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Breakouts Confirmed, Time for Consolidation?

A 10 million-beat on the May non-farm payrolls failed to trigger much dollar demand.  Indeed, the dollar fell to new session lows against a few currencies after the report, including sterling and the Mexican peso, which are discussed at greater length a bit lower.  There does appear to have been a shift in market psychology in the middle of May.  We have been monitoring the heavier dollar, and the confirmation we sought last week of a breakout was delivered by the price action in recent days.  Still, some near-term consolidation appears warranted.

Among the major currencies, the yen is the only one who has been unable to appreciate against the dollar since the middle of May.  The yen has weakened by around 2.3%.  Of the other, the Swiss franc underperformed, appreciating less than 1% against the greenback.  The next weakest showing was from the Danish krone and euro, gaining around 4.5% against the dollar.  The strongest were the Antipodeans and the Scandis (~7.75%-10.5%).  This is the broad pattern one would expect in a period in which risk appetites were strong.   The risk appetites could be stoked by optimism about a vaccine, about an earlier or stronger recovery, or by abundant liquidity.  Given the timing and other conditions, we are more sympathetic to the liquidity hypothesis but recognize that the other factors are also present.

Dollar Index: An outside down day on June 4 saw follow-through selling before the US employment data.  It reached a low of about 96.45 before recovering to around 97.00.  By closing higher ahead of the weekend, it snapped a six-day slide.  The modest gain allowed the Dollar Index to push back above the lower Bollinger Band (~96.65).  Corrective upticks face the first significant technical hurdle in the 97.60-97.80 area.   The MACD is overextended, while the Slow Stochastic is poised to turn higher.

Euro: The euro reversed lower after rising to almost $1.1385 and ended an eight-day rally, its longest nine years. Its rally had lifted it above its upper Bollinger Band, and the technical indicators are stretched. The MACD and Slow Stochastic look poised to turn lower in the coming days. Initial support is seen near $1.1230-$1.1240. A break could signal a move toward $1.1150. The euro has rallied by around 8.6% against the Japanese yen since the start of last month and set new highs for the year before the weekend (~JPY124.45). It and closed over its upper Bollinger Band for the fourth consecutive session.  Look for a reversal pattern to confirm a top. 

Japanese Yen: The dollar rose almost 1.8% against the yen last week. It was the fourth consecutive weekly advance, the longest in a little more than a year, and the most in two months. The greenback stopped just shy of the psychologically important JPY110-level but settled well above the upper Bollinger Band (~JPY109.25). The momentum indicators are stretched but do not appear to set to turn yet.  The highs from earlier this year are coming back into view.  In late February, the high so far this year was recorded near JPY112.25, and the March high was near JPY111.70. On the downside, a break of the JPY108.80 would signal the surge is over. 

British Pound: Sterling rose 2.7% last week, the third consecutive weekly advance, and more than the previous two weeks put together. The 3.3-cent rally lifted cable to its best level in three months (~$1.2730). It traded above its 200-day moving average (~$1.2680) for the first time since mid-March, though it failed to close above it.  Sterling met the (61.8%) retracement objective of the down move since last December’s election (~$1.2710). Its seven-day rally is the longest in two-and-a-half years, stretching the technical indicators into overbought territory.  The indicators have not turned, and there is no reversal pattern. Yet, it closed every session last week above the upper Bollinger Band.

Canadian Dollar:  Helped strong risk appetites, rising commodity prices (especially oil), and a better than expected jobs report, the Canadian dollar rose 2.6% against the US dollar.  The greenback punched below its 200-day moving average (~CAD1.3460) after the employment data and signs that OPEC+ would extend their maximum cuts until the end of next month.  It closed inside the lower Bollinger Band (~CAD1.3400), and the Slow Stochastic looks set to turn higher. A move above CAD1.3500 would begin stabilizing the technical tone. The next support area is seen around CAD1.3330. 

