The broad technical condition of the dollar deteriorated materially before the weekend. It could be written off as an exaggerated Friday afternoon in the summer. However, as we had noted last week that the technical tone of the dollar had begun weakening, and we saw the price action in the Australian and Canadian dollar as the possible tell.
After depreciating on a trend basis for much of the first seven months of the year, the dollar spent August largely consolidating. Although the focus is on monetary policy, we are concerned about the US debt ceiling and spending authorization with the fissures in the majority party that has hardly passed a single bill in the past six months. If these issues can be addressed without much disruption, the dollar may begin recovering, but there is much wood to chop first.
The business-wing that has abandoned Trump may not be won back back tax cuts, and especially after the pardon are former Sheriff Arpaio. Business will work with Congress, which must craft the legislation. However, as we have seen, the Republican majority is in name only, and has fissures that are making it difficult to govern.
For the better part of the past two weeks, the Dollar Index has alternated between gaining and declining sessions. The Dollar Index finished last month near 92.85. It recorded new lows for the year ahead of the weekend, near 92.40. The consolidation has largely corrected the oversold technical condition. The Slow Stochastics have turned lower, while the MACDs may will likely cross in the next session or two. The low from May 2016 was a little below 92.00, and the 91.20 area corresponds with a 50% retracement of the rally since mid-2014. The 61.8% retracement is closer to 88.25.
Here in Q3, the euro has fallen in only two weeks, the week ending July 7 and last week, ending August 18. Similar to the technical reading of the Dollar Index, the Slow Stochastics have turned higher, leading the MACDs which barely crossed with the surge before the weekend that carried the euro to new highs for the year (~$1.1940). Many participants have had their sights set on $1.20 for some time. We note that $1.2140 corresponds with a 50% retracement of the euro’s decline that began in mid-2014.
The dollar spent the week chopping at the lower end of this year’s range. Before the weekend the greenback held above JPY109 for the first time in six sessions. The technical indicators are mixed, and in any event, are not generating a compelling signal that a significant low in place. If the year’s low, set in April is broken, the next important technical target is near JPY106.50. The euro surged above JPY130 ahead of the weekend. This break out targets the JPY134-JPY134.50 area.
Sterling is one of the worst performing major currencies this month. It has lost 3% against the greenback and 1.6% against the euro. Against the dollar, sterling returned to levels below $1.28 not seen since the late June. However, the downside momentum stalled, and new buying materialized before the weekend. The $1.2900-$1.2930 area offers initial resistance. The technical indicators are improving. The MACDs may be the last to turn but are poised to do so in the coming days. We suspect near-term potential extends toward $1.2975-$1.3000. These sterling gains may be more a function of a weaker US dollar than a bullish outlook for sterling. The euro is poised to extend its gains against sterling. The GBP0.9500 is the next obvious target, but many are calling for a move to parity.
Strong Canadian economic data underpins expectations that the Bank of Canada will hike interest rates again in October. The market is not nearly as confident that any other major central bank will lift rates this year, including the Federal Reserve. The US dollar is set to fall to new lows for the year against the Canadian dollar next week. A break of CAD1.24 will target the CAD1.2160 area. The CAD1.2550 area may now offer resistance.
The Australian dollar peaked near $0.8065 in late July before falling to nearly $0.7800 in mid-August. We suggested last week that the pullback in the dollar bloc had run its course. The Aussie struggled at the start of the week but recorded near six-day highs before the weekend. A move above $0.7970, which was approached before the weekend, signals not only a test of the earlier high for the year near $0.8065, but another leg up toward $0.8150-$0.8250.
Light sweet crude extended its losing streak to the fourth week. The 1.8% decline was the largest in five weeks. The technical indicators are encouraging, and the anticipated pullback in the dollar may also lend support. The $48.60-$49.00 band offers initial resistance, and it also corresponds to the 20-day moving average. A break of $46.60 would neutralize this bullishness, while a break of $45.50 would warn that the recovery since mid-June has run its course.
US 10-year yields slipped almost two basis points, fully accounted for the pre-weekend price action. It is the third decline in four weeks. The yield posted its lowest weekly close since June 26. The yield looks poised to retest if not fall through this year’s low near 2.10%. Our underlying concern is that if the market is unwinding the Trump trade, the 10-year yield may return toward levels seen before last November’s election (1.80%-1.85%) unless something changes. The September 10-year note futures contract has spent the last several sessions knocking on 127-00. The intra-day contract high was set in mid-June near 127-08. A move above there would target the 50% retracement of the decline since July 2016 high (134-07) which is found near 128-20. The technical indicators are getting stretched, but no sign yet of an imminent top.
The S&P 500 recouped the previous week’s losses, but it needs to continue to rally another percent in the coming days if it is going to extend its advancing streak for a sixth consecutive month. The S&P 500 gapped higher on August 22 but ran into sellers a little above 2450. The technical indicators are supportive, but we suspect there may be another attempt to fill the gap, which is found roughly between 2430.6 and 2433.7. The Russell 1000 Value Index rose about 0.8% last week. It was the biggest weekly advance since May. The Russell 1000 Growth Index rose 0.7%. It is the largest gain in a month. The technical indicators of the Value Index look more constructive than the Growth Index.