Is the Dollar Slump Just Beginning or is this the Tail End?
The key question in the foreign exchange market is if the disappointing jobs data confirms and solidifies the dollar’s downtrend that has emerged over the last couple of weeks. For many, the answer seems to depend on if the downside surprise was sufficient to delay the Fed’s plans to reduce its bond-buying.
The Fed has not provided a timeline, but it seems that tapering this month is too soon, given the Fed’s leadership comments, and was never really in the cards. We suspect that among top-of-mind issues at the Fed is to avoid a taper tantrum, though better it begins with 10-year yields around 1.30% than 1.70% where they were earlier this year. Chair Powell has repeatedly committed the Fed to give the markets ample notice. The July FOMC minutes do not count as ample notice. A formal statement about tapering before the end of the year must work its way into the FOMC statement. That makes tapering a November or December event. Although it may make a difference to some market segments, it may be a difference without a distinction for many, if not most, businesses and investors.
In the medium-term, we remain concerned that the twin deficits the US chronically records require a higher interest rates premium or the dollar bears the burden of the adjustment. From a technical perspective, we can understand the dollar’s strength as retracing part of the sell-off that began in late March 2020. However, in the long-term, we still see the dollar having ended its third significant bull market since the end of Bretton Woods.
In the short term, the two-week dollar sell-off looks overdone. And with that bias, we review the technical condition of the various currencies.
Dollar Index: The Dollar Index gave back August’s gains with a dip below 92.00 in response to the disappointing employment report. The late July/early August lows were set around 91.80. The year’s high was recorded on August 20, a little below 93.75. Although the downside momentum ahead of the weekend was not sustained, the 10th decline in 11 sessions may be more indicative. The MACD is at levels not seen since the second half of June, and the Slow Stochastic is back to May levels in oversold territory. The two-week drop overshot the (38.2%) retracement objective of the rally since late May around 92.15, corresponding to the lower Bollinger Band. The next retracement target (50%) is by 91.65.
Euro: After the US jobs report, the euro popped to almost $1.1910, matching the July 30 high to the tick, which itself was the highest since late June. The $1.1900 area also corresponds to the (38.2%) retracement of the euro’s decline since that late May high near $1.2265. The euro has advanced 10 of the past 11 sessions. It closed above the upper Bollinger Band (~$1.1875) for the past two sessions. The next retracement (50%) is by $1.1965, and the 200-day moving average is around the psychologically important $1.20-level. The MACD is near its best level since mid-June but well below the highs in late May. The Slow Stochastic has arched into overbought territory for the first time since late May. In this run, the euro has not closed below the five-day moving average. That may be the first sign that the momentum has faded. It begins the new week near $1.1840.
Japanese Yen: The US 10-year yield rose four basis points after the US jobs report, but in an unusual, though of course, not unprecedented way, it offered the dollar little support against the yen. The greenback returned to but held the week’s low set on Tuesday slightly below JPY109.60. Still, it took out and closed below last month’s uptrend line (JPY109.70). Although Japanese equities rallied on news that Prime Minister Suga would step down, the foreign exchange market was blase. The yen’s strength was a reflection, it seemed, of the broad decline of the dollar. The MACD has flatlined for weeks, and the Slow Stochastic is gently rising. Initial support is near JPY109.40 and then JPY109, which the dollar has not closed below in nearly four months.
British Pound: Sterling has not enjoyed the persistence of the euro’s rally, but seven gains in the past ten sessions lifted it to three-week highs near $1.3875. Ahead of the weekend, sterling settled above the down trendline drawn off the early June, late July, and early August high that came in around $1.3835. It closed above the 200-day moving average, and the five-day moving average cross above the 20-day. The momentum indicators are trending higher and are not over-extended. The upper Bollinger Band will begin the new week near $1.3915. The next important resistance area is $1.40. Sterling has not been above for almost three months.
