A week ago, fear of a currency and trade war were fanned by comments by US President Trump. Trump's comments about the EU and China manipulating their currencies were largely ignored except by short-term foreign exchange traders and the press.
An escalation of trade tensions eased when Europe agreed to do what it was doing (buying US soy) and wanted to do (import more liquified natural gas) and the US agreed to put freeze the imposition of tariffs on Europe, like autos, that the US was threatening. The steel and aluminum tariffs remain in place, though free-trade negotiations, previously under the rubric of the Transatlantic Trade and Investment Partnership (TTIP), will resume and will address them too. It was the best of political theater, though it seems a rather dramatic way to preserve the status quo and engage in a new dialogue.
The Dollar Index set the highs for the week ahead of the Q2 US GDP report, but it was unable to push through the offers near 95.00, and as it has done for the past six weeks, it closed lower ahead of the weekend. Over the course of the month, it has alternated between advancing and declining weeks. Net-net is essentially flat here in July, going into the last two sessions of the month. The narrow range is 94.00 to 95.00, and wider is 93.70 to 95.65. The technical indicators we use are not very helpful in this extended range trading.
For the better part of two months, the euro has traded between $1.15 and $1.18 with few exceptions. It has not closed above $1.18 since the middle of May. It has not closed below $1.15 since last July. Although there has been some intraday volatility, the euro has not closed outside the range set on June 14 ( ~$1.1565-$1.1860), the day that Draghi committed the ECB to not hiking interest rates for at least another year and confirming the end of the asset purchases in December. The challenge for short-term traders is that way to make money has been to play the range, and that will leave them ill-prepared for the eventual break. We note two regularities. First, the euro has closed lower each day the ECB met this year. Second, the euro has risen each Friday for the past six weeks as if short-term traders reduce trim their long dollar exposure ahead of the weekend.
The dollar is threatening to break down against the yen. A trendline drawn off the April, May and June lows is found near JPY110.60. The next target would be the 38.2% retracement of the dollar' advance since the year's low below JPY105 was seen in late March, and is found just below JPY109.90. The technical indicators are soft, consistent with further dollar losses. However, the heavier dollar tone in recent days likely reflects position squaring ahead of the BOJ meeting. Given that the dollar has already pulled back more than 2% from the high, we suspect that medium-term investors will sell into further yen strength.
Unless the Bank of England hikes rates and boosts expectations in the market for additional hikes, the increased risks of a Brexit without an agreement will likely continue to weigh on sterling. Since April, sterling has recorded low lows and lower highs on a monthly basis. It has fallen in 11 of the past 15 weeks, including the past three. It managed to eke out a minor gain ahead of the weekend, so like the euro, it too has risen each Friday for the past seven weeks. A move convincing move above $1.3200 is needed to stabilize the technical tone. We had thought there was potential toward $1.33. Support is seen near $1.3070.
The Australian dollar is stuck in a clear $0.7300-$0.7500 trading range. It finished the week in the middle of the range. Like the euro and sterling, it has closed higher for the past six Friday's and has hardly moved. The longer it stays in the range, the less prepared the market will be for the break.
The Canadian dollar has risen for four of the past five weeks. After the US dollar approached CAD1.30, it spent the last two sessions consolidating. The technical indicators do not suggest a bottom is at hand. Pressure from the interest rate differential is easing as the two-year differential has narrowed from a multi-year high near 70 bp to 60 bp. A break of that could open the door to a deeper correction toward CAD1.2850 area. On the upside, a move back above CAD1.3100 would stabilize the tone.
The September crude oil futures contract snapped a three-week nearly 6% slide with a modest gain of less than 1%. The gains were more than halved ahead of the weekend. After falling toward $62 a barrel in the middle of the month, the momentum fizzled at it approached $70. A move above the $70.40 mark would signal a run toward the multiyear high seen earlier this month near $73. The technical indicators appear to be mildly supportive. On the other hand, a break below $68 now would suggest a more important top may be in place. Separately, note that 7.3% annualized increase in non-residential investment in Q2 largely accounted for by the oil and gas industry. This is likely more a function of price dynamics than the tax changes.
US 10-year rates traded in a new range. The yields rose at the start of the week ostensibly in response to the speculation about changes the BOJ may make, though building some concession ahead of more than $100 bln in coupon supply may have also played a role. The yield consolidating in about a five basis point range below 3.00% after Monday's surge. The 2-10 year curve initially steepened to around 32 bp before slipping back toward 28 bp by the end of the week The 10-year note futures, however, was showing signs of resilience. In the face of what was a solid Q2 GDP print, the September note futures closed higher on the day. A convincing move above 119-16 though is needed to confirm a near-term low. For the second consecutive month, the Sept note has been confined to a 119-00 to 120-16 range.
The S&P 500 gapped higher on Monday and peaked in the middle of the week at 2848. The record high, set in January, was near 2873. It returned and filled the gap that extended to around 2808.6. It bounced off the bottom of the gap. The S&P 500 closed higher for the fourth consecutive week. It is up 3.7% for the month, making it the best month since January. Still, the technical indicators warn the market may be fragile. Some profit-taking ahead of month-end could see the S&P move lower. The market may have to retest the 2800 area, and the 38.2% retracement of this month's rally and the 20-day moving average are found near 2788.
In an unusual occurrence, owing to the poor earnings among some large growth stocks, the iShares Russell 1000 Value (NYSE:IWD) Index outperformed the iShares Russell 1000 Growth (NYSE:IWF) Index. Value rose 1.3%, while Growth slipped 0.5%. Here in July, Value Index has risen around 3.2%, while the Growth Index has is up closer to 3.6%. This past week's gains put the Russell 1000 Value Index up, albeit slightly, on the year, while the Russell 1000 Growth Index is up nearly 10.5%.