Momentum indicators warn of further USD weakness, will sellers emerge ahead of the FOMC?


Andrey Znamenskyi/iStock by way of Getty Images

The greenback fell in opposition to all the main currencies final week however pared the losses ahead of the weekend. The sub-50 EMU flash composite PMI unwound the half-cent acquire the euro recorded after the ECB delivered a 50 bp hike to kick off its first tightening since 2011.

Disappointing US financial knowledge (housing, main financial indicators, the Philadelphia Fed survey, and the flash composite PMI drop into contraction territory) weighed on US 10-year yields. This helped assist the yen after the BOJ saved its coverage stance unchanged. The benchmark US yield fell by greater than 14 bp final week after shedding 15 bp the earlier week, and posted its lowest weekly shut since the finish 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 under $100.

We had anticipated the greenback’s pullback ahead of the ECB assembly. However, that modest correction seems to have run its course, and we suspect the dollar could take pleasure in a firmer bias ahead of the FOMC assembly. That stated, the danger is for the dollar to trade decrease as quickly as the post-Fed press convention. After the 75 bp hike subsequent week, the market favors a 50 bp hike in September. The day after the FOMC assembly, the US stories its first take a look at Q2 GDP. The Atlanta Fed GDPNOW warns of the second consecutive quarterly contraction, whereas economists, for the most half, are on the lookout for a small enlargement.

Dollar Index: The Dollar Index pulled again after visiting a 20-year excessive close to 109.30 on July 14. It discovered assist round the (50%) retracement of the newest leg up that started in late June round 106.50, which was additionally close to the 20-day shifting common. It frayed after the PMI shock. A break of 105.95 can be important from a technical perspective. The shut under the 20-day shifting common (~106.55) was the first since mid-June. The momentum indicators are trending decrease, and the five-day shifting common could push under the 20-day shifting common for the first time in over a month.

Euro: The euro recovered to about $1.0275 final week after falling to a 20-year low close to $0.9950 in the earlier week. It met the (50%) retracement goal of the loss since the late June excessive close to $1.0615. The subsequent retracement (61.8%) is round $1.0360. The poor eurozone PMI spurred euro gross sales to about $1.0130. A break of the $1.0080-1.0115 band would affirm the finish of the upside correction and sign a return towards the lows. However, the momentum indicators are constructive. Even with the shockingly weak US PMI, the euro was unable to take out the earlier day’s excessive and even shut increased on the day.

Japanese Yen: The key driver of the alternate charge stays US yields. The 23 bp drop in the US 10-year yield over the previous two periods noticed the greenback fall from virtually JPY139.90 to about JPY135.55. The dollar closed under the 20-day shifting common (~JPY138.80) for the first time since the finish of May. The greenback approached the (50%) retracement of the advance that started on June 16 close to JPY131.50. The momentum indicators have turned down, however in any occasion, they’d peaked in early June. Foreign buyers seem to have purchased a document quantity of Japanese bonds in the first half of July (~$27.6 bln). Part of this can be short-covering after hypothesis that the BOJ would tweak coverage.

British Pound: Sterling rose by about 1.3% to snap a three-week slide. It is barely the second weekly advance since the finish of May. It mirrored the broad pullback in the greenback, however at the finish of final week, the UK’s flash composite held up higher than the eurozone or the US at 52.8. Indeed, it was even higher than anticipated (52.4). Also, the UK reported its first enhance in retail gross sales excluding gasoline since final October. Still, most of sterling’s positive factors befell in the first two periods of final week. It rose from $1.1855 to virtually $1.20 on a closing foundation by Tuesday, and it didn’t end the week removed from that. The momentum indicators are shifting increased, however sterling is encountering resistance on a closing foundation round the 20-day shifting common that will start the new week close to $1.2010. On an intraday foundation, sterling reached virtually $1.2065 ahead of the weekend, its highest degree since July 5. A break above there would goal $1.2115 after which possibly $1.22. A base has fashioned at round $1.19.

