The US dollar's recovery continued last week, with new highs for the year being recorded against the euro, yen, and Mexican peso. The key driving force is interest rates and ideas that the US monetary spigot will be turned down before Fed officials acknowledge. The rise in interest rates and inflation expectations are not just the result of the massive US monetary and fiscal stimulus. OPEC+ have cut output by around 7%, and last week, agreed not to boost production next month, surprising market observers, including ourselves, for example.
The uncertain regulatory environment, specifically, the exemption for Treasury holdings and excess reserves from calculating the liquidity ratio that expires next month, may also be playing a role. Next week, the US Treasury sells $120 bln of coupons ($58 bln 3-year and $38 bln 10-year notes, and $24 bln in 30-year bonds). There is no risk that the US auction fails, but it is a question of how sloppy it will be received. The last coupon sale was the $62 bln seven-year auction on February 25, which marked an inflection point. The bids were still two times greater than the offering amount. Perhaps, a mitigating factor is that the general collateral repo rate is spending more time below zero, which means that one is paid (small) to repo the Treasuries for cash.
We retain a bearish dollar view for the medium and longer-terms. Indeed, the very forces that help the dollar now, the large monetary and fiscal stimulus fueled divergence, we think, undermines the greenback in the longer-term through the "twin deficits." Meanwhile, the US employment data marked a change in the near-term trend in early January and again in early February. We would not rule out a three-peat as the dollar's recent surge leaves it stretched. At the very least, some consolidation and paring recent gains seem likely.
Dollar Index: The Dollar Index rose about 1.15% last week. It was the best performance since before the US election and vaccine was announced. It pushed above 92.00 before the better than expected jobs report and after stalled near 92.20. The momentum indicators allow more gains, but the dollar's rally, that many are just discovering, actually began in early January from around 89.20. That is to say, the dollar upside correction seems mature. In fact, the (61.8%) retracement of its losses since the election is found around 92.35. We had suggested something a bit higher as possible and anticipate a test on the 93.75-93.00, which houses the 200-day moving average.
Euro: With the pre-weekend sell-off, the euro completed the (61.8%) retracement of the rally since the election found near $1.1880. We had projected that the topping pattern we saw would allow the euro to fall to $1.1750, which at the time was below the 200-day moving average (now ~$1.1820). The momentum indicators are headed lower, but the trend lower has been in place since early January. Some consolidation looks necessary to preserve the orderly decline. It spent most of the pre-weekend session below the lower Bollinger® Band (~$1.1970). Three-month implied eased a little last week, which is what one might expect if the euro's decline is seen as corrective in nature.
Japanese Yen: The dollar rose by over 1.5% against the yen last week. It was the third weekly advance for a little more than 3%. For the past eight sessions, the dollar has risen above the previous session's high. It briefly traded above JPY108.60 for the first time since the middle of last year. The momentum indicators are stretched, and the greenback is finished above the upper Bollinger Band (~JPY108). The dollar's ascent has been so strong that initial chart support is not seen until JPY107.60.
British Pound: Sterling fell for the second consecutive week for the first time since last September. Despite the relatively successful vaccine rollout and plans to fully re-open by June 21, sterling has shine has dimmed given the jump in US rates. Sterling peaked on February 24 on a spike to almost $1.4240. Before the weekend, it slipped below $1.38 for the first time since Valentine's. The five-day moving average is below the 20-day moving average, not seen since the middle of December. The momentum indicators are falling hard. The lower Bollinger Band will begin the new week near $1.3720, which is slightly above the (38.2%) retracement objective of the rally since the US election. A break of that area runs into a band of congestion that extends to $1.3600. The (50%) retracement objective is near $1.3550. The $1.3900-$1.3925 may cap gains.
Canadian Dollar: The Canadian dollar was one of two major currencies to appreciate against the US dollar last week (the other being the Norwegian krone). It is the fourth weekly loss for the greenback in the last five weeks. Ahead of the weekend, the US dollar tested the week's high, just below CAD1.2740. As US stocks turned up and bonds stabilized ahead of the weekend, the US dollar reversed lower and made new lows late in the session, leaving behind a bearish shooting star candlestick pattern. Initial support for the greenback may be near CAD1.26, but we suspect there is scope for returning toward the multiyear low set in late February near CAD1.2470.
Australian Dollar: After selling off into the end of February, the Australian dollar tried recovering last week and stalled near $0.7850, a retracement of the drop and proceeded to pot another leg down to about $0.7620, through the lower Bollinger Band (~$0.7635) ahead of the weekend. Although it dipped below $0.7600 in late January, it has not below it this year. It was the second consecutive weekly loss, the first since last June. The momentum indicators are falling, and the five-day moving average is below the 20-day. The close was nothing impressive, near the middle of the range, but we suspect a firmer tone to start the new week. Initial resistance is likely $0.7770 and then $0.7820.
Mexican Peso: The Mexican peso was among the weakest of the emerging market currencies, falling about 2.3% against the dollar last week. That offsets about half the interest rate premium earned on a 10-year Mexico peso bond. The dollar pushed above the 200-day moving average (~MXN21.16) ahead of the weekend, for the first time since last October, and did not look back. It peaked around MXN21.42. We had suggested a target of MXN21.50. The momentum indicators are getting stretched, and the greenback finished above the upper Bollinger Band (~MXN21.2650). While MXN21.00 may offer initial support, stronger interest may be seen near MXN20.80. On a little longer-term outlook, our next target is in the MXN22.00 area.
Chinese Yuan: The yuan strengthened steadily from the end of last May through the first couple of sessions this year and since has been in an extremely narrow range. Indeed, as we have pointed out, the dollar has been in the range set in the first two sessions ever since, with a couple of minor exceptions. That range was roughly CNY6.43 to CNY6.5150. The dollar approached CNY6.50 before the weekend. During the National People's Congress, which runs most of next week, officials do not want a headline about yuan weakness. In the bigger picture, the yuan's stability means that it has appreciated against its CFETS basket. It reached the highest level since June 2018. The stability of both the yuan and Chinese government bonds gives them a quantitative characteristic that is often desired in portfolio construction. Among the favorite plays among levered fixed-income accounts continue to be short yen long Chinese bonds.