The dollar's bounce extended further than we expected, helped by an aggressively hawkish view of the Fed, which has seen the market price in more than one hike before the end of next year. The dollar's rally into early July left the technical indicators stretched, and we note that near-term trend reversals recently have occurred around the end of the month or US jobs report.
Despite the first employment report that beat expectations in three months, US interest rates softened. In fact, the implied yield of the December 2022 Eurodollar futures contract fell four basis points. The contract traced out what appears to be a key reversal by making new lows before rallying and closing above the previous high (in price). The two-year note yield, which doubled in June, slipped lower for the fifth session in the past six. The 10-year yield fell every day last week for a cumulative decline of 10 to approach 1.40%, the lower end of where it has traded over the past four months.
The new week begins off slowly with the US holiday on Monday. Given that the individual forecasts of Federal Reserve officials were not discussed at last month's FOMC meeting, and Chair Powell played them down, it ought not to be surprising if the minutes were not as hawkish as the dots. Still, while some "buy the rumor sell the fact" type of trading of the dollar was seen after the employment data, the market will want to see follow-through before becoming convinced that the month-long dollar rally is over.
Dollar Index: The Dollar Index rose to a new high since early April ahead of the jobs report, reaching almost 92.75. It sold off and closed near its lows, around 91.20. A potential key reversal was traced out. A break of 92.00 favors a near-term top being in place, and a move below 91.50 would be convincing. The momentum indicators are over-extended but are still pointing higher. As scar tissue shows, even with technical indicators seeming near extremes, prices can continue to rise, but the reversal pattern and weak close is the ideal set-up to mark the end of the month-long rally.
Euro: The common currency bounced off the push below $1.1810 after the employment data but did not take out the previous session's high (~$1.1885). It snapped a four-day slide. A move above $1.19 would help stabilize the tone. The late June high near $1.1975 needs to be overcome to boost confidence that a meaningful low is in place. The momentum indicators are in oversold territory, but if $1.1800 is given, there is little on the charts before $1.1700, which corresponds to the March low and the (38.2%) retracement of the rally since the pandemic low in March 2020 (~$1.0635).
Japanese Yen: The US dollar posted a bullish outside up day in the middle of last week, trading on both sides of the previous session's range and closing above its high to move back above JPY111.00. However, ahead of the weekend, it posted a bearish outside down day. It made a marginal new high for the year, a tad above JPY111.65, where the upper Bollinger® Band was found. The high from March 2020 was slightly higher at JPY111.70. The high from last year was set in February by JPY112.25. The MACD does not appear stretched, but the Slow Stochastic is more so. Both look poised to turn lower. The yen is often a range-trading currency, and the lower end of the range may be represented by the trendline off the Q2 lows, which is near JPY110.00 now.
British Pound: Sterling fell to its lowest level since mid-April (~$1.3735) before the US jobs data. It recovered to almost $1.3850 to record a key upside reversal. It has fallen in four of the past five weeks, and as a consequence, the momentum indicators are stretched. The MACD is poised to turn higher next week. Next week, follow-through cable buying could turn the Slow Stochastic, which has not confirmed the drop to the lowest level since mid-April. The $1.3870-$1.3900 offers the next hurdle. For its part, the euro has been struggling to sustain a foothold above GBP0.8500 and now looks set to pull back and return to the lower end of its range, closer to GBP0.8500.
Canadian Dollar: The Canadian dollar was the most impressive of the majors at the end of last week. After making a marginal new high near CAD1.2450, before the US jobs report, the greenback reversed lower, taking out the previous three sessions' lows to record key reversal. Indeed, it surpassed the (61.8%) retracement objective of the bounce since the June 23 low near CAD1.2250. The nearly 1% US dollar decline (to about CAD1.2310) ahead of the weekend was the largest in a year. Initial support will likely be found in the CAD1.2300. A break of it could signal a move back toward CAD1.2200. The MACD has curling over, but the Slow Stochastic is, well, slower.
Australian Dollar: The Aussie recovered smartly after falling to a new low for the year (~0.7445) ahead of the weekend and rallied smartly through the high of the previous two sessions to rise to almost $0.7535. It, too, posted a key upside reversal. It also snapped a four-day drop, which followed a five-day rally the previous week. The MACD is headed lower though it is already at the lowest level since April 2020. The Slow Stochastic is headed lower, but follow-through gains next week could see it turn higher, which would leave a bullish divergence in its wake, has not confirmed the new low in price. The $0.7550-$0.7575 band offers nearby resistance and houses the 200-day moving average. However, it may require a move above $0.7600 to boost confidence that a durable low is in place.
Mexican Peso: The dollar peaked against the peso the day before the US employment report, around MXN20.08, nearly reaching the (38.2%) retracement of the unexpected Banxico rate hike-induced slide (MXN20.1040). The pre-weekend sell-off saw it briefly trade below MXN19.75 to record a new low for the week. The momentum indicators are not particularly helpful now, but the dollar is likely to remain under pressure. Initial support is likely around MXN19.70 and then the five-month low set on June 9 by MXN19.60. The market has 50 bp of tightening priced into Q3.
Chinese Yuan: The yuan has been recently moving in line with emerging market currencies against the dollar. Consider last week, the yuan fell by about 0.25% and declined by around 1.3% in the month of June. The JP Morgan Emerging Markets Currency Index lost 0.5% last week and 1.2% in June. Still, the dollar rose for the fifth consecutive week against the yuan. Yet, last week's high near CNY6.4850 was below the previous week's high (~CNY6.4910), and the greenback's pullback after the employment data suggests a stronger yuan to start the new week. Initially, the dollar could ease toward CNY6.45 and maybe CNY6.43 in the coming days.