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DOLLAR SECENARIO – TIMES AHEAD

The constructive outlook for the US dollar was predicated on two beliefs. First that growth and interest rate differentials favored the US over the euro area and Japan. Second that this would be the key driver in the foreign exchange market.

The nearly 3% contraction of the US economy in Q1 (at an annualized pace) is simply shocking. It has shaken the faith. The US 10-year bond yield fell back under the downtrend line drawn off the January and June highs.

This news was followed by disappointing consumption data (contraction in real terms for the second consecutive month in May). Some economists revised down their estimates for Q2 GDP and some even talked of the probability that with more than 2/3 of the economy contracting for 2/3 of the second quarter, the entire economy probably contracted.

The decline in the US 10-year yield did seem to be a critical factor behind the dollar's fall below its 200-day moving average against the yen on a weekly basis, for the first time in more than a year and a half, but monetary policy is still diverging. The BOJ is buying two times the amount of assets the Federal Reserve will until August when it will be buying nearly three times more. Moreover, the Japanese economy is about a third of the size of the US (on both nominal and PPP terms, according to IMF data).

Similarly, the ECB has just cut its deposit rate to zero and warned investors its balance sheet may expanded by as much as 400 bln euros by the of the year (assuming full take down of the TLTROs) The euro has shown itself to be fairly resilient and finished last week in the upper end of its recent trading range.

The euro is close its best level since Draghi announced the ECB's new initiatives (just shy of $1.3680). The 200-day moving average comes in near there and does the top of the Bollinger Band. The 5-day moving average is above the 20-day average. The RSI is neutral, though the MACDs have turned up. The record low volatility means that sustained upticks may still be hard to come by. The $1.3735 area may be the most that can be reasonably hoped for ahead of the ECB meeting and US jobs data (Thursday, July 3rd for each as the US Independence Day brings forward by a day the employment report). Above there, $1.3800 may prove formidable and, if it is approached, look for official rhetoric to be dialed back up.

Just as telling of the deterioration of the dollar's tone is the heaviness of the Dollar Index. Important technical support is seen between 79.70-80.00. A break of this would signal losses toward 79.00. The 200-day moving average, just below 80.30, offers initial resistance.

Although the Dollar Index is mostly the euro and currencies that move within its orbit, a little more than a fifth of is accounted for by the Japanese yen and Canadian dollar. They were two of the strongest major currencies last week, appreciating about 0.65% and 0.85% against the greenback respectively. Indeed, this quarter the Canadian dollar is the strongest, advancing 3.6% and the yen is in third place with a 1.8% gain (after sterling’s 2.25% rise).

The technical indicators for dollar-yen, like the RSI and MACDs are not generating particularly strong signals, but the break of the 200-day moving average (~JPY101.70) is notable, and if it sustained in the coming days, more yen shorts might be forced to cover. The dollar also finished the week just below the lower Bollinger Band (~JPY101.44). While the JPY101.00 may offer some support, the May low was set closer to JPY100.80 and the year's low has, thus far, been set just below there in early February.

Sterling is looking a bit tired, and BOE Governor Carney is giving investors indigestion. Still, investors believe that the BOE will be the first of the G7 to hike rates and the market still appears to be more inclined to buy dips. Initial support is seen in the $1.6950 area and then $1.6900-20. It may require a break of the $1.6850 area to spur talk of a top in the $1.7050-60 area.

Indian Rupee is hovering in very tight range of 59.85-60.35 since more than a week. It’s expected to test again the highs of 60.35 in the coming week basis weak monsoon and Iraq crisis. If Oil touch 120 and monsoon perform weaker in coming months then we may see a lot of buying pressure in USD against rupee and it might test 62-63 regions once. It’s better to be on long dollar vs rupee.

Disclaimer

These deal indications are only advisory in nature and may not be true in 100% cases. Read more....