Change The Month, Change The Trend?

Summary

• The euro held support last week near $1.1700, and the greenback held below JPY111.00. It is difficult to read much into the price action due to the month- and quarter-end adjustments, which also is the end of many governments and corporate fiscal years.
• At the same time, the dollar bulls may be puzzled by the lack of a more positive response to news that US jobs growth last month was nearly half again as much as forecast (916k vs. Bloomberg's survey median forecast of 660k).
• The price action review in the foreign exchange market shows that this could be a near-term inflection point, which we have sensed is coming. However, there is still another test pending about how much of the reflation trade is indeed discounted. That other shoe to drop is inflation.

It seems in the recent past, short-term trends in the foreign exchange market change around monthly US jobs report. The euro held support last week near $1.1700, and the greenback held below JPY111.00. It is difficult to read much into the price action due to the month- and quarter-end adjustments, which also is the end of many governments and corporate fiscal years. Market conditions were thinned by the Good Friday holiday, so we should not put too much stock on the limited reaction to the stronger-than-expected US employment data.

At the same time, the dollar bulls may be puzzled by the lack of a more positive response to news that US jobs growth last month was nearly half again as much as forecast (916k vs. Bloomberg's survey median forecast of 660k). Moreover, the job growth in January and February was revised up by a combined 156k. Since the FOMC meeting, more than a million jobs have been restored, a welcome down payment, leaving it still about 8.5 million less than at the end of 2019. It seems reasonable to assume that well more than another million jobs will have been restored by the time the FOMC meets in June and adjusts its forecasts and guidance. Will the return of over 2 million jobs meet the Fed's threshold of "substantial progress" to adjust its bond buying?

The price action review in the foreign exchange market shows that this could be a near-term inflection point, which we have sensed is coming. However, there is still another test pending about how much of the reflation trade is indeed discounted. That other shoe to drop is inflation. Last year's negative CPI prints will be dropping out of the year-over-year measures. The base effect will make for strong inflation readings starting with the March CPI (April 12).

Here is a snapshot of how we see the technical condition of the dollar as April gets underway.

Dollar Index: The Dollar Index peaked near 93.45 on the last day of Q1, its best level since last November. Some position squaring ahead of a long holiday weekend for many saw it come back off toward 92.80 before the weekend. It recovered and resurfaced above 93.00 after the strong employment report. The MACD and Slow Stochastic are turning down from elevated levels. Ideally, from a technical perspective, the Dollar Index would retest the 93.45 area, which would be aggressively defended, confirming a near-term high. A few technical considerations, including the 200-day moving average, the uptrend line off the late February lows, and the high in early March, converge in the 92.50-92.60 area. A break of that is needed to signal anything important on the downside.

Euro: The euro held important support at $1.1700, which corresponds to the (38.2%) retracement of the rally from the March 2020 low. However, it failed to push back above $1.1800, which seemed to deter strong bottom-picking. The momentum indicators are trying to turn up, but the news stream still seems to work against the common currency. A convincing break of $1.1700 could spur another leg down, and $1.16 represents a complete round-trip since the eve of the US election. On the top side, a move above $1.1800 is constructive and would confirm a near-term bottom is in place.

Japanese Yen: The greenback stalled at almost JPY111.00 at the end of the quarter, its highest level in a year. It came back bid after falling to almost JPY110.35 after the stronger-than-expected jobs data in thin pre-weekend trading in the US. There were two highs from March 2020, JPY111.70 and about JPY112.25. The 2019 high was set near JPY102.40. The momentum indicators are overextended but have not turned down, but the dollar is knocking against the upper Bollinger Band (~JPY110.70). A break of the JPY109.75-110.00 is needed to signal a near-term top is at hand.

British Pound: Sterling bottomed around $1.3670 on March 25. Its recovery was stymied at the start and end of the week, near $1.3850. The MACD and Slow Stochastic have turned up, but without fresh gains, it appears to be working into a lower range. Above $1.3850, the $1.4000 area is the next important hurdle. Support is seen near $1.3750 and then $1.3700. While the euro has nearly returned to its pre-US election low, sterling is far above it (~$1.2850). That translates to a significant move on the euro-sterling cross. The euro had spiked above GBP0.9200 in December, and the first quarter bouncing on GBP0.8500, its lowest level since February 2020. There is little in the way of GBP0.8400, and even the 2020 low (~GBP0.8285), if that is overwhelmed.

Canadian Dollar: The US dollar appears to have entered a new range against the Canadian dollar. It peaked on March 30 near CAD1.2650 and pulled back into the CAD1.2530-1.2540 area. That pullback marginally overshot the (38.2%) retracement objective of the greenback's recovery from three-year lows set on March 18 around CAD1.2365. The next retracement objective (50%) is close to CAD1.2500. The momentum indicators are poised to roll over, suggesting selling into US dollar bounces ahead of next week (April 9) Canadian employment data. Another robust report would boost the chances that the Bank of Canada changes its forward guidance on tapering its C$4 billion a week of federal government bond purchases at its next meeting (April 21).

Australian Dollar: Last week's range was set by the outside down day on March 30, reversing lower after reaching $0.7665, and a hammer candlestick low near $0.7535 on April 1. That was a new low for the year. The Slow Stochastic has turned higher, but the MACD has yet to do so. The follow-through buying after the hammer candlestick was limited and not inspiring. A low in the Aussie does not seem to be in place. The next area of support is $0.7500, roughly the (50%) retracement of the rally from since early last November. The next retracement (61.8%) objective is closer to $0.7370, and the 200-day moving average is a little above there (~$0.7390). A move above $0.7640 is needed to improve the tone.

Mexican Peso: The dollar slipped through March's low (~MXN20.2830) ahead of the weekend, but in thin trading, it recovered and finished the week above MXN20.30. The MACD is leveling off after trending lower since early March. The Slow Stochastic has turned back down. Mexico is experiencing stagflation. Without much fiscal support, the economy likely contracted in the first quarter. Yet, inflation is rising, and on April 8 is likely to report that headline CPI pushed well above the upper end of the central bank's 2-4% target range and to a three-year high. Rate cut hopes have already been dashed, but such a report could weigh on the peso. Strong chart support for the dollar is not seen until closer to MXN20.00. Resistance is likely to be encountered in the MXN20.50-20.55 area.

Chinese Yuan: The dollar rose for the sixth consecutive week against the yuan. Some reports try linking the swap activity by large Chinese banks to masked intervention by the PBOC. However, given the narrowing premium over the US, the poor performance of Chinese stocks, and what seems like more persistent outflows under QDII, the pressure on the yuan seems explainable by market forces. If the dollar is rising against nearly all the world's currencies, why should it not rise against the yuan too? The greenback reached a four-month high last week near CNY6.58. The offshore yuan is weaker, which is also where speculators can express views. The 6.60-level against both is an important psychological barrier. We suspect that may be the upper end of a new range, but if not, the potential extends toward the 200-day moving average (~CNY6.70 and CNH6.68).

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.