Pepped up dollar after Powell testimony plus big Bitcoin gains.

The dollar finished last week on the front following Fed chair Powell’s testimony before Congress, which allowed the DXY to close the week above the 102.700 handle. The DXY also benefitted from the shockingly high inflation print from the UK which dampened demand for the pound. UK CPI came in at 8.7% in May, year-on-year, versus an expected print of 8.4%. Looking towards the local SA CPI print for the month of May, SA CPI slowed to a 13-month low of 6.3%, year-on-year, down from 6.8% in April. The largest contributors to the local CPI print were food and alcoholic beverages, housing and utilities and transport which increased 11.8%, 4.0% and 7.0%, respectively.

Looking ahead to the economic calendar for the week, there are crucial data prints from the USA which will undoubtedly create volatility. The US GDP print for the 1Q2023 will be released on Thursday and expectations are pointing towards a 1.4% growth rate, quarter-on-quarter. Along with the US GDP print the Fed’s preferred inflation metric, the US PCE price index, will also be updated. Additionally, markets have the latest Chinese manufacturing results for the month of June to look forward to along with the updated CPI figures from the Eurozone. The dollar could inflict further pain against the major currencies if the Eurozone records abysmal CPI results like we saw from the UK last week.

First in line for this week’s chart pack is Bitcoin following its 17% gain last week. Bitcoin soared to a 12-month high of $31,000 after BlackRock’s announcement that they intent to launch a Bitcoin ETF. Additionally, the US Supreme Court decided in favour of cryptocurrency exchange Coinbase in a partisan opinion that will halt court proceedings against the company in two California cases. The IMF also recently flip-flopped on cryptos in a recent report: “While a few countries have completely banned crypto assets given their risks, this approach may not be effective in the long run,” the economists said in the report’s conclusion. The daily RSI for Bitcoin has however shot up into the overbought zone which could slow its upward momentum.

I would just like to remind our South African readers that we need to always look at the price action of a dollar denominated asset, such as Bitcoin, in rand terms. The BTC/ZAR price recorded 100% gains, year-to-date, last week! One Bitcoin was roughly R280,000 in January and it will now set you back almost R575,000.

The DXY closed last week above the 50-day MA resistance level at 102.674 which is positive for the green back. The 50-day MA will now switch from a resistance to a support and the dollar is set for further gains if it holds the index above its 50-day MA. Continued dollar strength will allow the dollar to pull the index towards the 61.8% Fibonacci retracement level of 103.936. The next resistance rates to look out for is the high from May at 104.741 and the 200-day MA level of 105.107. Conversely, a break back below the 50-day MA level will see the DXY drop back onto the black upward trendline. The technical indicators are however in favour of continued dollar strength. The daily MACD is rolling over and a buy signal seems imminent while the RSI is trending upward with loads of room to move higher before hitting the oversold zone.

While our attention is on the USA, let’s look at arguably the most important market in the world, the US debt market. The US 10-year treasury yield has been in a downwards trend since October 2022 and a test of the channel is looking imminent. It is imperative to understand the inverse relationship between bond yields and the present value of the bond (when yields drop, the price of the bond increases implying buying pressure. When bond yields rise, the price of the bond decreases, implying selling pressure, ceteris paribus). The 200-day MA of 3.689% is holding support and if it holds its ground, yields will rise higher to test the top-end of the channel and the 61.8% Fibonacci retracement rate of 3.885%. Conversely a break below the 200-day MA support will se yields drop lower onto the 50-day MA rate of 3.622%.

Fundamentally I see three factors which are supportive of a move higher in US bond yields. Firstly, global financial conditions are easing, and excess liquidity is rising. Short-term rates seem to be peaking not just in the US but globally. Once global rates have peaked, it will allow the market to price in a future cyclical upturn for the US economy. Longer-term yields will capture this sentiment by moving higher as investors will prefer riskier assets to reap the rewards on buoyant liquidity conditions. Secondly, inflation is becoming entrenched. Bonds are not a good inflation hedge which will further motivate the sell-off in longer-term treasuries. Heightened inflation expectations are the canary in the coal mine warning that bond holders may soon demand extra yield to lend money. Lastly, bond issuance will rise following the raising of the debt-ceiling. Additionally, the debt ceiling has brought scrutiny to the US’s fiscal situation which will dampen investor appetite for US debt (safe haven or not).

We can’t publish a market report without inspecting our beloved rand. The USD/ZAR climbed out of the downward channel from the past two weeks on the back of broad-based dollar strength. The pair bounced off the 18.12 mark to climb roughly 3.30%. The 50-day MA resistance rate of 18.77 limited the rand’s losses last week but a break above this rate will allow the pair to climb higher and test the next resistance rate of 18.97. A failed break above the 50-day MA will however allow the rand to pull the pair onto the bottom of the current upward channel. The technical indicators are however suggestive of rand weakness. The daily MACD indicator is rolling over and a buy signal is looking imminent.

Turning our attention to the stock indices, the S&P 500 finally pulled back after a tremendous 2Q2023. The MACD indicator is set to switch to a sell signal and the RSI is also falling from the overbought zone which could see the index fall onto the 61.8% Fibonacci retracement level of $4,260.

The JSE all share index was on the ropes due to the weakness in the rand and the pull back across the world’s major stock indices. This saw the index fall back below the 50-day MA level of R72,000 and out of the upward channel. The next support level for the index in the 200-day MA level of R68,239.


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