The White House is unlikely to comment on it, even if it is aware that the Chinese yuan was the third strongest currency in the world last week. The British pound was the strongest, rising a little less than 1% against the dollar and snapping a 14-week plummet against the euro. None of the other major currencies appreciated against the dollar last week. The Chilean peso was the strongest among emerging market currencies, rising about 0.4%. It is the second consecutive weekly gain and may have been helped by the two-week increase in copper prices.
That brings us to the Chinese yuan. It rose in the first three sessions last week and edged lower in the last two for a net gain of a little more than a quarter of a percent. The dollar peaked at the start of the week just shy of CNY7.07 and, although it pulled back, it remained above old resistance, which may now be support CNY7.0. The yuan is off 2.3% against the dollar this year. It does not reach the threshold of significance and is hardly an offset to US tariffs.
The Argentine peso was the poorest performer. After depreciating by almost 25% in the first three sessions last week, it bounced back 9.6% and finished the week off 17.3%. It may come under pressure at the start of the new week. Fitch cuts its sovereign rating by three notches (from B to CCC), and the negative outlook warns of the risk of another cut. S&P cut its rating to B- from B and also has a negative rating. This leaves Moody's B2 rating (equivalent to B by the others) out of line, but it had switched to a negative outlook from stable last month. Also, the money market operation will be watched closely on Monday. If the central bank does not roll-over the full ARS260 bln of funds (LELIQ) that is due, it will likely add to the pressure on the currency.
The market may test the resolve of the Hong Kong Monetary Authority as the dollar edges toward the strong end of its band (HKD7.85). The protesters started a campaign last week to disrupt by withdrawing funds from ATMs, but this is a minor source of pressure (less than the equivalent of $90 mln on August 15). More important are the funds related to the 10% drop in the Hang Seng Index in four-week drop. Speculative pressure is evident in the forward market. On the day following the Fed's rate cut, the 12-month forward points closed around -136 and peaked last week near 180 before settling a little below 120. We expect the HKMA to vigorously defend the band if needed.
Dollar Index: The Dollar Index gained about 2/3 of a percent last week and rose to a little more than a two-week high. It surpassed the (61.8%) retracement (~98.20) of the losses suffered following the end of the second tariff truce on August 1. The five-day moving average crossed above the 20-day day moving average at the end of the week, and the technical indicators are constructive. Initial resistance is seen near 98.50, and the August 1 high was a little below 99.00. Recall that the high set in January 2017 was about 103.80. Initial support may be pegged in the 97.65-97.80 band.
Euro: The euro closed below $1.11 ahead of the weekend. It was the third such close of the year, and they all took place since July 30. It will start the new week with a four-session losing streak in tow, during which time it fell approximately 1.5 cents. It has depreciated in five of the past seven weeks. It has fallen every month this year, but June. The August 1 low, set before the end of the tariff truce was announced but after the mid-course adjustment framing of the first Fed cut in over a decade, was set near $1.1025. The $1.1140-$1.1160 may offer initial resistance. Selling into upticks is likely ahead of the flash PMI reports on August 22. The technical indicators point lower, though the lower Bollinger Band begins the new week by $1.1065, which may inject some caution. Three-month implied volatility reached 6.85% last week, the highest since January. It may have topped. The 200-day moving average is about 6.08% and was near 5.5% in late-July.
