Further losses in the US Dollar index seem likely in coming days - BBH

The analysis team at BBH provides a comprehensive review on the latest developments in the FX market, noting that the US Dollar snapped a two-week advance and shed about 0.65% last week, adding that further losses in DXY seem likely in the coming days.

Key Quotes

Further losses in the US Dollar index seem likely in the coming days, as the technical condition deteriorated.  Initial support is seen in the 99.80-100.00 area, and a break, which seems probable, given the position of the technical indicators, would target the 99.00 area, where the recent leg up began and housed the 200-day moving average. The five-day moving average is looks poised to fall back below the 20-day moving average next week.  A move above the downtrend line connecting the January and March highs, and approached last week would lift the tone.  It is found near 101.40 at the start of the new week, falling about two ticks a day. 

The euro was among the poorest performers among the major currencies last week, gaining 0.25%.  However, there was little enthusiasm to sell the euro below $1.06, where the trend line drawn off the January and March lows comes it.  It is not traded above $1.07 yet in April.   The Slow Stochastics have turned higher, and the MACDs also look poised to turn in the coming days. The $1.0680-$1.0700 offer initial resistance, and to be sure, cautiousness may prevail ahead of the French presidential election.   Above there, potential extends toward $1.0740, and possibly $1.0780. The latter may be a bit of a stretch, but reachable if the deadlocked French polls shift back to Macron or if US yields fall further after the soft US CPI and headline retail sales before the weekend. 

The Japanese yen was the strongest currency in the world last week, gaining nearly 2.3% against the dollar.  It was yen's biggest weekly gain since last July.  We argue it is an exaggeration to think of this as a safe haven characteristic of the yen.  Even though foreign investors were not buyers of roughly JPY1 trillion of stocks and bonds in the week ending April 7, it was less than the previous week. And Japanese investors sold more than twice as many foreign bonds (short-covering).  In the 14 weeks so far this year (through April 7), Japanese investors bought foreign bonds in five weeks.    

We suggest that the real safe haven was US Treasuries, where despite the holiday-shortened week, the 10-year yield tumbled 14 bp, driving yields almost 2.21%. It is the lowest yield in nearly five months.   The drop in US yields, we suspect, spurred buying back of previously sold yen and discourages fresh portfolio flows out of Japan. Given Japan's growing current account surplus, anything that detracts from capital outflows spurs yen appreciation. 

The dollar finished below the 200-day moving average (~JPY108.80) against the yen for the first time since the US election, which also corresponds to the lower Bollinger Band.  The 61.8% retracement of the dollar's rally since the election is found close to JPY107.85.  Previous support at JPY110 now serves as resistance. 

The British pound was the second strongest currency among the majors.  It rose about 1.25% against the greenback, and the five-day moving average moved above the 20-day.  The technical indicators are not generating very clear signals, but we see initial potential toward $1.2600-$1.2620.   Above there lies the year's high set in early February a little above $1.2700.  We suspect sterling may begin the week on firm footing, but anticipate a softer close, The BRC data warns of weakness in retail sales, which will be reported at the end of the week.  It is likely to be the fourth decline in the past five months.   

The US dollar was stymied by CAD1.3340 in the last three sessions.  It corresponds to the 50% retracement of the decline from the April 4 high near CAD1.3455.  In the last seven sessions, the US dollar has gained in only one. The 61.8% retracement is near CAD1.3365. The greenback held the 200-day moving average (~CAD1.3225) at the lows.  The US two-year premium over Canada has narrowed by almost ten basis points since March 28, but it is holding a trend line drawn from last October and this past February's lows.   Our correlation work also shows that the Canadian dollar has become more sensitive to the price of oil.