Dramatic moves in the money market were investors discounting the acceleration of the tightening cycle between major economies. Japan stands apart because the central bank is clinging to the view that the increase in price pressure will not last. Other central bankers may talk of relying on data, but some data is more important than others. Price data and inflation expectation measures are more important than actual sector reports. Even after news of an unexpected contraction in May production, for the first time since January, rose slightly higher for a 75 bp increase the following month.
The dollar corrected in the first half of June after pulling back in the second half of May. The retracement was deeper than we expected, and the dollar made new highs against the sterling and yen. However, against other major currencies, there were last month’s highs. Our reading of price action and technical conditions warns that the dollar’s recovery is over. It is in the grip of a stroke. This coincides well with a narrative that suggests the market has peaked based on the current reported set of peaks in fed funds next year around 4.5%. It was hovering around 3% at the end of May. Remember that the Fed’s mean point suggests a peak funds rate of around 4%. It has been such a rapid adjustment (~150 bp in a few weeks) that there is now some consolidation potential.
Another notable development was last week’s emergency meeting of the ECB which proceeded with the process of formulating a new instrument to counteract fragmentation within eurozone bond markets. The ECB argues that fragmentation interferes with achieving its price stability objective. However, we have argued that 1) such a device already exists, and 2) a significant constraint still seems to be wired (conditionally). The earlier instrument was under outright market transactions aimed at the shorter end of the coupon curve (1–3 years), and purchases to be sterilized in order to minimize the impact on the balance sheet. However, the innovation now is that the ECB is suggesting that the country rather than the country determine when to trigger it. There seems to be a greater sense (drunken?) that officials can identify what President Lagarde referred to as an “irrational” move.
, The dollar index saw half of this month’s rally after the Fed’s 75 bp, “buy rumours, sell facts”. New bids were found around 103.50 after setting new highs slightly below 105.80. The MACD is in the middle of its range, but the slower Stochastic is overextended and headed for a lower early next week. The upper Bollinger® band was breached on the basis of closing at the beginning of the previous week, but the pullback was brought back to the band. The upper band starts the week near 105.50. The Dollar Index is set to make new highs, but we will be looking for a reversal pattern or any other indication that the bulls are exhausting. That said, the next important technical area isn’t until 1.08-1.09.
, On 9 June, partly in response to the ECB meeting, the euro posted a bearish outing of the day, trading on both sides of the previous session’s range and closing below its lows. The single currency was trading flat around $1.0775. Selling increased to around $1.0360, with lower recorded selling shortly after the FOMC announcement. Recall that last month a five-year low was near $1.0350. The ECB signaled its commitment to resist significant divergence in the EMU bond market. A combination of this and the US 2-year premium on Germany slipped below 200 bp for the first time in nearly four months, helping a minor squeeze propelled the euro, which briefly climbed to $1.06. While the core-periphery spread narrowed ahead of the weekend, the euro lost its mojo and rebounded back to around $1.0440. The MACD is trending down, and the Slow Stochastic is over-extended. While it looks like it could go higher next week, remember that it remained in the oversold zone from early April to mid-May.
, The Japanese authorities were successful in stabilizing dollar-yen exchange rates despite huge differences in monetary policy. Within about 24 hours of the FOMC meeting, the dollar declined from a new 22-year high near JPY135.60 to JPY131.50, a nine-day low. The work was undone by the BoJ, which gave no indication at its meeting that it would change its monetary stance, even though the main inflation measure had met its target. Recognizing that a dramatic fall in the yen was destabilizing, Governor Kuroda did nothing to shake the impression that he favored the direction. The BOJ statement said it will be watching the forex market and capital markets closely. Does it really tell us something we didn’t know? Policy easing through the balance sheet and capping yields at 0.25% is disrupting the functioning of the markets, and the futures/cash link broke last week. The chances of interference on this side of the BOJ meeting seem even remote, not that we thought they were particularly in the first place. Slow Stochastic has turned down, while MACD is turning up from a shallow dip. Still, the dollar is poised for a possible strong gain next week. There will be more talk of moving towards JPY140.
