The US dollar was generally stronger last week. The dollar-bloc currencies and sterling bore the most weight. Decreased appetites for risk, illustrated by losses in the major equity benchmarks, seemed to have played a role. Sterling fell every day last week to reach its lowest level since late March ahead of the weekend. While there was discussion of the possibility of negative rates in the US, the UK two-year yield has remained below zero for the past three sessions. New Zealand, which explicitly played up the possibility of negative policy rates, while doubling its bond-buying, saw its currency slump the most of the majors, losing about 2.7%. At the same time, UK talks with the EU are not going well, and without an extension, which Prime Minister Johnson rejects, it is difficult to see how significant disruptions will be avoided.
On the one hand, interest rates will remain low for a long time, and, for many investors, there is not much of an alternative to equities, and there appears to be plenty of cash on the sidelines. On the other hand, the extreme left-hand tail risk that was palpable in March has been reduced by aggressive central bank and government action. Still, a meaningful recovery appears to some time off and more economic pain, in terms of business failures and supply chain disruptions. At the same time, the tensions between the US and China are ratcheting higher, and it has tended to curb risk-appetites in the past.
Dollar Index: A 99.00-101.00 range has contained the Dollar Index since the end of March with a few downside breaks that proved false. It pushed toward the upper end of the range last week, reaching its best level since April 24, roughly 100.55. With the pullback ahead of the weekend, it finished about 0.4% higher on the week. The sideways movement has rendered the momentum indicators moot, and if one assumes the range remains intact until proven otherwise, the risk-reward and the rule of alternation would seem to discourage new longs.
Euro: A range of about 1.2-cents prevailed last week (~$1.0775-$1.0895), and the euro finished virtually unchanged. Demand around $1.08 seems to be gradually being absorbed. The euro traded below there five times in April and has matched that in the first half of May. A move and probably a close above $1.09 is needed to take pressure off the downside. Three-month implied volatility had its lowest weekly close (~6.7%) since the end of February. Volatility may increase as the EU and ECB move back into fore next month.
Japanese Yen: The range for the entire week was set on Monday (~JPY106.40-JPY107.75). The rest of the week was consolidation. The price action reinforces the month-old trading range of JPY106.00-JPY108.00. Three-month implied volatility is approaching the 200-day moving average near 7.10%. It peaked around 19% and was trading below 5% in mid-February.
British Pound: Sterling's five-day slide shaved 2.3% of its value against the dollar and sent it to almost $1.21. It saw its lowest level since March 26 ahead of the weekend. The MACD is rolling over, but the Slow Stochastic is getting stretched. The convincing break of the late April low near $1.2240 and the (38.2%) retracement objective (~$1.2175) are bearish technical developments. Although initial support may be encountered in the $1.2000-$1.2030 area (psychological support and the 50% retracement objective), the risk extends to $1.1850-$1.1880 (61.8% retracement and the measuring objective of the double top at $1.2650, with a neckline at $1.2250). A move back above $1.2250-$1.2300 would help stabilize the tone.
Canadian Dollar: The US dollar rose four of last week's five sessions. It gained about 1.2%, the largest weekly rise in six weeks. An outside up day on Monday set the stage. The greenback rose from CAD1.3900 to roughly CAD1.4140. Since the explosive moves in March, the exchange rate has found a base around CAD1.3850. On the topside, the greenback has been making lower highs. The downwardly sloping trendline is found near CAD1.4160 to start the new week. The Canadian dollar remains sensitive to the general risk appetite, more so than the Australian dollar (60-day correlation of the percent change of the S&P 500 and the exchange rate 0.51 vs. 0.47, respectively). More inclined to see an eventual upside break for the greenback.
Australian Dollar: We have been looking for the Australian dollar to top out. It tested the late April high near $-0.6560 and reversed to post an outside down day on Monday. It approached $0.6400 in the second of the week and settled on the week's low. For the first time since April 3, it closed below its 20-day moving average (~$0.6435), and the five-day moving average can move below the 20-day in the coming days. The MACD is rolling over from over-extended territory while the Slow Stochastic is tuned down from a secondary bounce. The next support area is around $0.6370, and a break could confirm a top is in place and warn of losses toward $0.6170, a measuring objective of a double top, and the (38..2%) retracement of the big rally off the March spike low to almost $0.5500.
