(Marc Chandler – Marc to Market)
The dollar fell against all the major currencies last week but pared the losses ahead of the weekend.
The sub-50 EMU flash composite PMI unwound the half-cent gain the euro recorded after the ECB delivered a 50 bp hike to kick off its first tightening since 2011.
Disappointing US economic data (housing, leading economic indicators, the Philadelphia Fed survey, and the flash composite PMI drop into contraction territory weighed on US 10-year yields.
This helped support the yen after the BOJ kept its policy stance unchanged. The benchmark US yield fell by more than 14 bp last week after shedding 15 bp the previous week and posted its lowest weekly close since the end of May. Note that the 30-day correlation between the change in WTI and US 10-year yields is at its highest since January (~0.35). For the first time since April, the September WTI settled the week below $100.
We had anticipated the dollar’s pullback ahead of the ECB meeting. However, that modest correction appears to have run its course, and we suspect the greenback may enjoy a firmer bias ahead of the FOMC meeting. That said, the risk is for the greenback to trade lower as soon as the post-Fed press conference. After the 75 bp hike next week, the market favors a 50 bp hike in September. The day after the FOMC meeting, the US reports its first look at Q2 GDP. The Atlanta Fed GDPNOW warns of the second consecutive quarterly contraction, while economists, for the most part, are looking for a small expansion.
Dollar Index: The Dollar Index pulled back after visiting a 20-year high near 109.30 on July 14. It found support around the (50%) retracement of the latest leg up that began in late June around 106.50, which was also near the 20-day moving average. It frayed after the PMI surprise. A break of 105.95 would be significant from a technical perspective. The close below the 20-day moving average (~106.55) was the first since mid-June. The momentum indicators are trending lower, and the five-day moving average may push below the 20-day moving average for the first time in over a month.
Euro: The euro recovered to about $1.0275 last week after falling to a 20-year low near $0.9950 in the previous week. It met the (50%) retracement objective of the loss since the late June high near $1.0615. The next retracement (61.8%) is around $1.0360. The poor eurozone PMI spurred euro sales to about $1.0130. A break of the $1.0080-$1.0115 band would confirm the end of the upside correction and signal a return toward the lows. However, the momentum indicators are constructive. Even with the shockingly weak US PMI, the euro was unable to take out the previous day’s high or even close higher on the day.
Japanese Yen: The key driver of the exchange rate remains US yields. The 23 bp drop in the US 10-year yield over the past two sessions saw the dollar fall from almost JPY139.90 to about JPY135.55. The greenback closed below the 20-day moving average (~JPY138.80) for the first time since the end of May. The dollar approached the (50%) retracement of the advance that began on June 16 near JPY131.50. The momentum indicators have turned down, but in any event, they had peaked in early June. Foreign investors appear to have bought a record amount of Japanese bonds in the first half of July (~$27.6 bln). Part of this may be short-covering after speculation that the BOJ would tweak policy.
British Pound: Sterling rose by about 1.3% to snap a three-week slide. It is only the second weekly advance since the end of May. It reflected the broad pullback in the dollar, but at the end of last week, the UK’s flash composite held up better than the eurozone or the US at 52.8. Indeed, it was even better than expected (52.4). Also, the UK reported its first increase in retail sales excluding gasoline since last October. Still, most of sterling’s gains took place in the first two sessions of last week. It rose from $1.1855 to almost $1.20 on a closing basis by Tuesday, and it did not finish the week far from that. The momentum indicators are moving higher, but sterling is encountering resistance on a closing basis around the 20-day moving average that will begin the new week near $1.2010. On an intraday basis, sterling reached almost $1.2065 ahead of the weekend, its highest level since July 5. A break above there would target $1.2115 and then maybe $1.22. A base has formed at around $1.19.
Canadian Dollar: The Canadian dollar rose by about 1.25% against the US dollar last week. It was the weakest of the majors, edging out sterling for the title. It snapped a three-week slide and recouped it all in full, with the greenback finishing the week below CAD1.2890. In fact, on the back of the poor US flash PMI, the US dollar fell to the lows of the month near CAD1.2825. The CAD1.2785-CAD1.2810 area may offer solid support. The momentum indicators are trending lower, and neither the MACD nor the Slow Stochastic confirmed the new US dollar high set on July 14. The five-day moving average has fallen below the 20-day moving average for the first time since mid-June. However, the pull of risk appetites should not be under-estimated. Despite the poor US PMI (and strong Canadian May retail sales–2.2% vs. 1.6% expected), the greenback still closed the pre-weekend session higher as US equities fell.
Australian Dollar: The Aussie gained 2.2% last week. It is the biggest weekly advance of the year. However, it stalled near the (50%) retracement objective of the drop from the June 3 high (~$0.7285) found around $0.6980. The next retracement (61.8%) is close to $0.7055. The momentum indicators are moving higher. After all, the Australian dollar has risen in nine of the past 12 sessions, and the 5-day moving average has crossed over the 20-day moving average for the first time since mid-June. And for the past six sessions, it has taken out the previous day’s high. In addition to the Aussie stalling at a key chart area, the other note of caution comes from the Bollinger Band, which came in near $0.6970 ahead of the weekend.
Mexican Peso: The peso struggled a bit against the dollar until the end of the week. Mexico reported slightly higher than expected mid-July CPI, which seemed to underscore expectations for a 75 bp hike by Banxico meets on August 11. The exchange rate often seems more sensitive to the risk environment (S&P 500) than interest rates (US yields), but the pre-weekend gain peso gain of 0.5% despite the 1.3% decline in the S&P 500 was notable. Still, the gain left the peso virtually flat on the week, and the greenback held support just below MXN20.50. The dollar has not closed below the 20-day moving average this month. It is near MXN20.47. The momentum indicators are falling, but if the dollar holds support, the Slow Stochastic could turn next week. Mexico reports June trade and employment data, but the highlight on July 29 is Q2 GDP. Its growth is outpacing the US this year. Mexico’s economy expanded by 1.0% quarter-over-quarter in Q1 and is expected to have grown by 0.8% in Q2.
Chinese Yuan: Last week, the dollar was virtually flat against the Chinese yuan, slipping less than 0.1%. Since the middle of June, it has been alternating between gains and losses. Quietly, the dollar has strung together the longest monthly advance against the yuan since 2018. The dollar has gained roughly 0.7% against the yuan this month, which would be the fifth consecutive monthly appreciation going into the last week of the month. The dollar traded above CNY6.77 for the first time since May. China’s property quagmire is receiving new attention domestically and seemingly by international investors. The CSI 300 was the only major equity market to have fallen (~ -0.25%) last week. Ahead of the weekend, the NASDAQ Golden Dragon Index ( cap-weighted index of companies with common shares in the US but who does most of the business in China) fell 4.5%, ensuring a loss for the fourth consecutive week. Recall it had rallied by a third between mid-May and the end of June. Over these past four weeks, it has fallen by almost 12%. Meanwhile, the US 10-year yield has nearly converged with China’s. The PRC was at a 65 bp discount in mid-June after offering a 100 bp premium as recently as early March.