Currency Positioning and Technical Outlook: Stirred but not Shaken

We have been tracking the deterioration of the US dollar's technical tone over the past three weeks.  That ended abruptly.  Weak euro area data, a more dovish than expected ECB, and heightened political uncertainty in Italy, saw the euro reverse lower after briefly moving above an eighteen month-old downtrend.   

The UK also cut its growth outlook, and poor data increases the likelihood that the BOE  may have to resume its gilt purchases in the new year, though consumer inflation expectations have ticked up recently.  

At the same time, there appears to be little progress on the US fiscal talks.  Whenever a top official signals this, the dollar seems to tick up on risk-off considerations, though with diminishing impact.  The stronger than expected November employment data is not sufficient to stay the Fed's hand and the FOMC will most likely expand the long-term assets purchased under QE3+ at its meeting that concludes on December 12.

The prospects that the Japan's LDP can secure a parliamentary majority in the December 16 election weighed on the yen on ideas that Abe will have a stronger hand to press for aggressive easing of monetary and fiscal policy.  We note the depreciation of the yen and the threat of currency debasement has not had a negative impact on JGB yields, which are slightly lower and near record lows.  

Euro:    The technical tone was adversely impacted by the euro's cent and a half decline in latter part of last week.  A move back above the $1.2980 to $1.3000 area would take the pressure off a retest on the $1.2840 important support area.  The euro has been turned back three times now since mid-September above $1.31.  The recent price action reinforces the significance of this area.  Look consolidative to weaker activity. 

Yen:  The dollar has spent the better part of the past two and a half weeks chopping between about JPY81.70 and JPY82.70. Technical tools are not generating any robust signals of the near-term direction.  We are inclined to see a continuation of the range-trading environment.  Although there have been some reports of profit-taking by hedge funds in recent days, our sense remains that many market participants are convinced the yen will weaken.  Just as many respect the resolve of the ECB to reduce the extreme tail risks, so too many are reluctant to resist an LDP-led effort to debase the yen.  Yen weakness ahead of the election, which could still see "sell the rumor buy the fact" type of activity afterwards. 

Sterling:  After meeting resistance in the $1.6130 area, sterling slid in the second half of last week to retest support in the $1.5980-$1.6000 band.   A break of $1.5940-60 area would confirm a high of some import is in place and would signal return to the mid-November low near $1.5830  Immediate resistance is seen in the $1.6060-80 area.  Consolidaitve trading is the most likely scenario.

Swiss franc:  News that Credit Suisse was going to charge large clients for holding substantial franc deposits spooked the market.  Yet,  at least two US banks and another large Swiss bank had engaged in a similar practice previously without eliciting such a dramatic response.  Some suspect the SNB will make a similar move when it meets on December 13.  We do not.  The euro rallied about 1.1% in reaction, but as more participants came along to our point of view, the euro surrendered 0.75%.  The dollar bounced from about CHF0.9240 to around CHF0.9380, but the close near CHF0.9345 is more neutral. We look for the franc to recover more ground against the euro, and that means for those who are inclined to play the dollar from the short side, may be better off in the franc, though it does not have nearly the same liquidity.  The franc may outperform the euro. 

Canadian dollar:  The technical position of the Canadian dollar appears to be the strongest of the majors.  And the official decision after the markets closed for the weekend, allowing the Cnooc-Nexen and Petronas-Progress bids to proceed, may provide an additional fundamental fillip.  The US dollar posted an outside down day against the Canadian dollar and below support that had built near CAD0.9900.  The next band of support is seen in the CAD0.9845-75 area.  The speculative market had been taking profits on long Canadian dollar positions in recent weeks, but may now be tempted to return.  The technical condition is among the strongest of the major currencies. 

Australian dollar: The Australian dollar has been exceptionally resilient in the face of what would seem to be poor news stream, which includes a rate cut, expectations for another next year, disappointing growth and a wider trade deficit.  It also remained firm despite the euro's 1.5 cent drop in the second half of last week.  While market positioning seems stretched, the technical condition remains constructive.  Initial support is seen in the $1.0450 area.  The $1.0510-20 area offers the immediate cap, but the bulls have their sights set on the six month highs above $1.06.  Impressive resilience.  Yield pick up remains attractive.  

Mexican peso:  The dollar broke down against the peso and finished the week at its lowest level in two months.  Support is seen nearby in the MXN12.78-80 area, but the interest rate story remains so compelling, and the Federal Reserve is poised to expand its balance sheet quicker, the peso remains attractive.  As we cautioned with the Australian dollar, market positioning is getting stretched in the peso.  Yield pick up is attractive.  Interesting opportunity to park cash over the holiday period. 

week ending Dec 4		Commitment of Traders
		(speculative position in 000's of contracts)
	Net	Prior Week	Gross Long	Change	Gross Short	Change
Euro	-32.8	-66.7	48.3	12.5	81.1	-21.4
Yen	-90.3	-79.5	20.9	-6.1	111.3	4.8
Sterling	27.3	10.3	66.1	14.9	38.8	-2.0
Swiss Franc	0.6	-3.4	11.7	2.0	11.1	-2.0
C$	57.1	62.4	66.4	-6.3	9.3	-1.0
A$	92.2	76.8	136.2	14.0	44.0	-1.4
Mexican Peso	119.0	93.9	127.0	25.5	8.0	0.4

***The net short euro position is the smallest in 14 months. New gross longs, which increased by a third in the latest reporting period were in weak hands as the euro sold off 1.5 cents in the three sessions following the end of the period.
***The net short yen position is the largest in five years.  The gross short position is at levels seen only   few times in the last two decades.
***Gross long sterling positions are the largest in a year.
***The net Swiss franc position swung back to the long side, albeit barely.  It has been vacillating over the past couple of months.  This is the first net long position in a month.
***The net speculative long Canadian dollar position has been continued to unwind since hitting a record of 105k in late September.
***The net long speculative Australian dollar position stands at a new record high.
***After a bout of profit-taking in Oct and most of Nov, the speculative community is re-building a substantial long peso position. Gross longs increased by a quarter in latest reporting period.