Our reading of the dollar's technical condition warned that the downside correction that had begun in late June had more room to run. However, after initial weakness at the start of the week, it trended higher until hours before the weekend, including setting new highs for the year against the Swiss franc.
The main driver seems to be investor confidence that the divergence of policy and asymmetries in power, leaves the US in the best position to weather the kind of disruption to the global economy spurred in no small part by the US itself. The dollar appears to be range-bound against the euro, sterling, and Australian dollar, but at new multi-month highs against the Swiss franc and the yen.
Equities advanced with the major markets led by the Nikkei's 3.75% rally, which was the biggest since the end of Japan's fiscal year in March. MSCI's Emerging Markets Index rose over 1% to snap a four-week slide. It was only the fourth weekly gain since the end of Q1. There has been talk of some bottom pickers in the EM space emerging, seemingly attracted on valuation grounds, and the weakness of the yen and Swiss franc may point to how it is being funded.
The Dollar Index closed higher in the first four days of the week before closing fractionally lower on Friday, creating a potential shooting star pattern. Before the start of last week, the Dollar Index had closed below the neckline (~94.15) of a double top (~95.50). Although there was initially some follow-through selling at the start of the week, that proved the low, shy of the measuring objective of the double top. The 0.8% gain on the week marked the end of the three-week pullback. The 95.50 area needs to be overcome to send it on its way to 50% retracement of last year's slide found near 96.00. The 61.8% retracement is found a little below 98.00. The technical indicators appear to be confirming the end of the downside move, and a pullback after the four-day advance. Perhaps toward 94.30 may offer a new buying opportunity.
The euro recovered ahead of the weekend after approaching a two-week low and carved out a possible hammer pattern. The euro remains confined to a $1.15-$1.1850 trading range. The technical indicators are turning against it, but in relatively narrow ranges. As the extremes have not been seen for a month, trading can be choppy. For the last six weeks or so, the euro has been consolidating the losses suffered in the previous six weeks that saw the euro slide from around $1.24 to $1.15. It is not clear what it will take to break the euro out of the current range, but it is probably more than a September Fed hike, implementation of the next round of tit-for-tat on tariffs on $16 bln of US and Chinese goods, and the first window for an ECB rate hike in Q3 2019.
The dollar's 1.7% rise against the yen over the week is the largest since the middle of last September when it rose 2.8%. Despite the magnitude of the move, the direction is not new. The dollar has fallen against the yen in only three weeks since the end of Q1. The dollar convincingly took out a multi-year downtrend line found (~JPY111.50). The next target is seen near JPY113.25, which houses the 200-day moving average and the 61.8% retracement of the dollar's decline from early 2017. In our experience, the dollar-yen is most often a range-bound pair and when it looks like it is trending, it is frequently moving to a new range. It is not clear where the upper end of the range will be found, and that is what the market will be fishing for in the coming period. The dollar started the year trending lower and then entered a largely JPY105-JPY108 range. The dollar recovered from a downside violation in late Q1 and established a JPY108-JPY111 trading range. Symmetry would suggest the new range may be JPY111-JPY114. It would put the dollar in the middle of the potential new range, and some consolidation, perhaps as some breakout plays are booked, should not be surprising.
Sterling recovered into the weekend, and the price action also looks like a hammer candlestick. President Trump seemed to walk back the earlier impression that he left that given May's intentions to stay close with the EU on goods trade, a bilateral US-UK trade agreement was less desirable, after the damage was done. Sterling recovered fully, gaining more than a cent off the session lows near $1.3100. A move above $1.3250 could spur another cent advance to test a trend line drawn off the June and early July spikes. Additional resistance is seen near $1.3400. The Bank of England will likely be the next major central bank to hike interest rates. On balance we expect next week's busy data schedule, which includes inflation, labor market, and retail sales to continue to persuade market participants that the BOE will likely hike rates next month.
Even with the help of a 25 bp rate hike and a central bank that appeared more optimistic than the many had expected, the Canadian dollar lost 0.6% against its US counterpart. The greenback's strength and the rate differential story proved too much for the Canadian dollar. Despite the rate hike, the 2-year interest rate differential moved a few more basis points in the US favor to reach a two-week high near 66 bp. Previously, since the Great Financial Crisis, it has not been above 60 bp, and that appears the floor now. The US dollar needs to establish a foothold above the CAD1.3225 area, which is the high here in July and the 50% retracement of the pullback since late June (the 61.8% retracement is ~CAD1.3265). A trend line drawn off the low from the second half of May and through last month's low and the low from last week when the hike was announced, intersects a little below CAD1.3090 at the start of new week and near CAD1.3120 at the end of the week.
Of the majors, the Australian dollar was the strongest against the dollar with a less than a 0.1% loss. The Aussie has been confined to a $0.7300-$0.7500 trading range for the past month. It finished last week a little above the middle of the range, frustrating short-term risk-reward calculations. The technical indicators suggest playing the range until proven wrong.
Crude had one bad day last week. And a whopper it was. On July 11, a number of factors, some real, like the re-opening of Libyan ports, and some anticipated, like US pressure on Russia to boost output, drove Brent down 7% and WTI 5%. Although the move was dramatic, it seems corrective in nature and halting around the 50% mark (~$69.35 August WTI) of the last leg up that began in late June near $63.50. A move above the $72.60 area would likely signal a run to possibly new highs.
The US 10-year Treasury yield moved in a little more than two and a half basis point range around 2.85%, the middle of its two-week range. This translates into an uninspiring 13 tick range for the September futures contract (120-00 to 120-13) last week. The technical indicators are not generating strong signals in this sideways market. Domestic fundamentals seem to argue for higher yield, but when compared with alternatives, foreign investors may find current rates attractive, especially if they think the dollar can appreciate or at least hold its own, as the flattening curve makes it expensive to hedge.
The S&P 500 traded choppily, but it managed to close the week a little above the 2800 level that has been a nemesis to the bulls since the late January/early February swoon. Although there were two other gaps openings in the past week, one on Monday is key. It appears on the weekly bar charts, and it remains unfilled as the new highs were recorded. It may be a measuring gap, which is seen in the middle of a move, and would project toward 2830. The gap that marked the beginning of the sell-off in January may attract prices into the 2835-2851 area that did not trade.