The US dollar rose against nearly all the major and emerging market currencies in the past week. The notable exception among the majors is sterling, where hawkish BOE comments and another rise in average earnings goaded the bulls. Among the emerging market currencies, only three rose against the greenback, South Africa rand, the Turkish lira, and the Chilean peso.
The focus of the market appears to be shifting from the Greek drama tragedy and the dramatic fall in Chinese shares to macroeconomics. Outside of some official cheerleaders, many are skeptical that demands that Greece has accepted, even if fully implemented, would put Greece's debt on a sustainable path and/or make the economy more competitive. Still, with the bridge loan falling into place, which will most likely allow Greece to service its obligations to the ECB and IMF, and new ELA, which will allow banks to likely re-open next week, the Greece is not as urgent of a situation. Its ability to have systemic impact lessened.
Chinese shares have stabilized. They posted modest gains last week. Trading in more shares was unfrozen though there were still over 630 issues that could not trade. If these measures do not prove sufficient, signals from officials indicate they are prepared to do more. This allows the divergent trajectories of monetary policy to have greater sway in the foreign exchange market. Yellen confirmed that the Federal Reserve was still on track to hike rates this year, while Carney cautioned that the BOE anticipates raising rates. Other major central banks are easing policy either through orthodox means–rate cuts–like the Bank of Canada delivered last week, and the Reserve Bank of New Zealand is expected to do on July 23, or unorthodox means–QE–as is the ECB, BOJ and Riksbank are currently engaged.
The euro fell nearly 3% last week. It recorded a lower low each day last week and settled at its lowest level in two months. Arguably the euro is simply moving to the bottom of its trading range. However, if the $1.08 level is convincingly violated, the technical condition would deteriorate markedly. The $1.08 area corresponds to a potential neckline of a double top pattern, which if valid, would suggest measuring objective of $1.04 or a little lower.
We offer two caveats. First, the euro finished the week near its lower Bollinger Band (~$1.0850), which highlights the speed at which the euro has fallen. However, neither the RSI nor the MACDs suggest the market is over-extended. Second, while the focus is clearly on divergence, the premium the US pays over Germany actually fell last week in both the 2-year and 10-year sectors. The implied yield on the September Fed funds futures contract rose one basis point. The general narrative about divergence would have led one to expect a widening of the US premium and more than a just a single basis point.
