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If Stronger than Expected Inflation, Consumption, and Jobs Didn’t Lift the Greenback, What Will?

Summary:
The dollar had a rough week.  Despite a series of economic data showing that the US economy was surging by more than expected, the greenback failed to muster any traction and fell against all the major currencies and most emerging market currencies.  The US 10-year yield tumbled eight basis points last week, the most since last August, and down 15 bp over the past two weeks.  The 30-year yield dropped by a little more than six basis points to extend its retreat for the fourth consecutive week and bring the cumulative decline to about 17 bp.  While I had expected the surge in prices and activity to have lent support to the greenback and US rates, we recognized that much of the good news of the strengthening recovery and divergence with most other countries had been behind the dollar's

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If Stronger than Expected Inflation, Consumption, and Jobs Didn't Lift the Greenback, What Will?
The dollar had a rough week.  Despite a series of economic data showing that the US economy was surging by more than expected, the greenback failed to muster any traction and fell against all the major currencies and most emerging market currencies.  The US 10-year yield tumbled eight basis points last week, the most since last August, and down 15 bp over the past two weeks.  The 30-year yield dropped by a little more than six basis points to extend its retreat for the fourth consecutive week and bring the cumulative decline to about 17 bp.  

While I had expected the surge in prices and activity to have lent support to the greenback and US rates, we recognized that much of the good news of the strengthening recovery and divergence with most other countries had been behind the dollar's appreciation in recent weeks.  We recall that the dollar did not rally after the considerably stronger than expected March employment report.  Buy-the-rumor, sell-the-fact activity is not uncommon in the capital markets, but in this context, it is not clear what "rumor" was as nearly every report was stronger than expected.  We recognized that the dollar was at an inflection point and suggested that if it could not rally and rates did not rise, that would lend credence to ideas that large divergence meme and economic acceleration had been discounted.   It is in this context that we analyze the price action.  

Dollar Index:  The Dollar Index fell every day last week for the first time since last June.  It has risen in only two of the last 10 sessions.  The decline is still within the expected retracement objectives of the advance from either the year's low (Jan 6 ~89.20) or the Feb low (~89.70).  The 91.55 that it hovered around in the second half of last week marks the rally's halfway point from the Feb low.  The (50%) retracement objective of the large move is closer to 91.30. The lower Bollinger Band begins the new week near 91.35.  Below there the next targets are in the 90.80-91.10 area.  The 2%+ slide this month is stretching the momentum indicators.  It may take a move above 91.80 to begin stabilizing the tone.  The 200-day moving average is found around 92.25, which is the initial (38.2%) retracement of this month's decline is found.  

Euro:  The single currency had fallen to almost $1.17 on the last day of March and recouped nearly three cents in the first half of April.  It was knocking on $1.20 in the second half of the last week.  It has not traded above there since March 4.  The (38.2%) retracement of the decline from the $1.2350-level seen at the start of the year is near $1.2025, just above the upper Bollinger Band. The (61.8%) retracement of the leg down from the late Feb high (~$1.2245) is near $1.2035.  A convincing move above there is spur talk of $1.22.  The MACD is at its best level in six weeks and approaching levels that it peaked in late Feb.  The Slow Stochastic is stretched at its best level of the year and appears to be moderating.   Initial support is seen in the $1.1950-$1.1960 area.  

Japanese Yen:  The decline of US yields in the face of the large coupon supply and strong price, consumption, and employment data seemed to undermine the greenback against the yen.  It fell in the first four sessions of last week before stabilizing ahead of the weekend.  The dollar found a bid around JPY108.60, its lowest level since March 25, a little above where a base was forged last month (~JPY108.30-JPY108.45).  The five-day moving average crossed below the 20-day for the first time since early January, reflecting this month's downtrend from the March 31 high, a whisker shy of JPY111.  The momentum indicators are still falling quickly.  A close above JPY109 suggests the tone may be stabilizing.  

British Pound:  Sterling has been recording lower highs since peaking on Feb 24 near $1.4235.  According to Bloomberg, last week, sterling took out the March low by 1/100 of a penny and proceeded to recover 1.5 cents to about $1.3820 and finish the week at new highs.  The MACD and Slow Stochastic have turned up, and the five-day moving average is poised to move above the 20-day moving average for the first time since early March.  The first important obstacle is the high set earlier this month, near $1.3920, and $1.3950 is the (50%) retracement objective of the decline since late Feb high.  Above there and then $1.4000-$1.4020 area may offer more formidable resistance.  The euro peaked ahead of the weekend at GBP0.8720, its best level since the end of February, and posted a key reversal ahead of the weekend. If the near-term high in place, like the technical indicators suggest, sterling should outperform the euro in the days ahead, and the cross may return to GBP0.8500.  

Canadian Dollar: The Canadian dollar was the worst-performing major currency against the US dollar last week, appreciating by about 0.25%, which owed in full to the bounce (~0.35%) ahead of the weekend.  The greenback has slowly ground lower and fallen below CAD1.25 for the first time since March 23.  It held just above the $1.2475 area, representing a (61.8%) retracement of the rally from the multiyear low on March 18 (~CAD1.2365).  It is flirting with the lower Bollinger Band (~CAD1.2495).  The MACD is set to turn lower, while the Slow Stochastic turned lower earlier this month.  The Bank of Canada meets on April 21, and some adjustment of its forward guidance is likely given the increased confidence that a strong recovery has taken hold.  

Australian Dollar:  The Australian dollar stalled near $0.7760 in the last two sessions, after having begun last week near $0.7625.  It was the second consecutive weekly gain after falling in five of the previous six weeks.  The gains were sufficient to drive the five-day moving average above the 20-day for the first time in a little over a month.  The $0.7770-$0.7775 area offers nearby resistance, and a move above there spurs a test on the March highs (~$0.7830-$0.7850). Initial support is seen around $0.7700 and then $0.7675.  

Mexican Peso:  The peso's 1.25% gain last week brought it back to where it started the year.  The dollar declined for the third consecutive week and the fifth week in the past six.  Falling US yields seemed to help, and the emerging market currencies have done well over this period.  The JP Morgan Emerging Market Currency Index rose by almost 1% last week, which, like the peso, was the third weekly gain in a row and five of the past six weeks.  The greenback looks poised to take out the mid-February lows (~MXN19.89) and could head back to the year's low set on Jan 21 near MXN19.55.  However, the technical indicators are stretched from the decline that began from around MXN21.6360 on March 8.  Mexico T-bills (cetes) pay over 4% annualized, while US bill yields hover near zero.  

Chinese Yuan:  The dollar fell every day last week against the yuan for the first time since last June.  It was not a large move by foreign exchange standards, losing about 0.5%.  It was the second consecutive weekly drop in the greenback, which ended a six-week advance.   The greenback finished the week a little above CNY6.52, its lowest level since March 24.  Although China is on the US Treasury's currency watchlist, it seems to be broadly tracking the euro.  In fact, on a purely directional basis, the correlation between the euro and the yuan is near 0.88 on a rolling 60-day basis, the upper end of where it has been since the beginning of 2019.  The offshore yuan continues to trade slightly weaker than the onshore yuan.  The CNY6.50-area marks the middle of this year's range, and below it, there is congestion around CNY6.48.  The CNY6.54-CNY6.56 band offers a nearby cap.  





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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