Dollar Tone Improves

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The US dollar’s technical tone improved last week, but it did not break out of recent ranges.  It appears that the continued increase in US interest rates is proving expensive to be short the greenback if there is no downside momentum.  Despite a good start to US earnings and the fact that the S&P 500 finished higher last week, the charts warn of the near-term downside risks. 

The US dollar was broadly higher last week.  It seemed as if the inexorable rise in US interest rates may be beginning to give it some traction.  The US 10-year yield made a marginal new four-year high, creeping closer to 3%, while the US premium over Germany surpassed 300 bp for the first time.

The Dollar Index’s four-day advancing streak, which it will try to extend next week, is the longest in two months.   It is important to recognize, however, that there has been no breakout yet.  The Dollar Index remains in the broad 89.00-91.00 trading range.  It did not make a new high for the month.  That is to be found near 90.60.  Although the technical indicators are not generating strong signals at the moment, the underlying tone is firm.  The Dollar Index fell only one week in February and one week in March.  So far, here in April, it has also appreciated in all but one week.

After testing the upper end of the trading range (~$1.24) several times without success, the euro backed off.  It slipped to a two-week low near $1.2250 ahead of the weekend.  The rising short-term interest rate differential means that it is increasingly expensive to hold euros without offsetting appreciation.  Still, the weekly loss of 0.35% is small beer, and the lower end of the range (~$1.22) remains intact.  Participants may be patient even if the $1.22 area is frayed.  The low from March 1, near $1.2150, may need to be taken out to signal a clean break.  The technical impulse is not particularly robust, but there appears to be a slight downside bias.

The euro returned to CHF1.20 last week for the first time since the SNB jettisoned the cap on the franc (floor for the euro).  While the single currency poked through there, it was marginal and brief.  A euro high may not be in place, but the technical indicators are stretched.  News that North Korea announced an end to its ballistic missile tests and the closing of one of its missile sites might be greeted with fresh franc sales on risk off ideas.  However, we see the North Korean announcement is largely show.  It has not tested a missile since claiming to have successfully achieved the capability to hit the US heartland.

The dollar finished last week at its best level since February 21 (~JPY107.65). We continue to monitor a head and shoulders bottom pattern.  The break of the trendline did not spur the kind of impulsive move that technicians often like to see on the violation of the neckline.  Nevertheless, the firmer greenback tone is evident.  The four-week dollar advance matches the longest ones since late 2016.   The JPY108 area is the main obstacle to a run toward JPY110.  A base has been built in the JPY106.65-JPY106.85 area.

Sterling likely put in a top of some import last week near $1.44.  It reversed lower and finished the week at $1.40.  It broke below the trendline created drawn off the March 1, March 8 and April 19 lows.  Soft inflation and retail sales data, the defeat of the government’s position (on the common market) by the House of Lords, and some cautious comments from BOE Governor Carney were the fundamental drivers.  A break now of the April low (~$1.3965), which is also the 61.8% retracement of the rally since March 1, could signal a move toward $1.37, which could be the neckline of a larger double top  The technical indicators suggest additional near-term losses are likely.

The US dollar carved out a nearly textbook perfect head and shoulders pattern against the Canadian dollar last month.  It broke the neckline (~CAD1.28) in early April.  The measuring objective was CAD1.2475.  The greenback’s downside momentum began easing, though a marginal new low was set on April 17 (~CAD1.2530).  A combination of the continued rise in US rates, a patient Bank of Canada, and soft Canadian CPI and retail sales saw the greenback jump to almost CAD1.2770.  The dollar finished above its 20-day moving average (~CAD1.2735) for the first time in a month.  The pre-weekend rally also saw the dollar meet the 38.2% retracement objective (~CAD1.2755).  The 50% retracement (~CAD1.2825) corresponds to some old congestion and provides a reasonable near-term objective.  The technical indicators favor additional US dollar gains.

The Australian dollar staged a key reversal on April 19.  It made a new high for the month (~$0.7815) and then sold off hard for a week and a half low.  There was follow-through selling ahead of the weekend, which saw the Aussie end the week in the band of support that had been forged in late March and early April (and extends to ~$0.7645).  With interest rate differentials continuing to move against it, and the failure at $0.7800, the path of least resistance appears lower. And the technical indicators seem to concur.  The $0.7600 area may slow the descent, but $0.7500 may prove that more important challenge.

US President Trump’s tweet, complaining about the “artificially” high oil price injected some volatility into pre-weekend crude trading, but WTI for June managed to close fractionally higher.  The decline in US inventories a.nd ideas that the global inventory overhang has been corrected (current levels are marginally above the five-year average, which had been OPEC’s quantitative goal).  Since the start of the year, the continuation futures contract has been knocking on the 50% retracement level of the crude’s decline since mid-2014.  That retracement was a little below $67 a barrel.   The recent price action has convincingly moved through this area, that the June contract briefly traded above $69.00.  The $70 is psychologically important, and the 61.8% retracement is found a little above $79 a barrel.

Ahead of the weekend, the US 10-year yield poked above 2.95%, but not to 3.00%, to record its highest yield in four-years.  Recall that on April 2, the yield had fallen to almost 2.70%.  Part of the rise reflects an increase in inflation expectations.  The 10-year breakeven has risen about 15 bp this month to 2.19%, just shy of the 2014 high (~2.20%).  Also, the 2-10 year curve fell to new cyclical lows on April 17 (~43 bp) but recovered to two-week highs (~50 bp) ahead of the weekend.   The June note futures tested the low from February (119-14), and the continuation contract made new seven-year lows.

Despite losing about 1.4% in the last two sessions, the S&P 500 closed 0.5% higher for its second consecutive weekly advance.  Gaps are an important part of price action.  The rally in the first half of the week closed the old gap from the lower opening on March 22.  The losses in the second half of the week filled the gap created with the higher opening on April 17.  The key gap now was created on April 19 with the lower opening.  Its small gap (~2702.85-2703.65), but it could be important from a technical perspective the longer it is not filled.   Initial support is seen in the 2650-2655 area, and a break warns of initial risk toward 2635-2645.

The Russell 1000 Value Index is showing some life.  It rose nearly 0.65% last week and 2.75% over the past two weeks.  The Russell 1000 Growth Index rose 0.55% last week for a 2.30% two-week advance.  As is well appreciated, growth has led the market on the way up, and often value has led pullbacks.  We will continue to monitor this as a potential sign of a rotation.