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Every Currency is a Snowflake

Summary:
The dollar was mostly weaker against the major currencies last week.  The Swiss franc and Japanese yen were joined by the seemingly unlikely candidate, the Swedish krona, to have gained about 1% against the US dollar last week to the lead the majors.  The yen and franc's gains extended moves already underway and perhaps, accentuated by the sell-off in stocks and the rally in bonds in response to the heightened trade tensions. The krona has the appeal of a high beta euro, and as the euro recovered, the krona did too but more so.   The New Zealand dollar fell by around 1%, and that is after recovering from the sell-off spurred by an unexpectedly large 50 bp rate cut. The RBNZ also brandished the possibility of QE. Sterling lost shed 0.8%, not far behind the Kiwi as the risk of

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Every Currency is a Snowflake
The dollar was mostly weaker against the major currencies last week.  The Swiss franc and Japanese yen were joined by the seemingly unlikely candidate, the Swedish krona, to have gained about 1% against the US dollar last week to the lead the majors.  The yen and franc's gains extended moves already underway and perhaps, accentuated by the sell-off in stocks and the rally in bonds in response to the heightened trade tensions. The krona has the appeal of a high beta euro, and as the euro recovered, the krona did too but more so.  

The New Zealand dollar fell by around 1%, and that is after recovering from the sell-off spurred by an unexpectedly large 50 bp rate cut. The RBNZ also brandished the possibility of QE. Sterling lost shed 0.8%, not far behind the Kiwi as the risk of a no-deal Brexit is spurring a re-pricing of the UK.  New 2.5 year lows were made ahead of the weekend near $1.2025. The market is also pricing in a higher chance of a BOE rate cut in Q4 despite the currency weakness.  The euro gained a cent on the week but was virtually unchanged since Monday's close. With the ECB meeting a month away (September 12) and the high-frequency data continuing to disappoint, investors are rightfully cautious toward the euro.  Meanwhile, the market is convinced that the Fed will cut rates at least two more times this year.  

Dollar Index:  Trump's tariffs and the Fed's perceived reaction function put in the high for Dollar Index on Aug 1 just shy of 99.00. It fell to nearly 97.20 on August 6 before consolidating in a triangle or wedge pattern that is often seen as a continuation pattern.  If so, the risk extends back to the lows seen in late June near 96.00.  Before it gets there, the (61.8%)  retracement of the two-month rally and the 200-day moving average, both of which come in around 97.00 must be overcome.  Despite the choppy consolidation, the MACDs and Slow Stochastics still point lower.  Last week's roughly 0.6% decline snapped a three-week advance. Beware of false breaks that sometimes are associated with this pattern.  

Euro:  The single currency extended its recovery off the two-year low recorded before the end of the tariff truce on August 1 (~$1.1025).  It ran out of runway on August 6 at $1.1250.  It spent the last three sessions chopping down to almost $1.1175 before bouncing back above $1.1200, recording lower highs along the way.  This is also seen as a continuation pattern.  It too would project to the late June extreme near $1.14.  The (61.8%) retracement of the subsequent decline is found near $1.1265, and the 200-day moving average is near $1.13.  The five-day moving average is above the 20-day moving average for the first time in a month.  The technical indicators like it higher.  The euro's almost 0.9% gain last week ended a three-week slump.  

Yen:  The dollar fell to new seven-month lows near JPY105.25 ahead of the weekend.  Before the end of the tariff truce was tweeted, the dollar was breaking higher against the yen. It pushed above JPY109 for the first time since the end of May.  The big downside reversal and the repricing of Fed expectations and growth may have run their course or nearly so. The technical indicators are losing momentum in overextended territory.  A bout of profit-taking may be likely before the psychologically important JPY105 level yields.  MOF officials have warned the market, but intervention to smooth the market as it may be tempted to do is unthinkable.  We suspect that some of the demand for the yen is coming from Japanese institutional investors raising the currency hedge ratios on US investment.

