The US dollar fell against all the major currencies last week, and the technical indicators warn the further losses are likely. Market speculation that the Federal Reserve will be forced to cut rates more than once this year has strengthened. It is outpacing the expectations that the ECB and BOJ will have to ease policy as well. Canada's firmer data, including a surge in job creation, and Norway's shift to a less accommodative monetary stance, are notable exceptions. The Bank of England may be as well, but the uncertainty about Brexit and the risk of a no-deal exit at the end of October suggest steady policy may continue to be appropriate.
President Trump hinted that the new tariffs on Mexico would not be implemented while the markets were open before the weekend. The peso rallied on the news, and the deal that led to the "indefinite suspension" of the tariff was confirmed. To be sure, the "suspension" means the tariffs and the claim of emergency powers remains on the books, and that the proverbial Sword of Damocles continues to be an implicit threat whose suspension can be lifted at the will or whim of the US President.
US Dollar Index: The Dollar Index lost about 1.25% last week. It was the biggest weekly decline since February 2018. It approached our 96.40 target that held a retracement objective and the 200-day moving average. It is not closed below the 200-day moving average (now ~96.55) in over a year. It has fallen in six of the past seven sessions, leaving the technical indicators stretched. None have begun turning. A break of the 96.30 area, which is also where a trendline from last September's lows through the Q1 19 lows intersects, could signal an initial move toward 95.60. Leaving some scope for an upside correction, a 94.50 target in Q3 seems reasonable, which is the (38.2%) retracement of the rally that began last year.
Euro: The euro's nearly 1.5% advance last week as its largest gain since last August. It reached almost $1.1350, its highest level since the third week in March, and recouped half of what it lost earlier this year. The euro closed above the downtrend line connecting the high for the year (Jan 10) and the March (20) that caught the highs around the ECB meeting. The 200-day moving average begins the week a little below $1.1370, and the (61.8%) retracement of this year's decline is near $1.1400. The possible double (or triple bottom) near $1.11 projects a little through $1.1400. Gains in five of the past six sessions are stretching the momentum indicators, but it can toward $1.1600-$1.1650 in the next couple of months.
Yen: Several times last week, the dollar tested the JPY107.75 level that we had identified as support and corresponding to the (61.8%) retracement of the rally off the flash crash low (~JPY104.85). The Lower Bollinger Band begins the new week near JPY107.80. The double top (March and April, ~JPY112.15 and ~JPY112.40 respectively) projects toward JPY107.00. The technical indicators are stretched. A bounce runs into initial resistance near JPY108.65 and then JPY109.
Sterling: Sterling has also gained against the dollar in five of the past six sessions. Last week's 0.85% advance ended a four-week slide that began with Trump's declaration that the tariff truce with China was ending. Sterling finished last week above its 20-day moving average (~$1.2720) for the first time since May 7. The $1.2800 area corresponds to a (38.2%) retracement of the decline that began a month ago. The next (50%) retracement is found near $1.2875. Further out, potential head and shoulder pattern that may have been formed over past two-and-a-half weeks projects toward $1.2950. The (61.8%) retracement of the decline in May is found a little higher near $1.2975. The five-day average is poised crossed about the 20-day average in the coming days for the first time in a month, and the technical indicators are headed higher.
Canadian Dollar: Half of the Canadian dollar's 1.85% gains last week came after another better than expected jobs reported ahead of the weekend, which offered a stark contrast to the US disappointment. Rising equities and a smaller discount to the US on two-year borrowings saw the greenback fall through not only CAD1.34, the lower end of its recent range, but also CAD1.33, the lower end of its previous range. Trading drew to a close with the US dollar just above the (61.8%) retracement of this year's gains (~CAD1.3265). The greenback closed at its lowest level since the end of February, when it also last closed below the 200-day moving average (~CAD1.3275). It also convincingly violated the uptrend off last February and October lows that caught the February and March lows this year. It came near CAD1.3315. The downside risk in the coming months extends toward CAD1.30. Although the technical indicators still favor additional US dollar losses, caution is in order: The US dollar closed not merely below the lower Bollinger Band set at two standard deviations beneath the 20-day moving average, but it ended last week a little more than three standard deviations below the average.
Australian Dollar: The Australian dollar bottomed near $0.6865 on May 17, a week before the euro put in its low. It finished last week (barely) above $0.7000 in nearly a month. The 0.9% gain is the third consecutive weekly advance. The technical indicators are stretched, but new highs are still possible. The $0.7035 area is a (50%) retracement of the leg down that began in mid-April. Above there is the next (61.8%) retracement and the 100-day moving average in the $0.7070-$0.7075 area. The potential bottoming formation suggests a $0.7170-$0.7200 medium-term target is possible. The constructive technical outlook may hold provided the Aussie holds above $0.6950.
Mexican Peso: The market reacted tentatively to hints from Trump that he would not go through with the tariffs and the peso gained a little less than 1% to reverse its earlier decline and close around 0.3% higher on the day. This, in turn, nearly offset the week's decline. The peso can recover further. Short-term peso bills (cetes) are attractive. However, the rating agency action on the sovereign and Pemex, coupled with disappointing data after a contraction in Q1 warns that Mexico's challenges are not limited to dealing with the US. The MACD and Slow Stochastics are only about to turn. Old resistance in the MXN19.20-MXN19.30 area may now offer initial support, but a return to MXN19.00 in Q3 cannot be ruled out.
Oil: The July contract overshot the (61.8%) retracement target of rally from the low at the end of last year (~$52.70), but the selling, encouraged by continued strong US inventory accumulation and, perhaps, ideas that more Iranian oil is escaping through the US embargo, seemed to have run its course. The gains in the second half of last week are set to turn the MACD and Slow Stochastics higher in the coming days. There is near-term potential toward $55.20-$56.50 a barrel.
US Rates: Since the end of the US-China tariff truce, US interest rates have fallen dramatically. The implied yield of the January 2020 fed funds futures contract dropped 45 bp. The two-year note yield has seen the 45 bp decline. The 10-year yield matched the 45 bp and bump it by four more. The escalation and broadening of the tariffs were understood by investors as a headwind on a mature economic expansion that was already slowing. The poor jobs growth and weaker than expected hourly earnings, coupled with 1.6% decline in unit labor costs in Q1 19, the second consecutive decline, suggest the labor market will not be a source of price pressures. The technical studies of the September 10-year note are stretched, and the MACD and Slow Stochastics are set to turn lower. US Treasury is auctioning $78 bln of coupons and $72 bln of bills (not counting the four- and eight-week bills). The supply, coupled with heightened perceptions of currency risk and stretched technical indicators suggest higher yields may be needed.
S&P 500: The S&P 500 snapped a four-week slide that had begun with the end of the tariff truce, and it did so with flair. The 4.4% rally was the largest weekly advance since last November. The index began the week by extending its drop to just below 2729; holding above our 2700-2720 target. The subsequent bounce was dramatic but fairly orderly until perhaps Friday when the open gap was not closed (~2852.10-2852.85, and, no, size does not matter). Still, the weekly close was above the (61.8%) retracement of the decline from the start of last month. While resistance is seen near 2900, there does not appear to be much from a technical perspective to prevent a return to the highs.