Monday, May 17, 2021

"Treasuries Call the Tune in FX"

Although we usually visit Mr. Chandler and Bannockburn during the week for what is probably the best "squawk box" style information presentation on the internet his weekend posts are almost always interesting as well.

From Marc to Market, May 16:

The higher than expected US CPI spurred a jump in rates and the greenback, but it proved to be little more than a bull trap. The dollar's upside momentum faded even before the large miss on retail sales ahead of the weekend. Yes, if one averages some recent data and squint in just the right way, the reports don't look so bad, but the point is not so much about fine-tuning Q2 GDP estimates, which are easing from still strong levels.

Rather, the key questions are whether it moves the Fed's needle or encourages the market to do the Fed's heavy lifting. And both are being answered in the negative. Without higher US rates, both relative to other countries and in absolute terms, it is difficult in this context to see the dollar mounting a strong and sustained bounce. Moreover, the miss on both jobs and consumption suggests that Chair Powell's consensus is not likely to unravel at next month's meeting. More will come around to the view that the Jackson Hole Fed confab and the September FOMC meeting are the next windows of opportunity for a policy adjustment.

Ironically if high-frequency data are not likely to sway the Fed for another quarter, and if the bond vigilantes adhere to the maxim about not fighting the Fed, technical factors may have greater sway in the foreign exchange market. It is with that in mind that we turn to our weekly look at the price action.

Dollar Index: The CPI-higher rates sparked a rally in the Dollar Index that stalled at the (61.8%) retracement objective (~90.90) of the decline from the high seen in the middle of the previous week, which is also where the 20-day moving average is found. The Dollar Index has not closed above its 20-day moving average in over a month. A break of 90.00, near where the lower Bollinger Band starts the news week, signals a test on the February low near 89.65. Beyond that is the low for the year set in early January by 89.20, a three-year low. The momentum indicators seem somewhat supportive, but the weak close ahead of the weekend means that they may play catch-up.

Euro: The euro rose last week to its highest level since the end of February, just above $1.2180. The pullback brought it to almost $1.2050, where the March and April lows trendline intersected. It ended the week with strong momentum, and a test on the $1.2180-$1.2200 resistance area looks likely. Above there, the late February high was close to $1.2245. The MACD and Slow Stochastic are not generating strong signals and understandably so given that the single currency has been in a two-cent trading range (~$1,1980-$1.2180) for a month....