It was below 5% as recently as the first half of July.  Given the put-call skew, and the spot price action, it appears that levered accounts may be rolling spot positions into options and some rotation of the leading euro buyers may have shifted to Europe from the US.

Japanese yen:  The dollar flirted with the JPY107 level last week, but failed to close above it even once.  Perhaps frustrated or bored, participants trimmed some long dollar exposure ahead of the weekend to snap a five-session rally.  The momentum indicators are still trending higher,  but the buying interest dried up.  Japanese investors have large amounts of foreign bonds for the second week (ending August 7) when the yen was strong.  It would not be surprising if some began hedging foreign currency exposure.  Separately, the yen also fell to new lows for the year against the euro, but a divergence in the Slow Stochastic, which has not confirmed the new euro high, suggesting caution is in order.  A break of JPY106 would likely confirm a dollar high is in place. The euro could pullback toward JPY124.25 after peaking near JPY126.75.

British Pound:    With the pre-weekend gains lifting it to new highs for the week a little above $1.3140, sterling gained about 0.5% last week.  The recent highs were set around $1.3170-$1.3185.

Sterling is knocking up against the five-year trendline (see chart), which is near $1.3130 to start the new week.   The MACD is moving sideways at elevated levels while the Slow Stochastic trends lower.  The consolidative phase looks set to continue.  A convincing break of the trendline unveils the $1.35 area as the next big technical target.  On the downside, a break the $1.2980 area may shake out some of the late longs. 

Canadian Dollar:  The US dollar extended its losing streak against the Candian dollar for the fifth consecutive week and traded below CAD1.3200 for the first time since the end of January.  The low for the year was near CAD1.2960.  The MACD has flatlined, but the Slow Stochastic has been gently rising and did not confirm the new greenback low.  Initial resistance is seen in the CAD1.3300-CAD1.3320 area.

Australian Dollar:  The Australian dollar edged higher against the US dollar last week, having now appreciated for eight consecutive weeks.  Yet, it is consolidating below the recent highs near $0.7240 that stalled the advance and was unable to trade above $0.7100 last week.  Support was seen ahead of $0.7000. The MACD is moving sideways, while the Slow Stochastic is trending lower.  The five-day moving average is set to slip below the 20-day moving average early next week for the first time in a month. 

Mexican Peso:  The greenback has a four-session losing steak in tow to start the new week.  The widely expected Banxico 50 bp rate cut (to 4.5%) did prevent the dollar from drifting lower against the peso.  It set a new low for the month near MXN22.00 before the weekend.  The MACD is not showing anything.  The Slow Stochastic is trending down.  Mexico’s real and nominal rates remain high, and this continues to attract carry-trade strategies.  Although many are not sure if the central bank delivers another rate cut this year,  and ironically, the stronger the peso, the more likely it would seem.  The July low for the dollar was near MXN21.92, and the June low was around MXN21.4650.  A cap ahead of the MXN23.00 area, the top of the broad range, the dollar may find resistance near MXN22.50-MXN22.60. 

Chinese Yuan:  Contrary to consensus expectations, the heightened Sino-American tensions have not weighed on the yuan. In fact, the dollar has fallen for the past three weeks and six of the past seven weeks.  Duration is one thing, and magnitude is another.  Over the seven-weeks, the dollar has fallen by about 1.8%.  Some disappointing data before the weekend may encourage speculation of a monetary response next month and may help put a floor under the dollar.  The PBOC signals give no reason to expect the benchmark Prime Loan Rate to fall next week. 

Gold:  The reversal pattern we identified last week signaled the end of gold’s nine-week rally that carried it to record highs.  Our $1950-$2000 target was overwhelmed by the dramatic sell-off that took the yellow metal to around $1863 before some bargain hunters stepped-up.  The subsequent bounce carried lifted it by a little more than $100 to meet the 50% retracement objective of the sharp sell-off before selling pressure re-emerged.  The next retracement objective (61.8%) is near $1995.  The momentum indicators are trending, and a retest of the lows seems likely.  A trendline off the March, June, July, and August lows starts the new week near $1871.  A break of the $1860 area could see $1825.

Oil: WTI for September delivery chopped around a narrow range in recent sessions.  Leaving aside the poor start to last week’s activity, the contracted was confined to a $41.50 to $43.00 range.  There have been a few exceptions, but for the most part, September crude has held above $40 a barrel and below $43.00.  The 200-day moving average is near $43.50, and crude has not closed above it since January. The technical indicators give no sense that a breakout is imminent.  

US Rates:  Bearish steepening of the US curve was seen last week as both the PPI and CPI prints were higher than expected (though year-over-year pressures remain soft), and the was some concession ahead of the refunding.  The two-year yield rose a couple of basis points for the second week in a row to 15-16 bp.  The 10-year yield jumped 13 basis points on top of the four the previous week to see 1.72% for the first time since late June.   The 30-year bond auction did not go nearly as well as the first two legs (3- and 10-year notes), and we think it was complicated by the $25 bln sale 20-year bond on August 19. The stronger than expected core US retail sales and manufacturing output figures could not lift yields further.  The momentum indicators favor a recovery in the Sept note futures contract (lower yields).  

S&P 500:  The benchmark eked out a small gain last week.  It was the sixth week of the past seven that the S&P 500 rose.  It managed to briefly trade above its record close (~3386) but generally traded in a narrow range (mostly 3365-3385) over the last few sessions.  The resilience of the S&P 500 was unscored last week.  It posted a key bearish reversal on August 11 by making a new high, in this case, a fresh six-month high, and then selling off and closing below the previous day’s low.  It looked ugly, technically speaking, but there was no follow-through. On the contrary, it recovered the took out the high the following day.  It is also a reflection and reward of buy-on-dip strategies.  The NASDAQ was virtually flat last week after gaining almost 6.2% in the previous two weeks.  The 20-day moving average is near 10780, and a break of it would be a yellow flag.  

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