Dollar and Yen Strong Finish Warn of Next Week’s Anxieties

Overview of the technical outlook for the major currency pairs, oil, 10-year US rates, and the S&P 500, within the context of macroeconomic developments.  The dollar pulled back in H2 of August after rallying in the first half.  The downside momentum faded after the middle of last week. 

 

The pullback in the dollar from the mid-August faded last week as emerging market and trade tensions resurfaced as potent forces.  The outperformance of US assets in August was expected to generate dollar-sales at the end of the month, the dollar gained against all the major currencies at the end of last week. The dollar’s low was registered by the middle of the week.  The MSCI Emerging Markets Index fell for the last three sessions after rallying the first two days of last week.  The euro and the dollar-bloc currencies made new lows ahead of the weekend.

We had suggested the 94.00 area was a reasonable technical target for the Dollar Index.  It was the 38.2% retracement of the rally since mid-April.  The low last week was a little below 94.45 registered on Tuesday.  This also represents the low for the month.  Over the next three sessions, a base seemed to have been carved out there.  The Dollar Index had been pushed below the trendline drawn off the June 14 (ECB meeting) and July lows but closed the week back above it (~94.70). The technical readings on the daily bar charts have not turned higher, but are poised to do so early next week, which begins off with a US holiday.   The Dollar Index can rise toward 95.70-96.00 without meeting strong resistance.   The weekly readings are not particularly constructive, but the monthly ones suggest the Dollar Index has not peaked.

The dollar made new lows for the week against the yen on August 31 (~JPY110.70).  Softer core bond yields, heavier global stocks, and pressure in emerging markets make for a constructive environment for the yen.  The dollar slipped a little more than 0.1% on the week against the yen and about 0.65% on the month.  The dollar had begun the month near JPY112.00 and fell to JPY109.80 on August 21.  The dollar’s recovery faltered just above the weekly downtrend line going back to 2015 (~JPY111.60).  The greenback finished just below the middle of the session’s range ahead of the weekend.  The 61.8% retracement of the dollar advance from the August 21 low is near JPY110.55.  A break of this would retarget the JPY109.80-JPY110.0 area.  Note that this year’s average is near JPY109.40.   The average here in H2 thus far is JPY111.20.  The dollar has not closed above JPY112 in nearly six weeks and offers the nearby cap.

The euro peaked on Tuesday $1.1735, a little more than 10 pips shy of the month’s high.  It finished the week a little more than a cent lower, recording lower lows for the last three sessions. The euro penetrated the downtrend line drawn of that mid-June high (~$1.1695)and even closed above it in the middle of the week.  It was a false break and the euro.  The euro finished the week well below it.  The euro dipped below $1.16 before the weekend and close a little above.  The price action does not inspire confidence, but it may take a break of $1.1535 to encourage thoughts of another run at the mid-August lows below $1.13.  The RSI and Slow Stochastics have turned down, but the MACDs have not.

The dollar bears may see a hammer candlestick on the monthly charts.  Under this perspective, the price action in the last few days is flag pattern, a continuation formation,  which would project into the $1.19-$1.20 area.  This is broadly consistent with the possible head and shoulder bottom the euro may have formed here in August.   It offers a measuring objective near $1.1940.   Losses below $1.1530 would negate the head and shoulders pattern and a move back through the June 14 downtrend line (~$1.1680) with conviction would lend it more credibility.

After pessimism about a UK-EU divorce agreement drove sterling near $1.2660 in the middle of the month, some renewed optimism helped it recover through the $1.30 level.  The dollar’s strength provided too much ahead of the weekend, and sterling eased back to $1.2945.  Initial support is seen near $1.2930.  Sterling has been climbing a trendline drawn off the August 15 lows.  It starts the new week and month near $1.2880, an area that houses several retracement objectives.   The technical condition looks stronger than the euro,  The euro met a wall of sellers near GBP0.9100 and proceeded to sell-off below the previous week’s low.  The euro traded on both sides of the previous week’s range, but the close, above the previous week’s low, neutralized the negativity often associated with this type of price action. Further corrective pressures could see the euro fall toward GBP0.8860, the 50% mark of the rally that began in mid-April near GBP0.8620.