Canadian Dollar: The Canadian greenback rose by about 1.25% in opposition to the US greenback final week. It was the weakest of the majors, edging out sterling for the title. It snapped a three-week slide and recouped all of it in full, with the dollar ending the week under CAD1.2890. In reality, on the again of the poor US flash PMI, the US greenback fell to the lows of the month close to CAD1.2825. The CAD1.2785-1.2810 space could provide stable assist. The momentum indicators are trending decrease, and neither the MACD nor the Slow Stochastic confirmed the new US greenback excessive set on July 14. The five-day shifting common has fallen under the 20-day shifting common for the first time since mid-June. However, the pull of danger appetites shouldn’t be underestimated. Despite the poor US PMI (and powerful Canadian May retail gross sales – 2.2% vs. 1.6% anticipated), the dollar nonetheless closed the pre-weekend session increased as US equities fell.

Australian Dollar: The Aussie gained 2.2% final week. It is the greatest weekly advance of the yr. However, it stalled close to the (50%) retracement goal of the drop from the June 3 excessive (~$0.7285) discovered round $0.6980. The subsequent retracement (61.8%) is near $0.7055. The momentum indicators are shifting increased. After all, the Australian greenback has risen in 9 of the previous 12 periods, and the 5-day shifting common has crossed over the 20-day shifting common for the first time since mid-June. And for the previous six periods, it has taken out the earlier day’s excessive. In addition to the Aussie stalling at a key chart space, the different word of warning comes from the Bollinger Band, which got here in close to $0.6970 ahead of the weekend.

Mexican Peso: The peso struggled a bit in opposition to the greenback till the finish of the week. Mexico reported slightly-higher-than-expected mid-July CPI, which appeared to underscore expectations for a 75 bp hike by Banxico which meets on August 11. The alternate charge typically appears extra delicate to the danger surroundings (S&P 500) than rates of interest (US yields), however the pre-weekend peso acquire of 0.5% regardless of the 1.3% decline in the S&P 500 was notable. Still, the acquire left the peso just about flat on the week, and the dollar held assist slightly below MXN20.50. The greenback has not closed under the 20-day shifting common this month. It is close to MXN20.47. The momentum indicators are falling, but when the greenback holds assist, the Slow Stochastic might flip subsequent week. Mexico stories June trade and employment knowledge, however the spotlight on July 29 is Q2 GDP. Its development is outpacing the US this yr. Mexico’s financial system expanded by 1.0% quarter-over-quarter in Q1 and is predicted to have grown by 0.8% in Q2.

Chinese Yuan: Last week, the greenback was just about flat in opposition to the Chinese yuan, slipping lower than 0.1%. Since the center of June, it has been alternating between positive factors and losses. Quietly, the greenback has strung collectively the longest month-to-month advance in opposition to the yuan since 2018. The greenback has gained roughly 0.7% in opposition to the yuan this month, which might be the fifth consecutive month-to-month appreciation going into the final week of the month. The greenback traded above CNY6.77 for the first time since May. China’s property quagmire is receiving new consideration domestically and seemingly by worldwide buyers. The CSI 300 was the solely main equity market to have fallen (~-0.25%) final week. Ahead of the weekend, the NASDAQ Golden Dragon Index (cap-weighted index of corporations with widespread shares in the US however which do most of their enterprise in China) fell 4.5%, making certain a loss for the fourth consecutive week. Recall, it had rallied by a 3rd between mid-May and the finish of June. Over these previous 4 weeks, it has fallen by virtually 12%. Meanwhile, the US 10-year yield has practically converged with China’s. The PRC was at a 65 bp low cost in mid-June after providing a 100 bp premium as lately as early March.

Original Post

Editor’s Note: The abstract bullets for this text have been chosen by Seeking Alpha editors.

Source link


Please enter your comment!
Please enter your name here