Sterling:  Sterling rose in only one session last week against the dollar as it extended the losing streak for the fourth week.  Ir has fallen for 14 consecutive weeks against the euro.  Sterling was turned back from $1.22 and dipped to around $1.2025 before the weekend, a level not seen since January 2017. Many of the technical indicators are stretched, and the Slow Stochastics are leveling out. However, sterling can still barely sustain an uptick. To wit, it has not risen in two consecutive sessions for three weeks.   The news stream can get worse.  Not only will the Brexit anxiety intensify, but the macroeconomic picture will become more challenging.  Government spending may prevent a contraction in Q3 after the 0.2% decline in Q2 GDP, but the private demand is expected to weaken. Meanwhile, price pressures will likely increase as sterling's fall feeds through, mitigated in part by the decline in oil prices.   

Canadian Dollar:  The US dollar extended its gains for a fourth consecutive week against the Canadian dollar, the longest streak of the year.  It lost its momentum at mid-week in front of CAD1.3350 and saw the week's gains pared to test CAD1.3200 ahead of the weekend.  Some disappointing economic data and the global outlook has seen the market upgrade the chances of a Bank of Canada rate cut this year to 60% from less than 25% a month ago.  At the end of last week, investors learned that the amazing Canadian job-creating machine is cooling.  Canada has lost jobs for the past two months, and the three-month moving average of new full-time positions is at its lowest level since last September.  Unemployment rose again (5.7% from 5.4% in May and 5.5% in June).  On the other hand, wages jumped to new cyclical highs.  The greenback's fall in the past two sessions retraced nearly half (~CAD1.3180) of the gains from the year's low in mid-July (~CAD1.3015).  Below CAD1.3180, the US dollar may find support in the CAD1.3140-CAD1.3160 area, which houses a (61.8%) retracement, the 20-day moving average, and congestion in late July.  The MACD and Slow Stochastics are poised to turn lower, suggesting a technical bias to sell into US dollar upticks.  

Australian Dollar:  The 200-day moving average has checked rallies in the Australian dollar three times this year:  January, April, and most recently last month.  From that July high near $0.7080, the Aussie dropped to almost $0.6675 last week.  Its two-day recovery brought to the (38.2%) retracement objective (~$0.6830), and it consolidated below it ahead of the weekend.  The Slow Stochastics have turned up, and the MACDs is set to join it shortly.   Above $0.6830, the potential extends toward the $0.6880-$0.6930 area.  However, US-China trade tensions, continued Hong Kong protests, India's decision to end Kashmir's delicate autonomy, and North Korea missile tests, do not bode well for the risk appetite that may be required.  Initial support may be seen near $0.6750, which it did not close below last week.  

Mexican Peso:  The dollar closed higher against the Mexican peso for the fourth week running, but the gains stalled with a double top near MXN19.74.  With a neckline around MXN19.55, the small pattern  (evident in the intraday charts) projected toward MXN19.36, which is also near the (50%) retracement objective of the dollar's surge since the end last month (~MXN19.34) and the 200-day moving average.  It made a low ahead of the weekend a little below MXN19.38.    The central bank meets on August 15 and speculation of a rate cut has increased.  The market has discounted about a 1-in-3 chance of a cut this week and a near 2-in-3 chance that rates will be lower at the next meeting (September 26).  Inflation has re-entered the central bank's 2%-4% target, and the real economy is weak.  There is uncertainty over the policy of the AMLO government, and capital (business investment) is on strike, and lower rates are unlikely to address it.  The dollar's pullback in the second half of the week was insufficient to turn the MACDs and Slow Stochastics lower, but they are about to cross lower.  A break of the MXN19.35 area could spur a test on the MXN19.20-MXN19.25 band that houses the (61.8%) retracement objective, the 20-day moving average, and previous resistance.  

