The dollar’s upside momentum carried the over-extended technical condition into midweek. The consolidative/corrective phase we anticipated gained momentum into the weekend, and a further dollar weakness is likely in the coming days. At the same time, the 10-year yield’s pullback may have run its course and the S&P 500 bounced convincingly off the test on 2800 and finished near the best levels of the week.
A week ago we were concerned that the dollar’s surge had left it over-extended from a technical perspective and most of the major pairs, but the yen and Canadian dollar were outside their Bollinger Bands. We cautioned against chasing it, but the dollar’s surge continued. It peaked in the middle of the week and stalled. We look for a consolidative/corrective phase in the coming days that will entail a weaker dollar.
The Dollar Index lost a bit more than 0.5% ahead of the weekend, its largest loss in almost a month, and snapped a three-week advance with a 0.25% loss.. The technical indicators warn of downside risk. Although there it found some support near 96.00, we suspect there is scope for near-term losses toward 95.25-95.50. It finished last month near 94.35, appreciating for the fourth consecutive month.
The euro eked out a minor gain for the week (~0.2%), which required it to rally a percent from the week’s lows near $1.13. The recovery was signaled by a hammer candlestick on Wednesday and confirmed by follow-through buying. The three-day advance that it carries into the new week ended a four-day slide. The test for the euro bears is in the $1.1470-$1.1500 area. In the bigger technical picture, we have suggested a larger head and shoulders pattern has been carved, and the neckline is around $1.15. It is not uncommon for the neckline to be re-tested after a break.
The dollar has trended lower against the yen this month, and although it bounced off JPY110 at the start of the week, it was unable to break a downtrend line near JPY111.55. It was turned back at set to retest JPY110, where a $1.3 bln is struck in an option that expires on Monday (August 20). The technical indicators are mixed. A break of JPY109.80 could spur another big figure decline.
Sterling posted an outside down day on Tuesday and reached almost $1.2620 the next day before consolidating. As it consolidated, it appeared to meet fresh sales near $1.2750. The technical indicators suggest the risk is on the upside, but the $1.2770-$1.2780 may provide a barrier ahead of $1.2835-$1.2850.
Four days last week, the greenback was sold near CAD1.3175, and it took a higher than expected headline CPI (3.0% vs. 2.5%) for the market to give up on it. This pushed it toward the lows of the week near CAD1.3050. The market may have exaggerated the significance of the rise in July CPI. Two of the three core rates were flat, and the third (trim) edged up to 2.1% from 2.0%. The US two-year premium over Canada has been trending lower since reaching an 11-year high a little above 75 bp in late June. It was straddling the 50 bp area ahead of the weekend. Initial support is seen near CAD1.3040 and below there, the lows from earlier this month near CAD1.2960 beckon.
From mid-June through early December, the Australian dollar was confined to a $0.7300-$0.7500 trading range. It broke to the downside and reached almost $0.7200 in the middle of last week. It recovered smartly and made new highs for the week in the waning hours of activity. It finished back in the old range and faces nearby resistance near $0.7360, beyond which lies $0.7400.
The light sweet crude for September delivery fell through a nearly year-long trendline near $65 a barrel, but the break was premature, and prices rebounded smartly after reaching almost $64.40. The bounce fizzled as prices recouped half of the week’s decline (~$66.40). The technical indicators we use do not confirm that a low is in place. The 2.5% drop last week was the largest in almost three months. It has risen in only one week since the end of June. The US threat to sanction countries who continue to buy Iranian oil, including China, may fan speculation that more than the million barrels or so that had been expected will ultimately be taken out by the embargo, Firmer prices also may be consistent with the heavier dollar tone we anticipate. The $67.70 area may be sufficient to hold-off a deeper correction, though provided that prices do not get much above $69.70, our bearish medium-term technical outlook can remain intact.
Despite the widespread belief that US 10-year yield must head higher given the inflation, supply, forecasts for robust growth, and expectations for rising yields abroad, a 3% handle was rejected at the start of the month and the yield has fallen to 2.85%. The yield is bouncing between 2.85% and 2.90%. It is difficult to see yields below 2.80%, and we expect a near-term move higher in yields. Since late May the September note has been rangebound between 119-00 and 120-16 with a few exceptions. After trying three times to break higher, the market seemed to give up ahead of the weekend, with the close on the session lows. A break of 120-00 sends it to 119-16.
More impressive than the S&P 500 0.6% gain last week or that is is the sixth weekly gain in the past seven, was its successful test on support (and previous resistance) at 2800. It rebounded to 2855.6 before the weekend, successfully filling the gap created by the lower opening on August 10. There are two levels that traders will be watching. First, around the recent high was near 2863.5 and the January record high was almost 2873. The weekly technical indicators are not nearly as stretched as they were in January. That said, a break of 2830 now would weaken the technical tone.