Mexican Peso: The dollar rose 1.6% against the peso last week to snap a two-week 5.4% slide. After peaking around MXN25.78 in early April, the greenback has been consolidating. It has held below MXN25.00 this month and found support in the MXN23.50-MXN23.75 band. Initial resistance is now seen in the MXN24.50 area, and a three-week downtrend line begins the new week just below there. The MACD continues to drift lower, while the Slow Stochastics are just turning higher. The peso initially strengthened after Banxico delivered the 50 bp rate cut that was widely expected (overnight target is now 5.5%), but the pullback in equities proved too much, allowing the dollar to finish the week above MXN24.00.
Chinese Yuan: The yuan fell by about 0.4% against the dollar last week. Only a handful of currencies rose against the greenback, and the JP Morgan Emerging Market Currency Index fell by nearly 0.7%. It is not so much the magnitude of the dollar-yuan exchange rate movement, but the level that is notable. The dollar traded at a six-week high (~CNY7.11) before the weekend. It is the second close this month above CNY7.10 after not doing it at all last month. Some may link the yuan's weakness to the escalating US rhetoric. We suspect that ahead of the National People's Congress, Chinese officials likely prefer a stable yuan.
Gold: A four-day rally lifted the yellow metal above $1750 ahead of the weekend, its best level since late 2012. The advance began with an outside up day on May 7 from a low near $1677, as gold fell by about 1% over the next two sessions. However, the recovery and push higher was steady, and closes were near session highs, but only marginal new highs were seen as stops were triggered above the mid-April high near $1747 and more at $1750. Both the MACD and Slow Stochastics are pointing higher. The next big target is $1800. Initial support is likely near $1720.
Oil: Light sweet crude oil for July delivery extended its rally for a third successive week. The 13% rally lifted it to almost $30 a barrel ahead of the weekend. A small increase in demand, coupled with cuts in output, has helped prices recover. The US recorded its first decline in oil inventories since January, and there is a push for OPEC+ not to boost output in the next phase of the agreement output restraint agreement. The key technical level is $35, roughly last month's high and the (38.2%) retracement of this year's decline. It is also a level that reportedly will bring back some production. The MACD and Slow Stochastic are stretched but have not begun rolling over. This would seem to be consistent with a push closer to $35, but profit-taking is likely ahead of it.
US Rates: After absorbing a record-sized refunding, US coupon yields were lower on the week. In fact, ahead of the weekend, the 10-year yield touched its lowest level here in May, just below 59 bp. The yield bounced back as investors seem comfortable with the 0.60%-0.70% range. The two-year yield, which fell to record lows the week prior to near 10 bp, stabilized and finished the week little changed. While the Fed continues to taper its Treasury purchases, some of its other facilities are just becoming operational. Purchases of corporate bond ETFs, which may include some high-yielding bonds, are formally launched last week. The Fed's balance sheet rose by about $213 bln (~3.2%) last week, the most in nearly a month. The March and April 2021 fed funds futures contracts hover around zero, but the May contract has not implied positive rates for seven sessions and counting. Foreign central banks continue to replenish their Treasury custody account at the Fed that was drawn down in March and the first half of April. Official holdings rose by $21.2 bln in the fifth consecutive week of accumulation.
S&P 500: The 1.5% rally in the last two sessions was not sufficient to offset the earlier losses, and the S&P 500 fell by about 2.25% last week. It reversed higher from three-week lows recorded on May 14 (~2766.6) and saw follow-through gains ahead of the weekend, with a close above the May 14 high (~2852.8) and back above the 20-day moving average (~2856.3). The momentum indicators are mixed with the MACD continuing to flatline near the highs and the Slow Stochastic turning back lower from the middle of the range. Resistance seems clearer than support presently. The double top from late April and early May is in the 2945-2955 area, and then there is the 200-day moving average and psychological resistance around 3000. A close below 2800, which has not occurred in three weeks, might signal a new phase. The April equity recovery, which lifted the NASDAQ into positive territory for the year, arguably, was fueled by the removal of the far left-hand tail risk by officials that moved to replace part of the income lost during the shutdown. Now, it seems as we anticipate the survey data to begin showing some improvement as economies start opening up, risk appetites may wane as focus shifts toward the long slough back to a new normalcy.