The dollar was beaten up in July. It fell against nearly all the world’s currencies except for a handful of emerging market currencies, including the Argentine peso and Turkish lira. It did not just fall against the major currencies, but it fell hard. The euro’s 5.0% gain in July was its best monthly performance since September 2010. Sterling’s nearly 5.6% gain was the most since May 2009. Gold, often seen as the un-dollar, surged by over 10% to a record high. It had rallied almost 12.5% in the previous three months.
After making new lows against several currencies ahead of the weekend, the dollar bounced back smartly. It seems one of two scenarios will be correct. The first is that the greenback’s recovery was noise having to do with position-adjusting at the end of the month, including hedges by asset managers. The second is that the reversal signals a technical correction, which means a stronger dollar is likely in the coming days. We are inclined to the latter but are concerned that the US jobs market recovery may have slowed sharply. At the same time, Congress and the White House cannot agree on the fiscal path forward, going over a fiscal cliff that will spur a large fall in income, with potential knock-on effects on consumption starting now unless there is a quick agreement. Meanwhile, the virus is killing a record number of Americans and has seen flare-ups in Europe (e.g., Spain, France, and Germany) and Asia (e.g., Hong Kong, and Japan) where it had previously been suppressed.
Dollar Index: The Dollar Index rose a mere five sessions in July and finished the month with a 4.5% loss, its largest in a decade. The six-week losing streak is the longest since last 2017/early 2018. In a rare development, it gapped lower ahead of the weekend and recovered to close the gap and settle near session highs. The MACD is still moving lower, but the Slow Stochastic did not confirm the pre-weekend low and is curling higher. If there is follow-through buying, as we suspect, s scope to 94.00-94.50 area or so, and an outside chance toward 95.00. To help keep this near-term outlook in perspective, if our understanding that the third large dollar rally since the end of Bretton Woods is over, and recognizing trends in the foreign exchange market can last 5-10 years, a medium-term move toward 85.00 (83.00-87.00) seems conservative. The last cyclical low for the Dollar Index in 2008 was near 70.70. It is possible a large double top is in place (late 2016 and March 2020 ~103.00) that would project toward 72.00.
Euro: After briefly poking above $1.19 for the first time since May 2018, the euro reversed lower ahead of the weekend. A potential bearish shooting star candlestick was left in its wake. The MACD and the Slow Stochastic appear poised to turn lower. The $1.1700 area looks like a reasonable target in the coming days, and a break of that could spur another half-cent decline before finding support. It is interesting to note that the euro has averaged roughly $1.20 since its birth. Recall that speculators have been net long in the futures market since mid-March and risk management, given the proximity of $1.20 an objective of many for the end of the year, some position adjustment should not be surprising.
Japanese Yen: The dollar staged a key upside reversal against the yen ahead of the weekend by first falling to its lowest level since March 12 (~JPY104.00) before rebounding smartly to a four-day high a little above JPY105.00. Although the JPY106 area marks the bottom of the old range, it may take a move above JPY106.60 may suggest potential back to the top of the previous range that is found around JPY108.00. The momentum indicators are likely to turn up next week.
Britsh Pound: Trend followers got exciting in May-June when sterling went on a ten-day tear to rally almost a nickel from $1.2260. Now it will begin August after snapped an 11-day advance, during which time it has appreciated from about $1.2550 to $1.3170. Cross-rate gains helped it resist the dollar’s bounce ahead of the weekend. The euro fell to a three-week low near GBP0.8980. As one would imagine, the momentum indicators are overextended for sterling but are still moving higher. Solid support is likely seen near $1.2980-$1.3000.
Canadian Dollar: The US dollar forged a shelf in late July ahead of the June low near CAD1.3315. Initial resistance is seen by CAD1.3460, and above there, previous support around CAD1.3500-CAD1.3525 should now become resistance. The MACD and Slow Stochastic appear poised to turn higher from oversold territory. The US dollar’s loss in July (~1%) extends the falling streak to the fourth month, which is the longest in six years.
Australian Dollar: After several attempts to push the Australian dollar above $0.7200, the bulls succeeded ahead of the weekend, but it exhausted them, and the Aussie was sold back to around $0.7135 before finding support. Unfortunately, the momentum indicators are not generating a useful signal. The Aussie sales snapped a four-day advance after rising four sessions the previous week as well. It begins August with a six-week rally, its longest in about two and a half years. The kind of correction that we suspect likely extends toward the $0.7000-$0.7050 area.
Mexican Peso: The dollar broke below MXN22.00, but there was not much follow-through selling. It remained a couple percentage points above June’s low near MXN21.45. After falling to start last week, the dollar traded higher for the previous four sessions, and the nearly 1.2% gain before the weekend was left it virtually unchanged for the week. Additional dollar gains loom, and the momentum indicators look likely to turn higher too. MXN23.00-MXN23.30 area offers the next important resistance.
Chinese Yuan: The greenback finished July at its lows closing level against the yuan in four and a half months (~CNY6.9750). The 0.4% loss ahead of the weekend was the most in three weeks. However, rather than signal the beginning of a move, it likes signals a pause. The dollar has fallen by about 3% against the yuan over the past two months. It is the fourth weekly loss in the past five. It is challenging to know the PBOC’s intentions outside of stability against the dollar, but an upside correction for the greenback may make it easier for it to guide it back above CNY7.0.
Gold: The yellow metal made a marginal new record high ahead of the weekend, but it remains firmly within the consolidative range it chopped around in the second half of last week. It seems to be nesting before making a genuine assault on the $2000-level. The MACD and Slow Stochastics do not rule out a new marginal high, but they appear to be set to turn lower shortly from overbought levels. A pullback could spur a retest on last week’s low (~$1907).
Oil: The September WTI contract broke down last week and set the July low near $38.70 and was straddling the $40 a barrel level ahead of the weekend. For the first time in nearly three months, it settled two consecutive sessions below the 20-day moving average (~$40.90). The MACD has been trending lower for more than a month, and the Slow Stochastic continued to trend lower after turning down the previous week. A break of $38 would weaken the technical tone and warn of the risk of a return to $35, which is a more important technical area.
US Rates: The US 5-year yield fell to a new record low ahead of the weekend under 21 bp. July is the seventh consecutive month the yield has fallen. The US 2-year yield has fallen for eight straight months and came within a basis point above its record low (10.3 bp) before the weekend. At a little above 53 bp, the 10-year note yield fell almost six basis points to post a record closing low. The September 10-year futures contract set a life of contract high at the end of last week. No coupons are being sold in the week ahead. The key maybe next week’s jobs data.
S&P 500: US stocks rallied into the close of trading for the month of July, and the S&P 500 gained about 0.75% before the weekend to finish its fourth consecutive monthly gain (~5.5%). It ended July near the month’s high and above the June high. The gap from February has been entered, but it is not filled until closer to 3328. The MACDs have flatlined, and the Slow Stochastics appear to be turning up after just correcting the overbought condition. The price action suggests participants are still buying modest pullbacks. The S&P 500’s gain in July took it back positive for the year (~1.25%). By contrast, Europe’s Dow Jones Stoxx 600 fell 1.1% in July and is down 14.3% year to date.
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