After a strong run in recent weeks, the US dollar may have begun a corrective phase. The risk of Quitaly appears to have receded and the panic subsided. Here we discuss the near-term outlook for the dollar, 10-year yields, oil and the S&P 500.
The dollar’s inability to rally ahead of the weekend on the back of a constructive jobs report and a re-pricing of the trajectory of Fed policy may signal that a corrective phase lies ahead. The market had grown a bit skeptical of another hike after this month’s anticipated Fed move during the turmoil that arose from political developments in Europe. By the end of the week, the pricing of the Fed funds futures strip was again consistent with the Fed’s median forecast of two more hikes this year.
The euro fell to almost $1.15 as the turmoil in Italy (and Spain) reached a fevered pace. We suspect the 50% of the euro’s rally that began at the start of last year near $1.1450, is safe for the time being and the euro will work its way toward $1.1750-$1.1800. The 20-day moving average is found in the middle of that range, and the euro has not traded above it since April 20. The Slow Stochastics did not make a new low to confirm the low in prices, leaving a bullish divergence in its wake. The MACDs are also turning up. The euro snapped a six-week slide with the week’s 0.2% gain.
The net long speculative euro futures position fell for the sixth consecutive week. The record was reached in the second half of April at around 151.5k contracts. It has fallen every week since and as of May 29 stood at 93k. But the net position reveals more than it conceals. The net long position has been reduced by around 40%, but the gross long position has increased in the most recent reporting week. It has risen in four of the past five weeks. At 230.9k contracts, the gross long speculative is larger now that it was at the end of last year (~209k contracts).
The reason the net position has fallen is that the gross shorts have grown faster. It has risen from 86.4k contracts in late April to 138k contracts as of May 29. The gross speculative shorts have also risen in four of the past five weeks. At the end of last year, the gross speculative short position was a little below 117k contracts.
The dollar alternated between rising and falling sessions against the yen last week. The inside days recorded on last Wednesday and Thursday was a minor reversal pattern rather than a continuation pattern. The dollar returned toward the week’s high before the weekend (~JPY109.85). It stalled at the 20-day day moving average. The yen did not rally when the BOJ announced that it was reducing its 5-10 yr JGB purchases (to JPY430 bln from JPY450 bln). Arguably the reaction reflects investors’ understanding that the this is a not a substantive change in policy or a sign that it is tapering. It may be a testament to the BOJ Governor Kuroda’s communication efforts and the idea that the main criticism from other BOJ board members is coming from those who take more action to ensure the inflation target is reached. We suspect the dollar needs to resurface above JPY110.20. Otherwise, the gains ahead of the weekend will look corrective in nature.
Sterling fell to nearly $1.32 last week and recovered to almost $1.3340 by the end of the week, with the help of a stronger than expected May manufacturing PMI and the easing of market anxiety. The technical indicators favor a near-term correction. Near-term potential extends into the $1.3400-$1.3430 area. The 20-day moving average is found at the upper end of that range, and sterling has not closed above this moving average since April 18 when it near $1.42.
The US dollar gyrated in a broad range against the Canadian dollar, and one does not have to cite European politics. The spurs were mostly domestic. Bank of Canada’s statement, after leaving policy on hold, as widely expected, was understood as a signal that rates would likely be hiked in Q3. The US dollar retreated to almost CAD1.28 from CAD1.30. The following day, Canada reported a weaker than expected Q1 GDP (1.3% vs.1.7% in Q4 17 and expectations that the pace of growth was steady). The US dollar recovered and briefly traded above CAD1.30 after the US employment data. The technical indicators do not appear to be generating a strong signal presently. The greenback has moved lower against the Canadian dollar in only three sessions since May 10.
The Australian dollar closed higher against the US dollar for the second consecutive week and the third week of the past four. However, for the better part of the past three weeks, the Aussie has mostly chopped between $0.7500 and $0.7600. The technical indicators are mixed, but if the Aussie cannot establish a foothold above $0.7620 by the end of next week, the charts may turn more decisively negative. There is a slew of Australian economic data next week, and although generally constructive data is expected, it will not be sufficient to push the RBA off its neutral stance.
Oil prices continued to unwind the Feb-May rally. Light sweet crude for July delivery fell about after shedding almost 5% the previous week. Record US production (10.77 mln barrels a day) and an anticipated increase in Saudi and Russian output means that the world’s three largest producers are going to add to supply. The technical indicators suggest the downside correction is not over. The next target is a little below $65, which corresponds with the late-January high and the 50% retracement of the rally from early February that began a little below $57. A loss of $63 would spur talk that a top of some import is in place.
The US 10-year yield fell from 3.12% on May 18 to a low a little below 2.76% at the start of last week as the risk of an existential crisis in the eurozone seemed to escalate. As European politics stabilized and the US reported data, lending credence to ideas the world’s largest economy has re-accelerated in Q2, US yields rose back above 2.90% ahead of the weekend. Additional near-term recovery in yields looks likely. The June note futures rallied from 118-10 on May 17 to a high of 121-12 on May 30. By the end of the week, it had retraced half of the rally (@119-27). The 61.8% retracement is at 119-16, which is also where the 20-day moving average is found.
The net short speculative position in the 10-year note futures rose to a new record high of 471k contracts. It was an increase of 112.4k contracts, snapping a four-week decline. It reflected the bulls liquidating nearly 70k contracts, bringing the gross long position down to 640.5k contracts. The bears added another nearly 43k to their gross short position, lifting it to a new record high of 1.11mln. At the end of last year, it a little below 720k contracts.
In three of last week’s four S&P sessions, the close represented a change of more than 1%. The VIX rose from a low of 12.3% on May 25 to a high of nearly 18.8 on May 29. It finished near 13.4, which is practically unchanged for the third consecutive week. The S&P 500 made new highs for the week ahead of the weekend, and although it closed well (~2734 just off session highs), the 2750 area needs to be overcome to lift the technical tone.
The Russell 1000 Value Index was virtually unchanged last week after falling in three of the previous four weeks. That said, it managed to eke out minor gains in April and May (for a cumulative gain of less than 0.5%). It is off 2.1% for the year. The Russell 1000 Growth Index rose 1.0% last week. It has risen in four of the past five weeks. It rose 4.5% in the April and May period and has gained nearly 7% for the year.