Australian Dollar: The Aussie surged 4.5% last week and carries a seven-day rally into the new week’s activity. It has fallen in only one week since April 3. The rally appeared to be losing some momentum as marginal new highs have been more difficult to make and retain. The Aussie did see the air above $0.7000 ahead of the weekend for the first time since January 3, but it spent most of the session consolidating in the upper end of the previous day’s range. The momentum indicators may turn lower in the coming days. Initial support is seen near $0.6900, but in a proper technical correction, a pullback toward $0.6700 would not out of line. 

Mexican Peso: In the last 15 sessions, the peso has fallen twice against the US dollar. Over this run, the peso has appreciated by a little more than 11%.  The greenback made a new low after the US jobs data near MXN21.49, the lowest level since mid-March. The MACD is beginning to level out in oversold territory, while the Slow Stochastics are actually starting to show a faint (dollar) bullish divergence. The next important technical support is seen near MXN21.30, the (61.8%) retracement objective of this year’s dollar rally. Despite the recent rally, the peso finished last week off about 12.25% for the year. 

Chinese Yuan: The dollar’s broader pullback appears to have come in the nick of time and helped put a floor under the yuan, which had fallen to nine-month lows on May 27. The yuan rose 0.75% against the dollar last week and, in doing so, ended a four-week slide. The yuan remains weak against its basket. Where is the floor for the dollar? The CNY7.05 is the lower end of the previous range and near the 200-day moving average (~CNY7.0460). Beijing is unlikely to allow the US to gain unchecked whatever advantage it imagines can be accrued by a weak US dollar (trade?  debt?).

Gold: Our base case is that the yellow metal is in a $50 range on both sides of $1700. It frayed the upper end in mid-May, but it has now fallen for three consecutive weeks and finished last week at six-week lows. There is little to hang one’s hat on until the $1650 area, and just below it near $1640 is the (38.2%) retracement objective of the rally since the mid-March low near $1450.  A break is likely to trigger stops. The MACDs still favor the downside, while the Slow Stochastic is turning down after flatlining in mid-range. Gold and the S&P 500 have been positively correlated over the past couple of months, but the 30-day correlation has become inverse. 

Oil: The price of July WTI rose 11.1% last week, its sixth weekly advance, over which time, it has risen from around $21.20 to about $39.60. Both supply and demand forces are at work. OPEC+ looks set to extend the maximum cuts until at least the end of July. Chinese demand and the gradual re-opening of many countries are also helping underpin prices. The rise in oil prices has been orderly, and the July contract has not traded above its upper Bollinger Band (~$40.80). Momentum indicators are stretched but do not show signs that a turn is imminent. The next technical target is near $40.10, the halfway mark of this year’s range. Beyond that, there is a gap from early March that extends to about $41.90. 

US Rates: The US 10-year yield surged last week, and the stronger than expected employment report allow it to finish the week with an exclamation point. The nine basis point increase ahead of the weekend was the most since mid-March and brought the week’s increase to 26 bp.  That is the most in a week since last September. It finished the week above 90 bp, the highest in two-and-a-half months. The 30-year bond yield has surged 30 bp over the past three weeks, and only five took place after the employment report. The two-year yield rose five basis point to about 21 bp, the highest since the end of April. Note that it had risen from 16 bp at the end of last week to 20 bp before the jobs data. The 2-10 year yield curve steepened every day last week and pushed above 72 bp ahead of the weekend for the first time in more than two years, before settling near 68 bp. It finished May below 50 bp. We suspect the bearish steepener is going to be a challenge for the Fed if it is sustained. 

S&P 500: The benchmark screamed higher last week, tacking on another 5% on the top of the roughly 6.25% rally over the previous two weeks. It gapped higher on Wednesday, entered but failed to fill the gap on Thursday and then gapped higher again on Friday after the employment report. The NASDAQ’s 3.5% rally last week put is up an incredible 9.5% for the year. It set a new intraday record high ahead of the weekend but failed to close on it. Friday’s gap (~3129-3164) should offer initial support for the S&P 500. On the top side, the next important technical hurdle is found in the band between 3260 and 3328, an old breakaway gap from March. The momentum indicators are stretched, and the S&P 500 finished above the upper Bollinger Band (~3180). 

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