The greenback had a tough week. It fell against most currencies. Our GDP-weighted currency index snapped a three-week drop, which ended an eight-week advance. The combination of a seemingly more hawkish Federal Reserve and position squaring around the expiration of futures and options had pushed the greenback dramatically higher and stretched the technical conditions. It had traded three standard deviations away from its 20-day moving average, for example, against several major currencies.
The dollar's pullback should not be surprising, though several large banks appeared to throw in the towel on their bearish narratives. Nevertheless, our underlying concern remains intact that given the large trade and budget deficits, the US must offer higher interest rates or accept a weaker dollar, and more likely, a combination of both. Moreover, we recognize that the US economy may be reaching its peak pace of expansion here in Q2 and that price pressures should also begin easing.
At the press conference after the FOMC meeting, Chair Powell cited two concrete examples of prices. The first was lumber, which he noted, rallied sharply but had begun coming off. The price of lumber has nearly been halved since peaking in early May. The second example was used vehicle prices. They rose by 10% in April and more than 7% in May and accounted for around a third of the jump in CPI. Early industry reports suggest the wholesale market may have peaked, and retail should follow with a lag.
Dollar Index: After rallying to 92.40 in the aftermath of the FOMC meeting, the Dollar Index fell to almost 91.50, where the 200-day moving average intersects, in the middle of last week. The subsequent upticks stalled in front of 92.00. It finished the week near its lows. Additional near-term losses are likely. There is scope to test the 91.00-91.15 area. The Slow Stochastic has rolled over from overbought territory, and the MACD looks poised to do the same in the coming sessions. A break of the 90.60 area would deliver a blow to the apparently newfound bullish sentiment.
Euro: The euro rose in four of last week's five sessions for a net gain of about 1%. Although it closed near the week's highs, the market shied away from testing the $1.2000 area, where the 200-day moving average and (38.2%) of June's decline is found. A move above there would likely signal a move into the $1.2050-$1.2100 band. The euro settled around $1.2125 on the day before the FOMC meeting concluded (June 16). The momentum indicators are turning up. A soft preliminary EMU June CPI figure followed by a firm US jobs report (estimates appear to be gravitating around 700k increase in nonfarm payrolls) may off a macro challenge to the constructive technical outlook for the single currency.
Japanese Yen: The dollar made a new high for the year against the yen, slightly above JPY111.10. However, it failed to settle above JPY111.00 and spent the entire pre-weekend session below it. Over the past 30 and 60 days, the correlation between the exchange rate and the US 10-year yield is stronger than the correlation with the 2-year yield. The US 10-year Treasury yield is struggling to rise much above 1.50%. Some observers still attribute the lowly yield to the Fed's purchases but recall that the yield poked above 1.77% at the end of Q1. Since late April, the dollar has been trending higher, and that trend line begins next week near JPY109.75.
British Pound: Although all the major currencies but the yen rose against the dollar last week, sterling was an underperformer, rising a still-impressive 0.75%. In doing so, sterling snapped a three-week 2.7% decline. After finding support slightly below $1.38 at the start of the week, it ran into sellers around $1.40 in the middle of her week and subsequently drifted back to $1.3900. The Bank of England may have sounded dovish, but the implied yield of the June 2022 short-sterling futures contract (three-month time deposit, like Eurodollar futures) eased by two basis points (~32.5 bp), still above the month's low (26 bp). This suggests the market is still pricing in a hike over the next year. The Slow Stochastic has turned higher, but the MACD is lagging. A move above $1.4020 could spur a test on the $1.4100-$1.4150 area. On the other hand, a break of $1.3870 signals that the bears have the upper hand.
Canadian Dollar: The US dollar extended its recovery after failing to take out CAD1.20 at the start of the month, reaching almost CAD1.2490 at the start of it the week. It reversed lower and fell to about CAD1.2250 in the middle of the week before consolidating. It still looks vulnerable. A break of the CAD1.2250 area, which corresponds to the (50%) retracement of the June gains, signals a move toward CAD1.2200, the next retracement (61.8%), and the 20-day moving average. The MACD and Slow Stochastic have turned down from overbought levels that followed the four-week 3.2% greenback recovery.
Australian Dollar: The Australian dollar made new highs for the week ahead of the weekend, above $0.7600. The Aussie approached the (50%) retracement objective of the sell-off that began with the key reversal on June 11, when the high for the month was set (~$0.7775), selling off and settling below the previous session's low. The momentum indicators are turning up, and further gains are likely ahead. A move through $0.7625 could see $0.7660-$0.7700. A move now below the 200-day moving average (~$0.7560) would be disappointing. The central bank meets on July 14 and will likely adjust policy. The most likely scenario is to cease targeting the three-year yield at its cash target level. It may also reduce the size of its next round of QE.
Mexican Peso: The dollar soared nearly four percent against the Mexican peso in the week of the FOMC meeting. The greenback stalled at the start of the past week and was offered even before Mexico's central bank surprised the world by raising rates. The dollar slumped by 1.7% on the day Banxico moved the most since last September. In fact, the greenback fell every session last week for the first time since April. The market is pricing in further aggressive tightening, encouraged by the bi-weekly CPI which poked above 6%. The momentum indicators are pointing lower. The five-month dollar low set earlier this month was a little below MXN19.60, and the low for the year was set in January near MXN20.55. A four-year trendline comes in near MXN19.04 at the end of next week, rising by about 0.01 pesos a week. We note that the momentum indicators are have also turned up for the JP Morgan Emerging Market Currency Index. The index bounced smartly off the 200-day moving average last week. It also rose in every session last week.
Chinese Yuan: The adjustment that the PBOC signaled in early June by lifting the reserve requirement for foreign currency forwards appears to have run its course. The dollar poked briefly above CNY6.49. We had anticipated a move into the CNY6.47-CNY6.4950 area. However, the way the PBOC is setting the dollar's reference rate seemed to suggest that officials were content with the pullback in the yuan. The dollar slipped for three consecutive sessions against the yuan, and the loss before the weekend of slightly less than 0.25%, was the longest losing streak and the largest loss of the month. If the CNY6.50 area is the upper end of a possible new range for the dollar, where is the lower end? That still has to be determined, but we suspect it may be around CNY6.4200. Although the yuan is a closely managed currency, it is notable that the Slow Stochastic and MACD are poised to turn lower for the dollar.