Fed Pushes on an Open Door, and the Dollar's Recovery Goes into Overdrive

Dollar bearish sentiment is fickle. The shift in the Fed's economic projections, which saw the median view now anticipate not one but two hikes in 2023, has seen the bears beat a dramatic retreat.  Many have abandoned their view entirely.  

In this weekly technical note, we have been tracking the improving tone for the dollar prior to the FOMC meeting. The broad sideways movement seemed to have alleviated the extended condition that was a product of the dollar's slide in April and May after rallying in Q1.  

At the same time, we are mindful that interest rates and differentials are not supportive of the dollar.  The 10-year rate differentials moved against the US in the past week, while the 2-year interest rate differential widened in the greenback's favor by a few basis points.  Perhaps, the most significant market adjustment is seen in the December 2022 Eurodollar futures contract.  The implied yield rose almost 17 bp to 52.5 bp.  The market had priced in a hike by the end of next year, and now, post-FOMC is discounting about a 60% chance of a second hike.  The Fed's macro projections showed seven officials see a hike next year as appropriate, up from four in March.  Recall that the implied yield of the December Eurodollar peaked in early April around 58 bp.  

The dollar's advance, except against the yen, was dramatic, and it has stretched the technical readings.  The expiration of futures and options before the weekend, and the approaching quarter-end, maybe adding to the short dollar squeeze.  Be attuned for reversal patterns or other signs that the greenback's upside momentum is fading.  

Dollar Index: While many observers attribute the stronger dollar to the Federal Reserve, last week was the fourth consecutive week that the Dollar Index advanced and the fifth week in the past six.  This suggests, broadly speaking, that the upside correction to its slide from the end of March was well underway before the FOMC meeting.  With the pre-weekend advance, the Dollar Index has surpassed the (61.8%) retracement (~91.95) of the erosion seen earlier in Q2.  It is now well beyond the upper Bollinger Band, set two standard deviations above the 20-day moving average, and is closer to a three-standard deviation move ( 92.35).  The MACD is rising sharply, while the Slow Stochastic has entered overbought territory.  The March high is still some distance off (~93.45), but it is what at least some bulls are targeting.  Initial support is seen in the 91.50-91.60 area.  

Euro:  The single currency fell for the third consecutive week, and its 2%+ decline was the largest since April 2020.  Ahead of the weekend, it approached three standard deviations from the 20-day moving average near $1.1840.  The $1.1780 area may be the next target, but the $1.1700-area is technically more significant.   It is where the euro bottomed at the end of March and corresponds to the (38.2%) retracement since March 2020, when the euro recorded a low near $1.0635.  The MACD and Slow Stochastic are headed lower, with the latter over-extended.  Initial resistance is around $1.1920.  

Japanese Yen:  The dollar rose slightly more than 0.7% against the Japanese yen in the past week.  It was a back-to-back to gain for the first time since the end of March and the first week of April.  The greenback stalled on June 17 near JPY110.80.  The market looks like it wants to re-try the JPY111.00 area where it peaked at the end of March.  Last year, the dollar made two highs against the yen.  The first was in March, near JPY111.70.  The high in February was near JPY112.25.  

British Pound:  The combination of the UK postponing the economy-wide re-opening well into July, a retail sales report that showed a decline as large as the advance economists expected, and the dollar's broad recovery saw sterling's losses accelerate.  It had slipped by around 0.35% in the previous two weeks before getting clocked for more than 2% last week.  It was the biggest loss since last September.  The sharp move has pushed sterling a little more than three standard deviations below its 20-day moving average.  The momentum indicators have entered overextended territory, but the weak close, near session lows warns that a low may not be in place.  The next support area is seen in the $1.3670-$1.3720 band.  

Canadian Dollar:  The US dollar was stuck in a sideways range between CAD1.20 and CAD1.2125 and exploded higher, punching through CAD1.2460 ahead of the weekend.  It also traded beyond three standard deviations above its 20-day moving average.  Last week was the fourth consecutive weekly appreciation of the greenback after it fell for the seven prior weeks.   The CAD1.2530 area is the next target.  It corresponds with a (38.2%) retracement objective of the greenback's decline since the end of last October.  Above there, there is little to stand in the way of a move toward the CAD1.27 area, where the (50%) retracement and the 200-day moving average are found.  The MACD and Slow Stochastic appear to be the most over-extended among the major currencies.  

Australian Dollar:  The Aussie peaked in Q2 in early May, a little shy of $0.7900.  It has declined in five of the six weeks since the peak.  The nearly 3% loss last week was the largest since last September.  It pushed through the 200-day moving average (~$0.7555) like a hot knife through butter.  Its losses also pushed it beyond three standard deviations from the 20-day moving average.  A break of the $0.7500 area brings the next target around $0.7380 into view, the (61.8%) correction for the move that began before the vaccine was announced in early November.  A bearish head and shoulders topping pattern is seen on the daily bar charts but is even clearer on the weeklies.  It could project toward $0.7050, which corresponds to the (38.2%) retracement since last year's low in March 2020, around $0.5500.  

Mexican Peso:  The dollar rose for the sixth consecutive session against the Mexican peso ahead of the weekend.  It is the longest advance in four months.  The dollar's 4%+ gain was the largest weekly advance since last September.  The greenback recorded a five-month low slightly below MXN19.60 on June 9 and has shot up to nearly MXN20.75 to briefly trade more than three standard deviations above the 20-day moving average. The momentum indicators show no sign of an imminent top.  The next objective is near MXN20.86.  In addition to the powerful short-squeeze in the dollar, Mexico's relative attractiveness has dimmed.  Even without a super-majority, AMLO is pushing to tighten up PEMEX's dominance.  In contrast, Brazil is moving to privatize Elctrobras. Brazil has hiked the Selic rate three times by 75 bp each (to 4.25%) and is set to go again in August. Mexico's target rate began the year twice the Selic target and now is 25 bp below it.  The Brazilian real was the only currency to rise against the dollar last week.  That said, dollar buying emerged below BRL5.00.  

Chinese Yuan:  The People's Bank of China has taken a few steps up an escalation ladder to protest the yuan's appreciation.  It generated modest results of stabilizing the exchange rate, but the market (over) reaction to the Federal Reserve appeared to do more than the PBOC's own measures were accomplishing.  The yuan weakened for the third week and more than the previous two weeks combined (-0.85% vs. -0.50%).  The greenback finished at its best level in a little over a month, near CNY6.4530.  The next interesting technical area is between CNY6.47 and CNY6.4950.  The dollar gapped higher after the FOMC meeting, and that gap (~CNY6.4055-CNY6.4185) may offer psychological support.  Chinese officials took action on three fronts recently:  the currency, industrial commodities, and crypto.  All three have moved in the desired direction, though the move against crypto was about access, not price.  


Fed Pushes on an Open Door, and the Dollar's Recovery Goes into Overdrive Fed Pushes on an Open Door, and the Dollar's Recovery Goes into Overdrive Reviewed by Marc Chandler on June 20, 2021 Rating: 5
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