Nervousness that the US deadline to complete NAFTA 2.0 talks would not be met, coupled the risk-off mood saw the US dollar rally from CAD1.29 in the middle of the week to nearly CAD1.31 before the weekend.  The greenback approached the downtrend line drawn off the late-June, July and early August highs.  It comes in near CAD1.3115 at the start of next week and finishes the week close to CAD1.3090.  The technical indicators are turning more positive for the US dollar.  A convincing break of above CAD1.3135 suggests a test on CAD1.3200.  It seems already baked in the cake that the Bank of Canada will hold fire at next week’s meeting, and barring some unforeseen shock, it is widely expected to hike rates in October (~80% chance).

The Australian dollar was the weakest of the major currencies, losing almost 2% against the US dollar in the last week of August.   It brought the month’s loss to a bit more than 3% and took the Aussie to levels not seen since early 2017.  Not only did it suffer in the general risk-off environment, but also from the rate increase of variable rate mortgages by one of Australia’s largest banks.  It is seen as making it more rather than less difficult for the central bank to hike rates.  A rate hike was not expected through the middle of next year in any event.  There may be some support near $0.7135, but better demand may be seen closer to $0.7000.

Recall that in the big picture, the Australian dollar appears to have formed a double top in September 2017 and March 2018 near $0.8135.  The neckline is drawn off the lows between the two peaks or roughly $0.7480.  We estimate the technical price projection is about $0.6825.

Light sweet crude oil for October delivery rallied 1.7% last week, extending the previous week’s 5.4% gain.  These gains more than offset the weakness in the first half of the month when WTI dipped below $64 a barrel.  It finished the month up 3.5%, a tad below $70. The larger than expected drawdown of US oil and product inventories helped support prices.  In addition, recent reports estimate that the US oil embargo against Iran, which is still two months from being implemented, is already having the desired cooling effect.  Iranian oil exports are estimated to have fallen to 2.5 years lows in August to about 2.1 mln barrels, down from a peak near 3 mln in April.  Over the last three months, the October contract peaked a little over $71 a barrel, (May ~$71.65, June ~$71.29, and July $71.05).  The technical indicators are getting stretched, and although a move closer to $71 is possible, we are looking for a reversal pattern or some sign that the advance is over.

The US 10-year yield transversed the recent range between 2.80% and 2.90% last week and finished near the middle of it.  Most economists and speculators appear bearish on ideas that rising inflation, increased supply, and strong growth should lift interest rates.   On balance, the technical indicators warn that the bears may be frustrated a while longer.  The record large speculative gross and net short 10-year Treasury futures position showed the first signs capitulation.  The bears covered 100k previously sold contracts (~8%) of the record gross short position in the reporting period ending August 28. The bulls made a stand too.  They increased their gross long position by nearly 14% or 70k contracts, the most since January.  The December note futures began the month a little below 119-00 and rallied a little through 120-20.  The pullback seen at the start of last week met a 38.2% retracement of this month’s gains on a closing basis and edged higher over the last couple of sessions.   The 120-121 range may contain the bulk of next week’s price action.

The S&P 500 and NASDAQ gapped higher on Monday and the gap, which is of added technical significance because it appears on the weekly charts as well, and posted new record highs Wednesday-Thursday before pulling back a bit ahead of the weekend.  The gaps have not been entered but may draw prices in the days ahead. The gaps are found between 7949.7- 7976.6 and 2876.1-2884.7 for the NASDAQ and S&P 500 respectively. While in unchartered waters it is difficult to talk about meaningful resistance, but perhaps in the current situation, the charts can help identify levels on the downside that would increase the probability of a correction  The NASDAQ has been climbing the five-day moving average and it begins the new week near 8069.  A break of it, especially on a closing basis, may be an early sign of fading momentum.   The S&P 500 closed below its five-day moving average (~2900).

The S&P 500 rose about 3.0% in August.  It is the fifth consecutive monthly advance.  In fact, since October 2016, the S&P 500 has only had three losing months, and two of them were February and March this year.  All the other G7 equity markets but Japan moved lower in August.  The Nikkei gained 1.5% in August to flirt with a three-month cap near 23,000.  Europe’s Dow Jones Stoxx 600 fell 2.4%, the largest monthly decline since March.  The MSCI Emerging Market Index fell 2.9% in August and is off almost 9% here in 2018.  The MSCI World Index (developed markets) rose 1.0% on the month and is up about 3.4% for thus far this year.