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The Dollar Remains the Least Ugly

Summary:
Neither trade tensions nor perceptions that the probability of Fed rate cuts was able to derail the mighty dollar, which rose against all currencies but two: the Swiss franc among the majors and the Russian ruble among the emerging market currencies.   The US continues to be perceived as the best positioned to weather the storm that it is helping to bring about, and this may be helping underpin the greenback.  At the same time, the dollar's gains seem by default as the several other countries' negatives seem more powerful than the constructive arguments for the US.   The increased risk of a no deal Brexit weighs on sterling, knocking almost a nickel off it since May 3 to its lowest level since January.  Speculation of rate cuts has hammered the Australian dollar, which has fallen

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The Dollar Remains the Least Ugly
Neither trade tensions nor perceptions that the probability of Fed rate cuts was able to derail the mighty dollar, which rose against all currencies but two: the Swiss franc among the majors and the Russian ruble among the emerging market currencies.   The US continues to be perceived as the best positioned to weather the storm that it is helping to bring about, and this may be helping underpin the greenback.  At the same time, the dollar's gains seem by default as the several other countries' negatives seem more powerful than the constructive arguments for the US.  

The increased risk of a no deal Brexit weighs on sterling, knocking almost a nickel off it since May 3 to its lowest level since January.  Speculation of rate cuts has hammered the Australian dollar, which has fallen nearly 2.5 cents this month to its lowest level since the January flash crash.  The New Zealand dollar is at its lowest level since last November as its central bank has already begun its easing cycle.  The Swedish krona suffered as the loss of competitiveness will squeeze the economy as global trade slows.  The dollar is at its best level against the krona since August 2002.  Norway, which has hiked rates recently is not getting rewarded much as the greenback pushes near the NOK8.80 area.  This area has held the dollar in check a couple of times over the past six months. 

 The dollar spent most of the week lower against the yen but recovered sufficiently ahead of the weekend to close fractionally higher on the week.  The yen's strength, like the Swiss franc's, seemed to be a reflection, not so much of their safe haven status, which the more you examine, the less compelling it appears, and unwinding of funding positions.   The euro fell every session last week.  Brexit, the broader trade tensions, the rhetoric around the EU Parliament elections, took a toll.

Dollar Index:    The Dollar Index rose a little more than two-thirds of a percent last week to recoup nearly completely the ground lost in the past two weeks.  It is now virtually unchanged for the month at 98.00.  The 18-month high was set immediately after the Q1 GDP report on April 26 a little below 98.35.  The corrective phase we have been tracking appears to have ended given the outside up week that was recorded and the magnitude of the retracement.   The technical indicators we use are favorable, and the five-day moving average is set to cross back above the 20-day average.  A break below 97.40 would suggest a more complicated and longer correction.  

Euro:  The euro reversed lower on May 13 after approaching two-week highs near $1.1265.  It proceeded to close lower every day last week, falling to $1.1155 and closed on its lows.  It convincingly violated that uptrend line that it had climbed over the last couple of weeks. The technical indicators give no sign that a low has been approached.  The euro recorded a bearish outside down week, and the five-day average has crossed below the 20-day. Mild support may be seen near $1.1130, but the target is the 18-month low set in late April near $1.1110.  Below there, no important support is seen before $1.10. 

Yen:   The US dollar fell to a three and a half month low to start the week just above JPY109 and steadily recover.  It finished the week at a seven-day high just shy of JPY110.10.  The technical indicators and the rounded bottom pattern boosts confidence that a low is in place.  The next targets are JPY110.30 and JPY110.70, but the gap created by the immediate reaction to the tweets that announced the end of the tariff truce is a more significant technical test.  The gap is found between roughly JPY110.95 and JPY111.05.  

Sterling:  The British pound has been crushed.  It has lost nearly a nickel against the US dollar over the past couple of weeks during which time it has fallen in nine of the previous ten sessions.  It closed just above the four-month lows it recorded near $1.2715. The technical indicators are stretched but not suggesting a turn is imminent.  A word of caution comes from the Bollinger Bands, where sterling finished the week below the lower band (~$1.2760).   A move above $1.2845 would begin repairing the technical damage.  Every session for the past two weeks, the euro has risen against sterling.  It is the longest advance since the advent of the euro.  The GBP0.8800-GBP0.8840 area, the highs from the first part of February may offer both a target and resistance.  

