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Greenback Breaks Down

Summary:
The US dollar fell against all the world's currencies last week. Although most of the G10 central banks have what can be considered easing biases, the dollar is most vulnerable because there is so much more scope to ease and its strength had been in no small measure predicated on monetary divergence.   It is striking that the dollar did not rally although geopolitical tensions are elevated.  The half dozen ship attacks in the Gulf in as many weeks, the US apparently was closer to a limited military strike on Iran than many realized, and the high-stakes meeting between Trump and Xi a week away.   Gold seemed to capture both themes:  lower for longer in rates and geopolitical tensions.  The precious metal rallied 4.3% last week, the most in three years, to reach a six-year high

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Greenback Breaks Down
The US dollar fell against all the world's currencies last week. Although most of the G10 central banks have what can be considered easing biases, the dollar is most vulnerable because there is so much more scope to ease and its strength had been in no small measure predicated on monetary divergence.  

It is striking that the dollar did not rally although geopolitical tensions are elevated.  The half dozen ship attacks in the Gulf in as many weeks, the US apparently was closer to a limited military strike on Iran than many realized, and the high-stakes meeting between Trump and Xi a week away.  

Gold seemed to capture both themes:  lower for longer in rates and geopolitical tensions.  The precious metal rallied 4.3% last week, the most in three years, to reach a six-year high above $1400.  It has pushed through the neckline of a large head and shoulders bottom pattern which projects toward $1700. 

Dollar Index:  Last week's 1.4% decline was the largest in four months.  The 200-day moving average has been toyed with, but this seems to be a convincing break (200-day is ~96.60 vs. close ~96.20), barely inside the lower Bollinger Band.  The 96.30 area corresponds to the (61.8%) retracement of this year's gains.  The technicals leave room for additional losses, and the 95.60-95.75 offer a reasonable near-term technical target that houses the (April-May) double top (~98.40) objective and the March lows.  Bounces may be limited to the 96.50-96.70 band.  

Euro: The euro's 1.4% gain last week likely secures an end to the string of monthly losses.  June will probably be the first month this year that the euro has not fallen.  It reached a three-month high near $1.1380.  It closed above its 200-day moving average for the first time since May 2018.  For the seventh week, the euro alternated in a sawtooth pattern between gains rising and declining.  It is close to its upper Bollinger Band (~$1.1375), but the momentum indicators do not suggest a top is at hand.   The near targets are $1.1400 (psychological round figure) and  ~$1.1450, the March high. 

Yen:  The dollar met the measuring objective of the dollar top it put in in April and May above JPY112 as it was sold to almost JPY107 last week.  The technical indicators allow for additional dollar losses, but the proximity of the lower Bollinger Band (~JPY107.25) may encourage caution.  If the market is near peak-Fed dovishness, as we suspect, then the yen may be among the most vulnerable.  The JPY107.80-JPY108.00 area may offer initial resistance.  The dollar has not closed above its 20-day moving average in two months.  It begins the week near JPY108.50.   There is not much compelling technical support below JPY107 until closer to JPY105. 

Sterling:   A hammer candlestick on June 18 set the technical stage for the three-day rally that lifted sterling from almost $1.25 to nearly $1.2750.  It rose almost 1.2% on the week and is a little more than a cent above where it finished May.  This month's highs, a (38.2%) retracement objective, and the upper Bollinger Band are found in the $1.2765-$1.2670 area.  The technical indicators are constructive, and the MACDs and Slow Stochastics did not make new lows when spot did, creating bullish divergence. Above there the next target is near $1.2740.  Support is by $1.2640.

Canadian Dollar:  The Canadian dollar is the strongest of the major currencies this year up 3.1%, helped, outpacing yen's 2.2% gain.  The Canadian dollar advanced every day last week but saw a bout of profit-taking the pared the gains ahead of the weekend, perhaps encouraged by a slightly softer than expected retail sales report.  The US dollar posted a key reversal on June 18, and the losses accelerated over the next two sessions.  It had closed outside of its lower Bollinger Band on June 20 but the upside consolidation ahead of the week saw the greenback move back into it (~CAD1.3180).  Resistance is seen near CAD1.3260 and again around CAD1.33.  

Australian Dollar:  Interpolating from the OIS, the market increased the odds of a rate cut on July 2 to a little above 80% from slightly below 60% last week while the Australian dollar gained nearly 0.8% against the US dollar.  It is now virtually flat on the month going into the last week.  The momentum stalled at the 20-day moving average and the (50%) retracement of the losses since mid-May, both of which are to be found near $0.6930.  The next retracement target closer to $0.6950.  A convincing break would target $0.7000-$0.7025.

Mexican Peso:  The dollar finished surrendering all the gains scored in response to Trump's tariff threat and briefly fell below MXN19.00.  Indeed, the greenback spiked below MXN18.90 before putting in a hammer candlestick on June 20.  Follow-through buying ahead of the weekend lifted the dollar to nearly MXN19.1650.   The nearby cap is seen around MXN19.20, but it may take a move above MXN19.33 to be meaningful.  

Oil: The August light sweet crude oil futures contract completed its bottoming formation and moved convincingly above $55.  The measuring objective is near $60, the high from late May and a (61.8%) retracement from the drop from the year's high in April (~$66.20).  Initial resistance is seen near $58.50.  

US Yields:  The US 10-year yield punched through 2% for the first time since November 2016 before closing around 2.05%.  The two basis point decline on the week is nothing to write home about, but it was the seventh consecutive weekly decline.  The 10-year yield has risen in only three weeks here in Q2.  The technical condition of the futures note warns the streak may end next week.  A rise in yields toward 2.15% or so would not be surprising given that indicators did not confirm last week's high.  When everything was said and done last week, the implied yield of the January 2020 fed funds futures contract fell four-and-a-half basis points to 1.625%.  It is currently 2.37%, discounting a little more than 75 bp cuts in the second half.  

S&P 500: The S&P 500 gapped higher on June 18 and again on June 20.  The latter gap was filled, but the former (~2897.30-~2905.45) was not.  The shooting star candlestick before the weekend is a cautionary signal and suggest the risk of some near-term profit-taking now that a new record high has been recorded, but the medium-term technical outlook still looks constructive.  The next target is the 3000-3030 area, but gains toward 3100 a bit further out are possible.      

Disclaimer




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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