Dollar Surge Continues

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The US dollar impressive recover over the last few months is continuing and pullbacks are brief and shallow.  Rising US rates and policy divergence have made it increasingly expensive to be short dollars.  Yet positioning adjustments seem to trail behind the price action.  

The US dollar is experiencing a powerful surge.  It is a function of rising US rates and gradually growing confidence that the Federal Reserve may hike rates three more times this year, rather than the two that the median Fed forecast (March dot plot) anticipated.

The dollar’s advance is also a reflection of poor developments abroad.  Consider the recent news stream.  The Japanese economy contracted in Q1 18, and the contraction was sufficiently large as to offset in full the revised slower growth reported in Q4 17. That means that net-net world’s third-largest economy is smaller now than at the end of last September.

Germany, the economic engine of Europe, and the world’s fourth-largest economy revised down Q1 growth to 0.3% from 0.4%.  The slowing from the 0.6% pace in Q4 felt near recessionary.  After a calm response to the Italian political drama since the early March election, investors reacted dramatically in the second half of last week, selling Italian bond and stocks.  This weighed on other peripheral European bond markets.  Much of the funds likely stayed in the eurozone, but with what many see as the prospects for a Greece-like confrontation between Italy and the EU, the news also appeared to weigh on the euro.

Given the technical condition a week ago, we thought the euro could test the 200-day moving average that was found near $1.2020 and noted additional resistance near $1.2045.  The euro peaked in front of $1.20 at the start of the week and never looked back.  It fell to a new low for the year before the weekend near $1.1750.   The euro recorded an outside down week, meaning that it traded on both sides of the previous week’s range and closed below the previous week’s low.  The last outside down week was in late March 2016.  It took a month, and the defeat of the National Front in France before the euro saw those weekly highs again.

The $1.1700 area is the next important technical area.  It corresponds to a 38.2% retracement of the euro’s rally that began early last year.  It is the top of a consolidative pattern last November.  The lower Bollinger Band is also found near-term.  A break of the $1.17 could spur another leg down, with initial target being around $1.1450-$1.1500.

The euro fell every day last week, and last week was the fifth consecutive weekly drop. It is the longest weekly losing streak since the end of 2014 and early 2015.  May 2016 was the last month that the euro did not rise in at least one week.   In the futures market, the gross speculative longs were cut for the first time in three weeks (to May 15), but some shorts were covered too.

The dollar has been no slouch against the yen, rising every day last week.  The greenback’s advancing streak now stands at eight weeks.  It is the longest run since Aug-Oct 2014.  The dollar is trading at four-month highs as it probes the air above JPY111.00.  Still, in the futures market, speculators added to the gross long yen position more than the gross short position, and thus shift the net position back to favor the longs after being net short for the past two reporting periods.

The correlation between the exchange rate, Japanese equities, and US yields has tightened.  The dollar closed essentially on the upper Bollinger Band.  The next obstacle is seen near JPY111.60, but overcoming it would put the dollar in a good position to challenge the JPY114.00 area.  Resistance above JPY110 should now act as support.

Sterling is not streaking so much.  It has been trading sideways in a $1.3455-$1.3620 band since May Day.  It finished last week threatening the lower end of the range.  The consolidative pattern has a continuation feel if you will, but the technical indicators are not offering much confirmation.  The MACDs are trying to turn higher, and the Slow Stochastics already have.  A bounce may be limited now to the $1.3560 area, where the 200-day moving average is to be found.  Speculators have trimmed the net long position, which appears poised to switch to a new short position in the next week or two.

In the bigger picture, we are monitoring the double top pattern since the neckline was violated at the start of the month.  The pattern projects toward $1.30-$1.31, which corresponds to a 50% retracement of the rally since the flash crash low in October 2016 (which Bloomberg puts at $1.1840).  But to get there, sterling must take out the 38.2% retracement found near $1.3400.

The Australian dollar posted an inside week, trading mostly in a little more than a half-cent range on either side of $0.7500.  The two-year-old uptrend was violated in late April (~$0.7600). The Aussie fell last week (~0.5%), least among the majors, except the Swiss franc, which managed to post a small rise (thanks to Italy?)  but managed to bounce in the middle of the week.  The Aussie looks to continue to trade in a $0.7400-$0.7600 range. In the futures market, the bulls and bears added to positions, but the latter was larger and the net short position, since early April, has grown.

The Australian dollar has fallen four of the past five weeks and so has the Canadian dollar.  The mid-week bounce in the Aussie coincided with the one day gain last week in the Canadian dollar.  Somewhat softer than expected retail sales (excluding autos) and a slightly lower than expected headline CPI weighed on the Loonie in a market that the greenback was bid.   Interpolating from the derivatives market, the odds of a hike at the May 30 central bank meeting declined over the past week to about 1-in-4 from 1-in-3, and the odds of a July hike are scaled back to 66% from 75%.

The US dollar rose about 0.7% against the Canadian dollar last week, and it was the fourth increase in the past five weeks.  Initial support is seen CAD1.2800-CAD1.2830.  The next obvious technical target is CAD1.2975-CAD1.3000.

The US 10-year yield slipped ahead of the weekend to snap a five-day advance.  It is the third session this month that has seen interest rates ease.  The 10-year yield rose a little more than 10 bp last week including the three basis point decline at the end.  It is the second consecutive weekly advance in yield and the fifth in the past seven weeks. Many observers see the 10-year yield in a range between 3.00%-3.25% in the period ahead.

The technical condition of the futures note is more constructive.  The low in price was not confirmed by the MACD or Slow Stochastics, warning of the risk of a near-term correction.  At the least, it suggests that the recent momentum is unlikely to be sustained.  That said,  the charts look blocked in the 119-00 to 119-16 range. In the futures market, speculators trimmed the gross short position, which remains north of a million contracts, and added smalls to the gross long position.

Oil prices rose in the first half of the week and consolidated in more recent sessions.   WTI for July delivery rose 1% last week.  It was the third consecutive weekly advance and the fifth in the past six weeks.  Disruptions and potential for more (Iran) at the same time that the overhead supply has been absorbed help underpin prices even while the US dollar is appreciating.   The squeeze on Brent while US refiners appear to have reached their shale capacity is widening the Brent-WTI spread to levels not seen in three years.   The July WTI futures contract has not traded below $70 since May 7.  On the upside, the $75 a barrel level is the next target and Brent toward $85.

The S&P 500 closed about 0.5% lower on the week, paring the previous week’s 2.4% rise.  The benchmark rose from about below 2600 to 2742 at the start of the last week.  The gap lower on May 15 marked the end of that move, even though the gap was filled over the next few days.  Initial support is seen in the 2680-2700 area, which corresponds to a 38.2% retracement of the gains in the first half of the month (2686), and the 20-day moving average  (2680). The MACDs and Slow Stochastics are warning of the downside risks.

Both the Russell 1000 Growth and Value Indices fell last week, with the former easing slightly more than the latter (0.5% vs. 0.4%).  It leaves the Growth Index up 5% for the year, while the Value Index is nursing a 1.4% decline.