Strong Dollar Optics, Less Clear-Cut Details

The dollar's performance last week is best understood as the fulcrum of the seesaw. The major currencies that are perceived to be levered or growth and/or risk rose. These are the dollar-bloc and the Scandis. The Swedish krona sold off before the weekend, perhaps as the market anticipates a weak CPI report that may reinforce ideas that the rate hike at the end of last year was not the start of a tightening sequence. 

Sterling actually led the advancers with a 1.2 gain. It was firm all week but was bid higher on speculation that the new Chancellor of the Exchequer, often seen as the second most important person in the UK government, will support a more expansionary fiscal policy. It would, arguably, boost growth prospects take pressure off the Bank of England.

The euro, yen, and Swiss franc, and along with the Swedish krona, were on the other side of the teeter-totter. The euro was the weakest of the majors, losing a little more than 1% on its way to its lowest level since April 2017. The euro lost twice as much as the Swiss franc, so the cross fell to its lowest level since July 2015. 

Among emerging market currencies, eastern and central European currencies underperformed, while the Mexico peso edged out sterling to be the best performer last week. The peso rose every session last week, unperturbed by the quarter-point rate cut. Year-to-date, the peso is the strongest currency in the world, rising by a pinch more than 2% so far. The JP Morgan Emerging Markets Currency Index snapped a four-week slide with an almost 0.3% gain. 

The two strongest technical indications are for a higher Canadian dollar and a continued recovery in oil prices. Dips in the Mexican peso will likely see be seen as a buying opportunity for asset managers and hedge funds. Recognizing that China heavily manages its currency, even if not by direct intervention, the political and economic considerations favor modest weakening for the yuan.  

Dollar Index

 Two weeks into this month, and the Dollar Index has fallen once. It sits at a four-month high near 99.15. The MACD is getting stretched but moving higher. The Slow Stochastic has begun leveling out. It continues to hug the upper Bollinger Band. The next immediate target is near 99.25 and then 99.65, last year's high. There is also the psychological attraction of the 100-level. The Dollar Index would have to fall through the 98.50 area to signal this leg is over. Remember that the Dollar Index is not really a valid trade-weighted basket and instead is heavily weighted toward the euro, which has underperformed. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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