The Dollar Can Build On The Pre-Weekend Gains

The US dollar traded heavily most of last week but rebounded ahead of the weekend, with some month-end flows impacting.  The Japanese yen was a notable exception.  The rise in US yields helped lift the greenback nearly a percent against the yen.  The Fed's stand pat stance in light of the surging economy and signals the Norwegian central bank and the Bank of Canada seemed dovish.  The contrast carried the Norwegian krone and Canadian dollar to new three-year highs last week.  Even if the greenback's pre-weekend advance was exaggerated, it looks to be turning after trending lower in April.  

10 and 20 us dollar bill

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The Federal Reserve's broad trade-weighted nominal dollar index fell by about 7.5% in the last three quarters of 2020 after rising by 4.6% in Q1 as the pandemic struck and the dollar was bought partly as a safe haven. In addition, it was partly a function of unwinding structured positions that used the greenback as a funding currency.  It gained 1.3% in Q1 21 but traded with a heavier bias in April and surrendered most of the Q1 gains, falling over 1%. Moreover, the technical indicators for the dollar have been stretched by its persistent decline in recent weeks. Frequently, it seems that the short-term trends in the dollar are reversed or consolidated around the US employment data.  The April report is released on May 7, and another strong report is anticipated.  

Our broad macro view is that given the large US fiscal and trade deficit (the March goods balance reported last week widened to a new record high deficit of a little more than $90 bln) requires higher yields or a weaker dollar, or some combination thereof.  The fact that the US 10-year yield rose nearly 83 bp in Q1 and the dollar strengthened, and the yield fell in April, and so did the dollar is not coincidentally.  We do not want to overstate the link between exchange rate and yields. The long-term relationship does not appear linear but cyclical.  However, when trying to discern the recent broad trend, the foreign exchange market seems particularly sensitive to US rates (UDN). 

Dollar Index:  The Dollar Index fell by about 2.5% in April, essentially unwinding the March gain. The pre-weekend advance, helped apparently by month-end position adjustments, was the most since early March. Tentative support was found near 90.40.  The MACD looks poised to turn higher, but the Slow Stochastic has flatlined in overextended territory.  The close above 91.15 may help stabilize the tone. To signal a correction to April, the 91.55 area may be overcome.  Above there, 92.00 comes back into view (USD).  

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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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