Yen: The dollar held important support near JPY105 and held below JPY107, transversing what we see as the new range. The MACDs and Slow Stochastics are trying to bottom. On the topside, the JPY107.20 is the (50%) retracement objective from the dollar's losses from August and the 20-day moving average is a little below there near JPY107.15. Above there is the (61.8%) retracement around JPY107.70. The dollar rose about 0.65% against the yen last week and has been unable to string together two consecutive weekly gains since April. A break of JPY105 immediately targets the flash crash low near JPY104.85 and the JPY104.50 low from March 2018. Three-month implied volatility rose to almost 8.5% last week, a seven-month high. We suspect that if the market's confidence that JPY105 will hold, implied volatility has scoped to ease. The 200-day moving average is near 6.67%
Sterling: Sterling snapped a four-week drop against the dollar and a 14-week decline against the euro last week with nearly 1% and near 2% gain respectively. It reached a new high for the week before the weekend near $1.2175 before settling a touch below $1.2150. While the RSI has turned up, the MACDs and Slow Stochastics are trying to do so too. The 20-day moving average and the high from July 31 suggest a band of resistance between $1.2210 and $1.2250 that needs to be cleared on the upside. Sterling has not traded above its 20-day moving average since July 1. Sterling looks poised to extend its recovery against the euro. The technical indicators have only recently crossed lower. After falling every day last week against sterling, the euro may find support initially in the GBP0.9040-GBP0.9060 range. It houses a trendline drawn off the early May and late July lows and the (61.8%) retracement of the rally since those lows in late July. Below there, GBP0.9000 may be more formidable.
Canadian Dollar: The US dollar's surge stalled on August 7 in front of CAD1.3350. It backed off (to about CAD1.3185) and tried again. It failed near CAD1.3340 on August 15. Follow-through selling the next day brought it to near CAD1.3260, and it closed a little above its intrasession low. This could be a double top, whose measuring objective is around CAD1.3030. More immediately, the CAD1.3220 area is the initial target and then CAD1.3180. The technical indicators are mixed.
Australian Dollar: A narrow range of roughly $0.6735 to $0.6830 has confined the Australian dollar for the past seven sessions. Even though it rose in three of last week's five sessions, it nonetheless extended its losing streak for a fourth consecutive week. The RSI and Slow Stochastics have turned higher, and the MACD does not look far behind. The risk of a September 3 rate cut was halved last week to a little less than 25% with the help of a stronger than expected employment report. A move higher, which we favor, needs to overcome $0.6880 to be significant.
Mexican Peso: The dollar found support near its 200-day moving average (~MXN19.35 last week). The unexpected 25 bp rate cut injected some volatility, but the dollar finished the week (~MXN19.66) below where it was trading before the announcement (~MXN19.70). The market looks like it wants to test the high for the year recorded in early June (~MXN19.88). The technical indicators are mixed. The dollar-peso exchange rate and the S&P 500 is highly correlated. Over the past 60 sessions, the correlation between the percentage change of the two is about 0.625, which is the most in nearly three years.
Oil: Crude oil is pinned between concerns of weakening demand and efforts to limit supply. The range here in August for Oct WTI has been roughly $52 to $58 a barrel. The technical indicators not generating a clear signal. There is a month-old downtrend line that begins the next week near $57 (and falls by about 13 cents a day) and the 200-day moving average by $57.35. The technical tone may be lifted if these levels can be surmounted.
US Rates: The US 10-year yield edged up a couple of basis points before the weekend but did little to change the significance week's decline. The yield slumped to 1.50%, its lowest level in three years. It finished a little above 1.55%. The low in 2016 was closer to 1.32%. The 52 bp decline in the past three weeks is dramatic in the context of macroeconomic news of a robust labor market, accelerating inflation, and vigorous consumption. The 30-year yield briefly dipped below 2.0% for the first time, though closed a couple basis points higher. The RSI and Slow Stochastics have not confirmed last week's new high in the price of the futures contract, but it is too early to call it a divergence. A shelf has been built in the September contract near 129-12. The two-year yield fell 17 bp last week to bring its three-week decline to 38 bp. The yield closed below 1.50% in the past two sessions, the first time since September 2017.
S&P 500: The price action closed the three-day island bottom we noted last week, but it held the recent lows, strengthening the technical tone. After recovering on August 15, the S&P 500 gapped higher on August 16. The gap is found between roughly 2856.7 and 2864.7 and may offer initial support. The RSI is constructive, and the MACDs are poised to turn higher, but the Slow Stochastics are lagging. The upper end of the range is in the 2940-2950 area, and a move above there would suggest a new record high is likely. Some of that tsunami of savings flooding into money market funds may be forced to chase the market higher.
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