, Sterling was squeezed higher after falling to a new two-year low of $1.1935 on June 14. A broader setback in the dollar after the FOMC meeting and flamboyant forward guidance from the Bank of England lifted sterling almost a nickel from lower levels, slightly above $1.24. It met the (61.8%) retracement objective of the decline from its late May high (~$1.2665) which came in slightly lower. Ahead of the weekend, support near $1.2170 was tested. A break below $1.2100 warns of a return to lower levels. Last week, a 3% gain on Wednesday and Thursday was enough to temporarily put the slower Stochastics higher, but the MACD appears to be rolling back. June 24 is the sixth anniversary of the Brexit referendum. It climbed slightly above $1.50 that day, but later fell to $1.3230 and closed around $1.3680.
, Ahead of the weekend, the Canadian dollar fell to a new low since November 2020. The risk-off mood, encouraged by more aggressive efforts by several central banks to tighten financial conditions, appears to have offset Canada’s good macro story. A weighting in addition to the 5.8% drop last week (proxy for risk) was a continued reduction in Canada’s two-year premium against the US. It had hit a new high of around 35 bp on June 8 and was reduced to a low of five by the end of last week. Momentum indicators give the greenback room to expand which could prove to be an upside break out. The CAD1.3025 area corresponds to a (38.2%) retracement of the greenback’s decline from the March 2020 high (~CAD1.4670). The US Dollar pulled it out last month, but it turned out to be a false break. The next retracement (50%) is near CAD1.3340. However, a sharp run-up (from CAD1.2520 on June 8) has pushed the US Dollar above the upper Bollinger Band ~ CAD1.3035. Canada reports April on Wednesday and, arguably more important in the current context, May on Thursday. The swap market is only halfway towards pricing 75 bp higher instead of 50 at the Bank of Canada meeting on July 13. A strong inflation report can boost market confidence.
, The Aussie dollar moved closer to last month’s low (~$0.6830) with a bid near $0.6850. It dropped to around $0.7070 following harsh and harsh comments from RBA Governor Lowe. However, it appears to be a proverbial dead cat bounce, and it is back at $0.6900 and the lower Bollinger Bands ahead of the weekend. Two-day gains failed to push the MACD higher. Slow Stochastic looked like it was headed for a downside, but poor price action ahead of the weekend meant that might not happen. The futures market now sees a year-end rate of close to 3.85%, up a little over 150 bp over the past two weeks. The premium rate against the US has also jumped, but the Australian dollar has depreciated by about 4% in those two weeks. A break above $0.6830 could signal a move towards $0.6760, (50%) a retracement of (50%) Australian gains since March 2020 lows (~$0.5510). The correlation of the Australian dollar with iron ore on a 30-day rolling basis is at a two-year high (0.52), and the new COVID restrictions saw prices fall 14% last week, the biggest weekly drop since last September Is.
, The dollar rose nearly 2% against the Mexican peso for the second week in a row, breaking a five-week slide. From Tuesday to Thursday, the greenback was halted in the MXN20.69-MXN20.70 range. This is the highest level since mid-March. The speed indicators are stretching. A break below MXN20.20 could be enough to close them. Mexico will report mid-June figures, shortly before the Benxico meeting on 23 June. The biweekly measure has remained stable between 7.5% and 7.75% for almost three months. April will also be notified before the central bank’s decision. A small drop wouldn’t be surprising. There is almost universal agreement that Banxico rose by 75 bp after an increase of 50 bp in the last four sittings. The trend draw from last November’s high (~MXN22.1550) and March high (~MXN214675) leads to a close of MXN20.76 early next week. A breakout may initially prompt a move towards MXN21.00.
, The greenback declined against the Chinese yuan last week. In the 15 weeks since the end of February, the dollar has risen against the yuan in three weeks. However, the strong uptrend ended a month before the dollar reached around CNY6.8125. Since then, it has been in a range, mostly CNY6.65-CNY6.75. Maybe CNY6.60-CNY6.80 is acceptable. Chinese stocks eased the regional and global push. Growth of 1.65%, its third consecutive weekly gain and fifth in the past six weeks. It’s still up about 12.8% for the year. On the other hand, sugar yield in the US increased by 42 bp last week. happened. A small premium was reinstated in the second fortnight of May.