Canadian Dollar:   The souring risk appetite illustrated by the decline in the US S&P 500 and the MSCI Emerging Markets equity index offset the narrowing of interest rate differentials and the impact of the biggest rally in oil prices in six weeks.  The dollar gained about a third of a percent, which offsets the minor losses seen in the previous two weeks.  It remains confined to a CAD1.34-CAD1.35 trading range.  There did not appear much reaction news that US steel and aluminum tariffs would be lifted, which allows the ratification process to resume.  The broad sideways movement has neutralized the technical indicators. 

Australian Dollar:   The Australian dollar fell nearly 2% last week, the most in three months, and extended its losing streaks.  There are two significant weights: The international climate--between trade tensions and risk intolerance--is not conducive for the Aussie.  Heightened speculation that a monetary easing cycle could start in a couple of weeks seemed to overshadow the close election polls.   Market participants will view the RBA minutes and the preliminary PMI data through the lens of a possible rate cut at the June 4 meeting.  The Aussie finished on its lows, and while the technical indicators are stretched, they do not appear poised to turn higher.   There is little chart-based support ahead of the flash crash low of near $0.6740.  Perhaps, the first indication that the Aussie may be bottoming against the dollar could come from cross rate demand, like against the yen, where its downside momentum appears to be stalling. The weakness of the Australian dollar has not prevented the stock market from reaching record highs or the rally in the bond market that has seen 10-year yields fall 30 bp in the past month to move within 15 bp of the cash 1.50% cash rate.  

Mexican Peso:  News that the US was going to drop the steel and aluminum tariffs did not prevent that peso from falling ahead of the weekend.  It had been nearly flat on the week coming into the last session.  It spent the week within the previous week's range.  The dollar posted an outside down day in the middle of the week but the initial follow-through was limited, and after dipping below MXN19.00, it finished the week a little below MXN19.17.  It was the fourth week in the past five that the dollar advanced.  The Slow Stochastic appears to have turned down, but the other indicators are neutral to slightly dollar positive. Nearby resistance is seen in the MXN19.25-MXN19.30 area, which also houses the upper Bollinger Band and last week's high (~MXN19.26).  Above this band, the risk extends toward MXN19.50.  

Oil:  The July light sweet crude oil futures contract bounced 1.8% to bring the three-week losing streak to a close.  The two geopolitical events- the heightened tensions between the US and Iran and the trade war between the US and China--seem to pull oil in opposite directions.  How can China frustrate the US aims? Violate the oil embargo against Iran in a way that minimizes the US ability to penalize a company that does business in the US.  The July contract stalled ahead of the weekend in front of a (61.8%) retracement of the losses since the April 23 peak. The lack of follow-through selling after the outside down day to start last week signaled the low was in place. A move above $64 likely signals a retest on the five-month high seen last month near $66.50.  

US Yields: In the two weeks since Trump's trade tweets, the 10-year Treasury yield has fallen a net 17 bp to under 2.40%.  Most of the decline can be explained by the decline in short-term rates.  The implied yield of the January fed funds futures contract has fallen 14.5 bp (to 2.095%).  The decline in the 10-year note yield lost momentum as the low from late March (~2.34%) was approached.  This was confirmed in the futures contract.  It stalled a few ticks short of the late March high just below 125-00.  The technical indicators suggest that the uptrend that began in the middle of April is nearly over and cautions against chasing the market. 

S&P 500:   The escalation of trade tensions seems has sparked the long overdue bout of profit-taking in US stocks.  The S&P 500 fell in consecutive weeks for the first time this year, losing about 4% net over.  eaThe 2800 level held on Monday, and it marked the low for the week.  The recovery faltered as 2900 was approached. This is area corresponds to a (61.8%) retracement of the losses since the high on May 1.   The 20-day moving average is near there as well.  It is also a possible neckline of a bottoming pattern.  A move above there would re-target the record highs.  

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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