The US dollar had another rough week, and the poor close ahead of the weekend warns that the downside may not be exhausted. Despite unmistakable signs that the US economy is accelerating, and by more than expected, the US 10-year yield is around 25 bp off the end of March high. This seems to dampen the enthusiasm for holding the greenback.
The Federal Reserve meets this week and there is no compelling reason to expect a change in tone from either the statement or Chair Powell's remarks. The Fed has anticipated that the pace of activity and prices would pick up and they have. We think as the economy continues to open up, and growth broadens and deepens, it will be increasingly difficult to justify the $120 bln a month in bond purchases. Although it is not fully discounted, the market leans strongly toward a rate hike by the end of next year.
Tactically, we had thought that there was still some life in the divergence meme that saw the dollar recover in Q1 after its losses accelerated in the last two months of 2020. Strategically, we remain bears. We continue to believe that the third large dollar rally since the end of Bretton Woods is over. Also, the divergence meme that had helped the greenback offers only a temporary respite, as the slow vaccine rollout in the EU and Japan delays but does not negate their recoveries. The combination of a large budget and trade deficit seems to require higher interest rate differentials to support the dollar. Over the past month, the 10-year differentials have narrowed rather than widened.
Dollar Index: The third consecutive weekly decline has brought the Dollar Index to the 90.80 area, which corresponds to a (61.8%) retracement of the rally from the early January lows (~89.20). A break of the 90.80 area signals a test on the 90.00-90.20 area before a return to the lows. The MACD is still headed lower while the Slow Stochastic is trying to turn higher. A close above 91.40 would help stabilize the technical tone.
Euro: The euro settled last week at its highest closing level since early March, and made a new high ahead of the weekend at $1.2100. The retreat after the ECB meeting that pushed the euro to $1.1995 was snapped up. The trendline connecting the January and February highs comes near $1.2110 at the end of April, which also is around the (61.8%) retracement objective of this year's decline. Above it, there is little chart resistance until $1.22. The MACD is still picking up this month's uptrend, while the Slow Stochastic is detecting a loss of momentum and appears to be poised to roll over. A break of the $1.1990 area may be suggestive, it probably requires a break of the $1.1930-$1.1935 area to be of technical significance.
Japanese Yen: The dollar dipped below JPY107.50 for the first time since early March ahead of the weekend and extended its loss for a fifth consecutive session, for the longest losing streak since last November. It was similar to the previous week when falling US rates dragged the dollar lower until it found a bid before the weekend. Still, it managed to close just above JPY017.75, the (38.2%) retracement target of this year's advance. If it does not hold, the next technical target is near JPY106.80. It has been two full weeks since the dollar managed to rise above the previous session's high. The dollar has not closed above the previous session's high this month. The MACD's decline has begun slowing and the Slow Stochastic has flatlined in overextended territory. A move above JPY108.20-JPY108.40 would lift the tone.
British Pound: Sterling did not perform well last week even though it is clear that the recovery in the UK is gaining more traction as the economy gradually re-opens. Retail sales jumped 5.4% in March (median expectation in Bloomberg's survey was 1.5%) and April's preliminary composite PMI was above last year's peak. Sterling's six-day rally ended after a 1.1% rally to start the week. However, it spent the rest of the week dribbling lower to finish the week higher (~ 0.3%), largely owing to a late rally ahead of the weekend. It was among the laggards (along with the Australian dollar and Canadian dollar). Sterling has spent March and April between $1.3670 and $1.4000. The upper end of range held last week. Initial support is around $1.3800 and a break may be worth a cent. In the two sessions through last Monday, the euro fell by about 1.5% against sterling but proceed to recover for the last four sessions and rose to almost GBP0.8720 ahead of the weekend and recorded its highest close in two months. The next target looks to be near GBP0.8760 and then GBP0.8850.
Canadian Dollar: The Bank of Canada announced it would reduce the amount of government bonds it was purchasing and brought forward to the second half of next year when it imagines the spare economic capacity would be absorbed. Yet, the Canadian dollar was not really rewarded and finished the week almost 0.3% higher against the US dollar, a function of its pre-weekend advance. The US dollar has been finding steady bids in the CAD1.2460-CAD1.2470 area. The combination of lower implied volatility and a smaller skew in the risk-reversal (favoring the US dollar) is consistent with interest in selling greenback calls. For the past five weeks or so, the US dollar has gone virtually sideways as reflected by the convergence of the five and 20-day moving averages (~CAD1.2530-CAD1.2550).
Australian Dollar: For the past six sessions, the Aussie has been alternating between gains and losses and over this span net-net it is virtually flat. In the first half of April, it traded mostly in a $0.7585-$0.7675 range. Now it is in a $0.7690-$0.7800 range. It did spike to about $0.7825 on April 20, which was the (61.8%) retracement objective of the decline since the peak in late February a little above $0.8000. The momentum indicators are mixed. The MACD is gradually rising while the Slow Stochastic has turned lower. A break of the $0.7670 area, which houses the 20-day moving average and (50%) retracement objective of this month's advance would weaken the technical tone. Next week Australia reports Q1 CPI early on April 28 in Canberra, and the underlying measures are expected to be stable, but the import/export prices, the following day, are more noteworthy. Australia has a positive terms-of-trade shock. Consider that its index of import prices fell every quarter last year and is expected to have fallen again in Q1. The index of export prices fell in the middle two quarters of 2020 but rose by 5.5% in Q4 20 and is expected to have risen 9% in Q1 21.
Mexican Peso: The dollar is trading at three-month lows against the peso. It has fallen for the last four weeks and six of the past seven. It is not the strength of the Mexican economy or its success in getting ahead of the COVID-curve that underpins the peso. In fact, there is a good chance that Mexico reports on April 30 that the economy contracted in Q1, and if it did grow, it is likely aided by the booming US economy through the trade and worker remittance channels. Mexico's one-month T-bills (cetes) pay a little more than 4%. The 4-week bill in the US has no yield. The momentum indicators are stretched and appear poised to turn higher. A move above MXN20.00 would suggest a near-term low is in place. Yet, if the grind lower continues, there appears little on the charts to deter a test on the year's low set in late January around MXN19.55.
Chinese Yuan: The greenback ended a nine-day slide against the Chinese yuan, rising a meager 0.1% ahead of the weekend. The yuan's gain reflects the broad dollar weakness we have been tracking. Over these past two weeks, the yuan has appreciated by 0.8%, which, incidentally, is more than most Asian currencies except the Japanese yen and the Taiwanese and Singaporean dollars. We suspect that in the near term, the PBOC would prefer the yuan to stabilize after its recent bout of appreciation. That said, China's premium over the US on 10-year rates widened last week to 161 bp, the most in a little more than a month, though its 60 bp off level prevailing at the end of 2020. China's April PMI is the main economic feature next week and some stabilization (slight lower readings) seems likely after the March surge. If CNY6.48 is the lower end of the range, then the CNY6.53 may be the upper end of a consolidative range for the dollar.