Chinese Yuan:  Since the dollar breached the CNY7.0 level, it has not gone back below.  The same can be said of CNH, the offshore yuan.  CNH has recorded higher lows for 10 consecutive sessions through the end of last week.   PBOC bill sale in Hong Kong next week drain liquidity and any sense of a downward spiral needs to be snapped in the bud.  The Slow Stochastics have turned lower, while the MACDs are still accelerating higher.  The Korean won, which seems to track the yuan closely (and has been included in the currency basket the PBOC uses), has been drifting higher in recent days. This may also be a tell of the coming stabilization of the yuan.  We argue elsewhere (here and here) that China is restrained by self-interest and has little interest in a sharp depreciation of the yuan, which is off 2.6% year-to-date.  It is too small to have significant major economic implications.  The CNY7.0 level is like the US formal complaint that China is manipulating its currency, little substance, and the psychological investment is short-term. 

Oil:  The escalating trade conflict between the US and China and the implications for world demand, coupled with the first weekly inventory build in the US weighed on oil prices.  WTI for September delivery fell 2.1% last week, and that is after rallying almost 6.6% in the previous two sessions.  That is the momentum that matters at the start of the new week.  Saudi Arabia has signaled its intention to implement deeper cuts in production and exports ahead of next month's OPEC+ meeting. Ultimately, we suspect demand considerations will carry the day, but in the near-term, a move above the $54.50 area could signal a test on the $55.65-$557.75 area of greater technical significance.  The technical indicators are trying to turn up but did not get over-extended in earlier drop.  The price action reinforced that technical significance of the $50 a barrel level.  

US Rates:  Economists may project that the trade conflict with China will shave 0.5%-0.75% off US GDP.  The Federal Reserve, Bullard as well as Powell, that only a mid-course correction is needed.  This trade disruption and fiscal shock (import tax increases) are hitting late in the business cycle.  It will slow growth, and the drop in oil prices and limited wage growth means the Fed's inflation target likely will be more elusive.  The three-month average for WTI was above $67 a barrel last September and October.  The three-month average through July was less than $57. The 10-year yield fell 10 bp last week after falling 22 bp week before.  Even though the yield tested the 1.60% level, it did not close a session last week below 1.70%.  Since the day the FOMC meeting concluded, July 31, the yield on a closing basis has fallen about 25 bp.  The two-year yield has shed 23 bp, and that is after the four-day rise in yields seen after last Monday's nearly 14 bp decline.  The waning of momentum is evident in the technical studies of the 10-year note futures, where the RSI and Slow Stochastics have turned lower, and the MACDs are about to join them.  This suggests a near-term low for the 10-year yield is likely in place.  The implied yield of the January 2020 fed funds futures contract fell 11 basis points last week after declining 12 bp the previous week.  Essentially, the market has judged that the latest escalation with China will ensure an additional rate cut this year.  At 1.51%, the implied yield prices in two 25 bp cut and 11 bp toward a third cut.  It is that third cut, (or the fourth one in H2) that is in the balance--between economic performance (do the risks materialize?) and trade (the source of disruption).

S&P 500:  The S&P 500 fell 0.4% last week, its first back-to-back weekly decline since May.  There are two dominant technical patterns in the S&P 500.  The first is a double bottom set near 2825 on Monday and Wednesday.  The neckline would be Tuesday's high near 2885, projecting a measuring objective near 2950.  The measuring objective of the double bottom corresponds to the (61.8%) retracement of the sharp decline experienced since the record high was set on July 26.  It gapped higher on August 8 and promisingly closed on its highs before spending the pre-weekend session consolidating lower.   Arguably more striking and significant than the double bottom is the three-day island bottom that remains intact.   Watch the gap. The S&P 500 gapped lower to start the week and gapped higher on Thursday.   Assuming Thursday's gap (~2892.2-2894.5) holds, the benchmark may be on its way to new highs. The MACDs and Slow Stochastics are poised to turn higher but did not reach the overextended readings that often seen at lows.  

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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