Breakouts Need Confirmation

The dollar had a difficult week, falling against all the major currencies but the Japanese yen and appeared to break out of its recent trading ranges against the euro, Canadian and Australian dollars. Only a handful of emerging market currencies fell against the dollar. Among these were the Chinese yuan (CYB), which, when everything was said and done, lost 0.1% against the US dollar. The Argentine peso was the weakest currency. It lost about half of one percent as its debt restructuring negotiations continued. That said, in places where the dollar appears to have broken out, we await confirmation. 

In the big picture, what the dollar decline, rally in equities, the outperformance of the Russell 1000 value companies over Russell 1000 growth companies in the last two weeks, the dramatic rally in the Mexican peso and Brazilian real (almost 9% and a little less than 6%, respectively) in May, and the narrowing of the premium that southern Europe pays over Germany, have in common is liquidity.Investors are convinced that officials will continue to provide the one thing they can provide quickly and efficiently, liquidity. Over the past two weeks, the market has become convinced that the ECB will expand its asset purchase program regardless of questions raised by the German Constitutional Court. Later in June, banks will have access to loans that pay them 100 bp to re-lend at a time the demand for credit is strong.China, Japan, and India have all announced rates cuts, new spending, or both.The Bank of England is expected to boost its bond-buying program later in June.Several Fed programs that were announced, like the Main Street Lending Facility, are just being launched now.  

Dollar Index: The Dollar Index closed below its 200-day moving average (~9850) in the last two sessions.However, ahead of the weekend, it bounced smartly off of the 98.00 area, its lowest level since late March, and forged a potentially bullish hammer candlestick pattern.The 97.80 area corresponds to a (61.8%) retracement of the explosive rally in March ( ~94.65 to ~103.00). A move above 98.70 would stabilize the technical tone, and move above 99.20 would lift the tone. The momentum indicators are getting stretched but have not turned higher. The Dollar Index managed to close just inside the lower Bollinger Band (~98.45) before the weekend after closed below it in the previous session. (UUP

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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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