Canadian Dollar: The Canadian dollar advanced for the second consecutive week, but it lagged behind the other dollar-bloc currencies. Indeed, the Australian and New Zealand dollars gained more than twice the Canadian dollar’s 0.75% advance. The US dollar briefly traded below CAD1.25 after the employment report, for the first time since August 6. The Bank of Canada meets next week, but with its own projection warning that the unexpected contraction in Q2 carried over into the start of Q3, taking fresh tapering steps seems unlikely. At the same time, it is premature to postpone the timeframe that the output gap will be closed (around the middle of next year). Polls suggest that the election has gotten tighter, raising the political uncertainty. The CAD1.2480 area corresponds to the shelf created in the first part of August and the (50%) retracement objective of the greenback’s rally from the multi-year low on June 1 (~CAD1.2010) to the spike high around CAD1.2950 on August 20. The next retracement (61.8%) is close to CAD1.2365. The MACD was trading lower and did not confirm the August 20 high, and the Slow Stochastic is leveling off after falling to the August lows. The implied yield of the December 2022 BA futures rose fell to 99 bp at the end of last week, the lowest rate since mid-June.
Australian Dollar: The Aussie’s two-week rally has been impressive. It rose 2.5% in the last full week of August and another 1.9% in the past week. Only one major currency has outperformed it, the New Zealand dollar, which has gained 4.65% over the past two weeks, and the Norwegian krone is a close third with a 4.3% gain. The Aussie’s rally in eight of the past 10 sessions lifted it to almost $0.7480, the best level since mid-July. At $0.7450, around where the Australian dollar settled the week, it met the (38.2%) retracement objective of the decline from the year’s high set late February a little above $0.8000. The main catalysts were arguably a record trade surplus, the elevated risk appetites, and the broad US dollar weakness. The $0.7500 area corresponds to some chart congestion from July and the (50%) retracement of the losses since the May 10 high, a little shy of $0.7900. The momentum indicators are elevated and look poised to enter over-extended territory. The five-day moving average crossed above the 20-day moving average for the first time in three months. A break of the $0.7380 area may be the first confirmation that a high may be in place.
Mexican Peso: The six-day dollar decline took it to almost MXN19.85 before the weekend, the lowest level since mid-August. The 1.5% decline was the largest weekly loss in Q3. The macro developments were not particularly supportive of the peso. The temporary nature of the price pressures from the central bank’s point of view reinforces that sense that after hiking in July and August, Banxico will standpat at its next meeting (September 30). The PMI softened. Domestic auto sales eased. Consumer confidence fell. The exception was worker remittances, which reached a new record high of $4.5 bln in July. The momentum indicators are moving lower but not are signaling oversold. Support is seen in the MXN19.80 area, which the greenback has not traded below for two months. Initial resistance is seen in the MXN20.00-MXN20.02 area.
Chinese Yuan: The yuan has risen for six consecutive sessions against the dollar. The greenback has been sold through the bottom end of the CNY6.45-CNY6.50 area that has confined it for the most part since mid-June. Still, the dollar finished back within it. Against the offshore yuan (CNH), the dollar settled well below the old floor (around CNH6.4350). The economic news has not been helpful. Both the “official” and Caixin composite PMIs fell below the 50 boom/bust level. The Chinese premium over the US on 10-year rates fell to nearly 150 bp ahead of the weekend, the lowest weekly close since the end of May. China’s apparent “cultural revolution” continues to widen. The Golden Dragon China Index of Chinese companies that have public shares in the US rallied for the second consecutive week for the first time since May. The index has risen by about 16% over the past two weeks after losing about 32% in an eight-week head-long plunge. We suspect that Beijing’s tolerance of a strengthening yuan is limited. The economy is soft and CPI, as we will learn next week, remain tame. Also, while banks seem to have greater difficulty on Mondays projecting the PBOC dollar fix, it will be carefully watched in the coming days for a sign of official discomfort.
Bannockburn Global Forex