The greenback has had a difficult week. It fell against most currencies. Our GDP-weighted currency index fell three weeks, ending an eight-week advance. The combination of a seemingly more hawkish Federal Reserve and a balanced stance around the expiration of futures and options had pushed the greenback considerably higher and stretched technical conditions. It had traded three standard deviations from its 20-day moving average, for example, against several major currencies.

The dollar’s pullback should come as no surprise, although several major banks appeared to throw in the towel on their bearish narratives. Nonetheless, our underlying concern remains intact: given large trade and budget deficits, the United States must offer higher interest rates or accept a weaker dollar, and more likely, a combination of the two. Additionally, we recognize that the US economy may reach its maximum rate of expansion here in the second quarter and that pricing pressures should also begin to ease.

In the press conference following the FOMC meeting, President Powell cited two concrete examples of awards. The first was the wood, which, he noted, had risen sharply but had started to pull away. Lumber prices have almost halved since peaking in early May. The second example concerned the prices of used vehicles. They rose 10% in April and more than 7% in May and accounted for about a third of the rise in the CPI. Early industry reports suggest the wholesale market may have peaked and retail is expected to follow behind.

Dollar index: After rallying at 92.40 the day after the FOMC meeting, the Dollar Index fell to near 91.50, at the intersection of the 200-day moving average, in the middle of last week. Subsequent increases stalled ahead of 92.00. He finished the week near its lows. Further short-term losses are likely. It is possible to test zone 91.00-91.15. The Slow Stochastic has moved out of overbought territory and the MACD looks set to do the same over the next few sessions. A break out of the 90.60 area would deal a blow to the seemingly new bullish sentiment.

Euro: The euro appreciated in four of the five sessions last week for a net gain of around 1%. Although it closed near the highs of the week, the market was hesitant to test the $ 1.2000 area, where the 200-day moving average is and (38.2%) of the June drop. A move above this level would likely signal a move into the $ 1.2050 to $ 1.2100 band. The euro settled around $ 1.2125 the day before the FOMC meeting ended (June 16). Momentum indicators are on the rise. A soft preliminary figure for the EMU CPI in June, followed by a firm report on employment in the United States (estimates appear to be hovering around 700k of increase in nonfarm payrolls) could constitute a macro challenge to the constructive technical outlook of the single currency.

Japanese Yen: The dollar hit a new high for the year against the yen, slightly above JPY111.10. However, it failed to settle above JPY111.00 and spent the entire pre-weekend session below. In the last 30 and 60 days, the correlation between the exchange rate and the US 10-year rate is stronger than the correlation with the 2-year rate. The 10-year US Treasury yield is struggling to climb well above 1.50%. Some observers still attribute the weak yield to Fed purchases but point out that the yield exceeded 1.77% at the end of the first quarter. Since the end of April, the dollar has been trending higher and this trendline starts next week near 109.75 JPY.

Pound sterling: Although all major currencies except the yen appreciated against the dollar last week, the pound has underperformed, still rising an impressive 0.75%. In doing so, the British pound was down 2.7% over three weeks. After finding support slightly below $ 1.38 earlier in the week, it encountered sellers around $ 1.40 in the middle of its week and then fell back to $ 1.3900. The Bank of England may have seemed dovish, but the implied yield on the June 2022 sterling futures contract (three-month term deposit, like Eurodollar futures) has eased by two basis points (~ 32.5 bps), still above the low of the month (26 bps). This suggests that the market is still anticipating a rise over the next year or so. The Slow Stochastic has risen, but the MACD is lagging behind. A move above $ 1.4020 could trigger a test on the $ 1.4100 to $ 1.4150 area. On the other hand, a breakout of $ 1.3870 signals that the bears have the upper hand.

Canadian dollar: The US dollar extended its rally after failing to break CAD 1.20 earlier this month, hitting near CAD 1.2490 earlier in the week. It reversed lower and fell to around CAD 1.2250 mid-week before consolidating. He still seems vulnerable. A break out of the CAD1.2250 area, which is the retracement (50%) of June’s gains, signals a move towards CAD1.2200, the next retracement (61.8%) and the 20-day moving average. The MACD and Slow Stochastic moved lower from overbought levels that followed the greenback’s 3.2% rally in four weeks.

Australian dollar: The Australian dollar hit new highs for the week leading up to the weekend, above $ 0.7600. The Aussie approached the sell retracement target (50%) that started with the key June 11 reversal when the month high was set (~ $ 0.7775), selling and settling below the low of the previous session. Momentum indicators are improving and more gains are likely to come. A move through $ 0.7625 could see $ 0.7660 to $ 0.7700. A move now below the 200-day moving average (~ $ 0.7560) would be disappointing. The central bank meets on July 14 and will likely adjust its policy. The most likely scenario is to stop targeting the three-year yield at its target cash level. It could also reduce the size of its next round of quantitative easing.

Mexican Peso: The dollar climbed nearly four percent against the Mexican peso during the week of the FOMC meeting. The greenback stalled early last week and was offered even before Mexico’s central bank surprised the world by raising rates. The dollar fell 1.7% on the day Banxico moved the most since last September. In fact, the greenback fell in every session last week for the first time since April. The market anticipates further aggressive tightening, encouraged by the bimonthly CPI which exceeds 6%. Dynamics indicators point down. The five-month dollar low set earlier this month was a little below MXN19.60, and the year-low was set in January near MXN20.55. A four-year trendline is approaching MXN 19.04 by the end of next week, increasing by about 0.01 pesos per week. We note that momentum indicators are also on the rise for the JP Morgan Emerging Market Currency index. The index rebounded intelligently off the 200-day moving average last week. It has also increased with each session over the past week.

Chinese yuan: The adjustment that the PBOC signaled in early June by lifting reserve requirements for forward currency contracts seems to have had its day. The dollar rose briefly above CNY6.49. We had anticipated movement in CNY6.47-CNY6.4950 zone. However, the way the PBOC sets the dollar benchmark rate seemed to suggest officials were happy with the yuan’s pullback. The dollar slipped for three straight sessions against the yuan, and the pre-weekend loss of just under 0.25% was the longest losing streak and biggest loss of the month. If the CNY6.50 zone is the upper end of a possible new range for the dollar, where is the lower end? This has yet to be determined, but we believe it could be around CNY 6.4200. Although the Yuan is a tightly managed currency, it is worth noting that the Slow Stochastic and MACD are on the verge of falling for the Dollar.


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