Speculative Positioning in the Currency Futures

Speculators did not change their positions very much in the week ending April 17, according to the latest Commitment of Traders report.  We continue to provide a dis-aggregated breakdown of the non-commercial or speculative positioning.  

The general preference among the speculative community has been evident for most of the year continues albeit to a mostly less degree.  The speculative community is net short the major foreign currencies (euro, yen, sterling, Swiss franc) and long the dollar-bloc (Australian and Canadian dollars) and Mexican peso.

Euro:  The net short euro position grew to 118.1k contracts from 101.4k.  This was almost a pure reflection of short positions being extended (17.8k), moderated by the establishment of a few new longs (1.1k).  The euro dipped below $1.30 (April 16) for the first time since mid-Feb, the day before the end of the reporting period.  The gross short position stands at 158.4k, the largest since late-Feb.

The speculative community was playing for a downside break out but the dip below $1.30 proved brief, leaving the late euro shorts in weak hands.  Thus the firmer tone that lifted the euro through $1.32 at the end of the week, and allowing it to close above the 20-day moving average for the first time since April 3, may have more to do with positioning than with a reassessment of fundamentals.  

Indeed technical factors appear more constructive than macro economic and political considerations.  The euro area debt crisis is arguably taking a turn for the worse and officials have yet to respond.  This means the situation is bound to deteriorate further.   However, the price action reinforces the idea that the $1.2970-$1.3000 area represents an important floor for the euro, while the $1.3380 area marks the upper end of the recent range. 

Yen:  The net short position was trimmed by 8.3k contracts to 57.8k.  This was a function of shorts being cut (7.5k) and a few new longs being established (820 contracts)..  The yen was strengthening and the shorts seemed to be capitulating but at the wrong time.  

The JPY80 level held in the spot market on a test on April 16-17 and after the reporting period, the yen weakened.  The dollar finished the week by knocking on resistance in the JPY81.80 area, which corresponds with a retracement objective and the 20-day moving average, which it has not traded above since April 4.    

The price action and the political economic backdrop, which includes increasing number of downside data surprises in the US, warn of the risk of a new bout of yen strength, especially if the BOJ is unable to get ahead of market expectations when it meets in the days ahead.   Given the length of time that the BOJ has pursued QE and only managed to produce a negative effect on yen in mid-February, an extension of QE now would not be a surprise nor necessarily stand in the way of yen gains.  

Sterling:  Speculators got the sterling move right.  The net short position fell to 13.1k from 18.8k as shorts were cut (2.3k) and longs were extended (3.4k).  And just in the nick of time.  Less dovish MPC minutes, stronger than expected retail sales report, some M&A flows and cross rate buying against the euro, helped lift sterling to new 2012 highs above $1.61 in the days that followed the end of the CFTF reporting period.  

Sterling's technical tone, like the euro's, looks better than the fundamental backdrop.  The UK economy has spent the past 6 quarters alternating between a small expansion and small contraction.  The fourth quarter of 2011 was an contraction so Q1 12 will likely be a small expansion.  It will be reported on April 25.   

The fact that a new round of asset purchases is less likely than the market previously thought (though a wait-and-see attitude has been our base case) does not reflect a more optimistic assessment of the economy as much as realization that inflation remains stickier.   Yet technically, the sterling can test the $1.6180 near-term, but has potential to run toward $1.6350-$1.6400.  

Swiss franc:  Speculators have low interest in the Swiss franc.  The market is reluctant to take on the SNB but have kept the euro-franc cross in relatively tight ranges just above the CHF1.20 level.  The net speculative short franc position expanded to 13.8k from 9.9k contracts.  Longs were shaved by 508 contracts, and the shorts grew by 3.3k.   

With the new SNB head, this does not appear to be time to test the official resolve.  For speculators, the risk-reward favors short franc long euro positions, but the euro, as we know, has problems of its own,  Maybe the way to express the view would be long sterling against the Swiss franc.   

Canadian dollar:  The net long position rose by 10k contracts, which almost completely reflect new longs coming into the market (10.3k), while short rose by almost 300 contracts.  The new longs were likely disappointed.  They may have initially been encouraged by the upgraded economic assessment offered by the central bank at the conclusion of its policy meeting that stood pat (April 17), but there was no follow through gains.  

While technical and fundamental factors seem to favor the Canadian dollar, the risk is that more signs that the US economy, especially the manufacturing sector, is slowing (after running ahead of demand) will lead the under-performance compared with most of the other major currencies.  

Australian dollar:  The net long position increased by about 9k contracts to 48.4k.  Longs grew for the first time in a month (4k).  Shorts were cut by 5k contracts.   The Australian dollar recorded the week's lows on April 17 and retested it just before the the weekend.  

The Reserve Bank of Australia is the only G10 central bank, besides the BOJ, to be set to ease monetary policy.  Although the inflation figures due out in the coming days are seen as key, the collapse of the terms of trade in Q1 would seem to suggests an easing of price pressures.  Market indications, such as the Overnight Index Swaps (OIS) suggest that almost 100 bp has been discounted over the next 12-months.  

Here too the technical factors seem more supportive than fundamentals.  A move now above $1.0420 would suggest a bottom is in place and encourage momentum players to look for $1.05-$1.06. 

Mexican Peso:   Peso bulls capitulated.  The net long position fell to 46.1k contracts from 68.6k.  Long bailed (-20.8k) and now have their smallest position in two months.  The shorts look like momentum players and extended positions by a more modest 1.7k contracts.  

On April 16, the dollar rose to MXN13.2960, which is near the level that we had anticipated, but the longs could stand the pain no more.  The dollar finished the week near MXN13.10.  The MXN13.00 offered resistance on the dollar's way up and will likely offer support on the way down.  A break of it, though, would likely signal a move back to MXN12.80.