The threat of the US not servicing its debt to China, the loss of 20.5 mln jobs last month, nor the prospect of negative interest rates have undermined the US dollar. It sat at the fulcrum between the currencies seen as beneficiaries of risk appetites, namely the dollar bloc and Scandis and the underperforming European currencies.
The euro was the heaviest of the majors, losing about 1.3% and recorded a new a two-week low below $1.08. A controversial German Constitutional Court ruling did the euro no favors. Still, with the help of a marked adjustment ahead of the weekend, the premiums over Germany were little changed on the week. Although the dollar gained against the yen for the last two sessions, it was not enough to snap the losing streak, which, at five-weeks, matches the longest in a decade.
We expected the risk appetites to have been largely satiated last month, but investors continue to press. This may help put a floor under European currencies. The JP Morgan Emerging Market Currency Index closed on the week's high and may be poised to break out of the nearly two-month trading range. The S&P 500 rallied around 3.25% last week, recouping all and more than what was lost in the previous two weeks. The NASDAQ joined the Shenzhen Composite and Korea's KOSDAQ in turning positive on the year.
Dollar Index: After bottoming near 98.65 on May 1, the Dollar Index rallied to roughly 100.40 on May 7 before reversing lower. The highs set last month, once early and once last, were a bit higher in the 100.80-100.95 area. A pullback to the lower end of the range is possible. The MACD has flatlined, while the Slow Stochastic turned higher last week. The 200-day moving average is found near 98.40, and the Dollar Index has not traded below it since mid-March.
Euro: The euro recovered from its first close below $1.08 in two weeks and traded to about $1.0875 before the weekend. Still, it is going nowhere quickly. It may not need to retest the $1.10 area (and the 200-day moving average near $1.1030) that turned in back on May 1. The $1.0900-$1.0920 area may be sufficient. Last week's low was near $1.0765, which is where the trendline drawn off the March and April lows is found.
Japanese Yen: While Japan's markets were closed for the Golden Week holidays, the dollar fell and dipped slightly below the yen, to JPY106. In the days that Tokyo re-opened, the dollar firmed, not by a low, but enough to make some suspect a low is in place. The upside looks limited. Last week's high was set near JPY107, and that offers initial resistance, but the JPY108 level must be re-taken to signal anything important.
British Pound: Sterling's penetration of the trendline drawn off the April lows, which lend credence to a double top formation (~$1.2645), failed to be confirmed on a closing basis. It recovered from roughly $1.2265 on May 7 to reach about $1.2465 ahead of the weekend. The $1.25 area may offer intermittent resistance, but the previous two highs and the 200-day moving average (~$1.2660) need to be overcome to signal a breakout.
Canadian Dollar: The risk-on mood helped underpin the Canadian dollar last week, about 1%. It was the first back-to-back weekly gain since mid-February. The US dollar is approaching the lower end of its recent trading range. The CAD1.3850 was in the middle of April and then again at the end of the month. The second recovery was not as strong as the first and fizzled with a potential key downside reversal on May 7 from around CAD1.4170. A break of the CAD1.3850 area still would need to overcome support ahead of CAD1.3800 to open the downside, which could extend toward CAD1.35-CAD1.36.
Australian Dollar: For the first time in a month, the Australian dollar slipped below the 20-day moving average on May 7 (~$0.6400) but reversed higher to posted a key upside reversal. Follow-through buying ahead of the weekend saw it test the $0.6550 area. The high since March 10 was set at the end of April near $0..6570, and that is the immediate target. Above there lies the 200-day moving average (~$0.6675) and the highs from early March a little below it. The Aussie gained 1.7% last week to extend its rally for a fifth consecutive week, the longest in more than two years.
Mexican Peso: The peso was the strongest currency in the world last week, rising nearly 3.6% against the US dollar. Strengthening risk appetites, which draw funds to Mexico's relative high yielding bill market, surging oil prices, news of record worker remittances, appeared to underpin the peso. With a few exceptions, the dollar has been in an MXN23.00 to MXN25.00 trading range for the better part of two months. It reached the MXN23.55 area, the lowest since mid-April, ahead of the weekend. The technical indicators that the dollar can still get closer to the lower end of the range. Thre is not much chart-based support between MXN22.20 and MXN22.84.
Chinese Yuan: Since the middle of March, the dollar has mostly traded between CN7.05 and CNY7.10. The broader range is CNY7.0350 to CNY7.1280. Officials are unlikely to use the current or their US Treasury holdings to express disapproval with the escalated US rhetoric. Chinese officials seem to recognize that a stable currency is in its interest. A sharp depreciation that many investors fear could trigger a new emerging market crisis would likely exacerbate China's domestic imbalances. The offshore yuan had threatened to break out, while the mainland was closed for the May Day celebration, but it moved back within its well-worn range.
Gold: The yellow metal remains in a $50 band on each side of $1700, and it finished last week, spitting distance from the midpoint. The outside update on May 7 saw minor additional gains the following day. A trendline off April highs caught last's tops and starts the new week near $1721.
Oil: July crude oil snapped a six-day advance in the middle of last week and proceeded to fall by more than 6% in two days before jumping nearly 4.8% ahead of the weekend. The smallest crude build in the US in six weeks, ideas that the demand compression is past the worst, and optimism of the cuts in supply continues to support prices. The US rig count decline was also the smallest percentage terms in six weeks helped reinforce the sense that industry shutdown is slowing. The July contract tested $28 a barrel last week and found support near $24.50. A move through $28.50 would target $30-$31.
US Rates: The US 10-year yield rose about seven basis points last week to 68 bp. This is roughly the middle of the two-month range. It has spent little time below 55 bp or above 80 bp. The June Treasury note futures suggest the ranges will persist. The shorter end of the curve is a different story. The two-year yield fell about four basis points on the week but was off twice that to set a new record low of nearly 10 bp. The bigger story was the December 2020 and beyond fed funds futures implied a negative interest rate beginning on May 7, but a sell-off ahead of the weekend saw a bit of a correction. The negative implied yields now begin in April 2021 and remain so through January 2022. We accept at face value that Fed officials do not want to adopt a negative target range because its track record elsewhere is not particularly encouraging, and it would be especially disruptive in the US given the importance of the dollar funding market.
S&P 500: Since the middle of April, the S&P 500 not closed below its 20-day moving average (~2842.5). It was frayed to start last week on an intraday basis after the gap lower opening, but it closed above it and gapped higher the following day. The gap was entered, but not closed in the middle of the week. It consolidated Thursday, before gapping higher ahead of the weekend. The next target is the recovery high set in late April near 2955. Above there and 3000 beckons, which is also where the 200-day moving average can be found (3002). The five-day moving average crossed above the 20-day in early April, and although it looked if it were going to cross back last week, it did not and widened further at the end of the week.