The reluctance of the Federal Reserve officials to signal a recalibration of policy given the booming economy, rising inflation expectations, and strong demand as the vaccine rollout allows for a broader economic re-opening, continues to cap the dollar. The jump in rates following the CPI surprise earlier in May and (misreading) of the FOMC minutes saw a quick rise in yields and the dollar, which was quickly unwound. Yet, broadly speaking, the technicals seem to favor consolidation with a modest upside bias. 

The market seems to be looking past next month's FOMC meeting. While the economic forecasts will be updated, the earliest that a signal on tapering the Jackson Hole confab in late August or the September FOMC meeting. The strength of recent economic data, including the preliminary May PMI, will give the hawks at the ECB some solid arguments. Still, even if they can force a slowing in the PEPP bond-buying, it is hardly tapering in the sense of a gradual move toward ending the purchases. ECB President Lagarde has been clear about this.  

Benchmark 10-year yields were softer this past week. Only in Germany and Switzerland are 10-year yields still below zero. Despite concern that the formal emergency in Japan, which is covering the area that accounts for around 40% of the GDP of the world's third-largest economy, may be extended through most of June and the preliminary May PMI, which warns that the Q1 contraction carried into Q2, Japan's 10-year yield is around seven basis points. The dollar value of the negative-yielding bonds in the world has fallen by a third this year to a little more than $12 trillion.

Dollar Index 

The Dollar Index recorded three-month lows ahead of the weekend around 89.65. The old support at 90.00 now provides the nearby cap.  The momentum indicators are stretched, and it seems like it faded in recent days, during which the Dollar Index has carved out a shelf in the 89.65-89.75 area.  Above 90.30 would stabilize the tone. It needs to get above the 20-day moving average (and the middle of the Bollinger Band (~99.50) to suggest a low is in place. The year's low was set in early January by 89.20, and below there, the last important low was set in 2018, close to 88.20.  

Euro

The single currency spent the last four sessions in about a one-cent range above $1.2150, which also is roughly the halfway point of the rally off the May 13 low, near $1.2050. A break of $1.2125, where the trendline drawn off the year's low set at the end of March (~$1.17) begins the new week, would signal a deeper correction is at hand. Thus, a return toward $1.2050 cannot be ruled out.  Our immediate concern is that momentum has stalled, and given the run-up, the new longs may be in weak hands. That said, momentum indicators are stretched but still look supportive.

Japanese Yen

The jump in US rates in the middle of last week saw the dollar recover from JPY108.55 to about JPY109.35. There was no follow-through dollar buying, and over the next two sessions, the dollar worked its way back to around JPY108.60. Initial resistance is now seen in the JPY109.00-JPY109.20 area. The MACD has been moving sideways this month while the Slow Stochastic has turned lower from mid-range. US rates seem to drive the exchange rate more than the so-called safe-haven demand, such as when stocks post outsized losses or amid disappointing economic news from Japan.   

British Pound

The Swiss franc, sterling, the yen, and the euro all rose by about 0.35% last week. It was sterling's third consecutive weekly advance and the fifth in the past six weeks. The momentum indicators are stretched but are not appear to be rolling over. However, sterling's pre-weekend rally stalled a couple of hundredths of a cent from the year's high (a little above $1.4235) and it reversed lower. Initial support is seen near $1.41. Stronger support in the $1.4000-$1.4020 area. On the upside, the next important chart points are the double high from 2018 ($1.4345-$1.4370).  

Canadian Dollar

The US dollar slipped by about 0.3% against the Canadian dollar last week. It was the seventh consecutive weekly decline. It recorded a new four-year low near CAD1.2015. The re-test ahead of the weekend held, but it needs to resurface above the CAD1.2145 area to signal anything noteworthy from a technical perspective. Above there, the next hurdle is seen around CAD1.2190-CAD1.2200. The MACD looks like it wants to turn up but is still largely flatlining in its trough. The Slow Stochastic did not confirm the new low, but it is not accelerating to the upside either. Still, given the extent of the move and the fact that it seems much good news has been discounted (two hikes by the end of next year), an upside correction for the greenback seems likely soon.  

Australian Dollar

The Australian and New Zealand dollars underperformed last week. They joined the Norwegian krone to be the only three major currencies that did not appreciate against the US dollar. The Aussie has done practically nowhere since mid-April. The lower end of the trading range is around $0.7675. Although it has been above $0.7800, it has proved to be a bull trap. Trendline support, drawn off the early April lows and the mid-May lows, begins the new week around $0.7725.  A break of the range could signal a test on the $0.7600 area. The momentum indicators appear to be bee neutered by the sideways price action. The Kiwi has a similar trendline that begins the new week near $0.7180.  A break of the $0.7115-$0.7135 support band could spur a move toward $0.7000.  

Mexican Peso

The dollar rose against the Mexican peso last week. It was only the third weekly gain since March 5. It recorded a five-month low in the middle of last week, slightly below MXN19.72, and recovered to almost MXN19.98 before the upside momentum slackened. Nearby resistance is sighted in the MXN20.00-MXN20.05 area, and then the month's high close to MXN20.32. The momentum indicators look poised to turn higher. The US dollar trended lower from early March (~MXN21.6360) to April 20 (~MXN19.7860). New lows have been recorded, but marginal and seemingly hard-fought.  The trending market gave way to broad sideways activity.  Mexico reports Q1 GDP next week. Small but positive growth is expected. The April trade balance will be interesting after a large downside surprise in March. That said, the direction of US interest rates may be more important to the exchange rate. The correlation between US 10-year yields and the dollar-peso (60-day rolling correlation on the change) reached its highest level in four years last week (~0.42). Mexico holds legislative elections on June 6, and AMLO's Morena party looks to be in a strong position, and we suspect that it could weigh on the peso.  

Chinese Yuan

The dollar was virtually flat against the yuan last week. On the one hand, the PBOC seems to want the yuan to stabilize, and at the same time, the head of its research department suggested that yuan appreciation may help blunt the impact of higher commodity prices. The PBOC has ensured ample liquidity, and this coupled with a decline in China's industrial commodities for a second week, helped send the Chinese 10-year government bond yield to its lowest level in about eight months. Although the premium over Treasuries eased to almost 140 bp (from around 250 bp last November), there is talk of dollar-based funds increasing their exposure to Chinese government bonds. The correlation (rolling 60-days, percent change) between the euro and the yuan is at 0.57, a three-year high. A dollar bounce may run into its first hurdle around CNY6.4430 and then CNY6.4580.