The dollar was struggling to sustain upticks when the market anticipated a million new jobs were created in April. It was sold off in disappointment that only a quarter of the expected jobs materialized. Despite the inexplicable miss, there is little doubt that the US economy is, in fact, booming. A large dose of fiscal stimulus, ongoing monetary stimulus, a relatively successful vaccine rollout, the re-opening of the economy, pent-up demand, the wealth effect of rising equities and home prices (and crypto) make for powerful fuel for the world’s largest economy.
We suggest that is the signal, and the disappointing job report is noise that is truly only worrisome if it is repeated. Nor should the dollar’s weakness be understood to portend a weak economy. On the contrary, the record trade deficit and the 18.51 vehicles sold (seasonally adjusted pace), which was the fifth-best in history, speaks to the relative and absolute strength of the US economy. Of course, no one thinks this kind of economic strength is sustainable, but the employment report does not mark its death knell.
Here is how we see the technical condition of the different currency pairs.
Dollar Index: The Dollar Index was stalling near 91.40 at the end of April and the start of May. It had been pushed to around 90.85 before the employment report, which saw it drop to around 90.20, below its lower Bollinger Band. The Dollar Index finished the week below the trendline connecting January (~89.20) and February (~89.70) lows that will start the new week near 90.30. A convincing break target points to new lows for the year. The MACD is at the year’s lows and still falling. The Slow Stochastic is moving laterally in its trough in oversold territory. Near mid-week, it had looked like the five-day moving average could cross above the 20-day moving average, but the losses of the last two sessions have seen pulled the shorter average back down.
Euro: In the middle of last week, the euro had been fallen to a 2.5-week low near $1.1985, but it rebounded quickly, and before the US employment miss, it was trading around $1.2075, its best level for the week. The disappointing data saw the euro kick up through the $1.2150- high set in late April. The $1.22-are may off a soft barrier, but the late February high was set closer to $1.2245. Initial support is likely to be seen around the old $1.2075 area. The MACD is turning higher again after pulling back in recent days, while the Slow Stochastic has trended lower to the middle of the range but has yet to turn higher. In the big picture, we suspect that the Q1 decline was a correction to the dramatic rally in the last two months of 2020, and that correction is over. We had initially thought there could be one more push lower. The implication is that businesses and investors should be prepared for the euro to rechallenge the year’s high (~$1.2350).
Japanese Yen: The softer US rates stalled the greenback’s advance near JPY109.70, while Japanese markets were closed at the start of last week, but even when the holiday ended, the appetites for the dollar did not return. The drop in yields that accompanied the disappointing employment report saw the dollar fall to almost JPY108.30, the (61.8%) retracement target of the rally off the late April low near JPY107.50. That rally lifted the MACD but without much enthusiasm, and it may be rolling back over. The Slow Stochastic had a stronger upswing and but appears to have stalled. The US 10-year yield recovered to back toward session highs (~1.58%) after initially falling below 1.47%, its lowest level in two months, but the greenback stabilized but did not recover much.
British Pound: A Bank of England that announced it would slow its weekly bond purchases, a strong vote for the Tories in local elections, and the poor US job report lifted sterling to the upper end of its recent range ($1.40) ahead of the weekend. Despite several attempts, it has not closed above $1.40 since late February. A convincing move above $1.4020, the (61.8%) retracement objective of the decline since the three-year high was recorded on February 24 near $1.4235, suggests another run at the highs. However, the momentum indicators are not generating any robust signal, and in any case, are not near extreme levels. The lower end other recent range is around $1.38, but initial support may be in the $1.3030-$1.3050 area.
Canadian Dollar: The US dollar fell for the fifth consecutive week against the Canadian dollar and traded at levels not seen since 2017. Although Canada was too disappointed with the April jobs report, the greenback made a new low afterward, near CAD1.2125. The MACD is still falling fast, and the Slow Stochastic continues to go horizontal in over-extended territory. In the last week of April, the US dollar closed below the lower Bollinger Band consistently. In the first part of this past week, it was back within it before again flirting with it in the last couple of sessions. It begins the new week near CAD1.2130. There seems to be little chart support ahead of CAD1.2000. The US dollar’s pre-weekend high was just shy of CAD1.2200. Above there, old support in the CAD1.2265-CAD1.2275 area should now offer resistance.
Australian Dollar: Three days of solid gains, including the 0.80% gain ahead the weekend, allowed the Australian dollar to close above $0.7800 for the first time since late February. Last week’s 1.7% rise was the most since the US election last November. Rising commodity and industrial metal prices were also widely factors. The Aussie shrugged off news that the March trade surplus was a third smaller than expected, and there was no signal from the RBA, which many in the market expect to signal the end to its yield curve control in July. Despite upward revisions to its growth and inflation forecasts, the RBA does not anticipate raising rates before 2024. As a result, the momentum indicators look poised to turn up, and technically, there looks little to prevent a re-test on the $0.8000 area seen briefly at the end of February. That said, the upper Bollinger Band is found near $0.7840.
Mexican Peso: The dollar recorded an outside down day against the peso the day before the employment report. It has fallen in five of the past six weeks. Last week’s roughly 1.4% decline took place in the last two sessions, which may have been sufficient to turn the MACD down. The Slow Stochastic is poised to turn lower. Mexico’s firm April CPI reading ahead of the weekend (6.08%) solidifies ideas that the 25 bp rate in February was the last in the cycle. Banxico meets next week and is now widely expected to remain on hold. Brazil’s Selic rate began the year at 2.0%, half of Mexico’s target. By the end of next month, it will 25 bp on top of Mexico. The dollar fell to about MXN19.86 ahead of the weekend, but the recovery in US yields seemed to have lent the greenback some support. The MXN20.00 area may offer a nearby cap. The three-month lows set in April were near MXN19.78, and the low for the year, seen in January, was by MXN19.55.
Chinese Yuan: The May Day holiday in China made for a two-session week for the onshore yuan. The dollar fell against it both days, and nearly 0.5% loss before the weekend was the largest since January. It was the fifth consecutive week the dollar has fallen against the yuan, which is the longest losing streak since last August-September when it fell for eight weeks. China reported a larger than expected jump in its April trade surplus and a slightly smaller than expected increase in reserves ahead of the weekend. The vast majority of China’s trade is conducted in dollars. Officials appear to be accepting a stronger yuan, and its slightly less than 1.5% gain year-to-date makes it the fifth-best among emerging market currencies. Because the yuan is so closely managed, it is difficult to know how patient Beijing will be to a dollar depreciating against it. If the US is going to get an advantage by doing so, Chinese officials may want to moderate it or share in it versus the rest of the world. The gap between the PBOC fix and market expectations (Bloomberg survey) was wider than usual under the new, more transparent regime, raising questions about whether a subtle protest was issued. Stay tuned.
Bannockburn Global Forex