Currency Positioning and Technical Outlook: Clouded by Fundamentals

We were wrong.  A week ago, we had thought a downside correction in the dollar was likely.   Instead the greenback remained generally firm.  The Canadian dollar was the main exception and managed to trade at its best level in a month.  The yen was a bit firmer too, but we had correctly anticipated that.

The fallout from Cyprus, including the perceptions of increased vulnerability of other EMU members, such as Slovenia, and the unresolved Italian political situation dragged the euro down to new four month lows, and generally weighed on the other major currencies.

The week ahead begins off slowly with some markets still on closed on Easter Monday.  Nevertheless, the week is full of regularly scheduled events, such as PMI reports, central bank meetings in Australia, Japan, the UK and the euro area, and North American employment reports and US auto sales.   In addition to these, Cypriot developments, Italian politics and Slovenia's financial condition are also shaping the investment climate.

Euro:  March was the second consecutive month that the euro fell.   The $1.2750 offers initial support  and some option barriers are believed to have been struck there.  The next downside target is $1.2680, which corresponds to a retracement objective of the euro's rally sparked by ECB Draghi's comments in late July 2012.   We remain concerned that from a technical perspective the euro is stretched.  The new four month lows were not confirmed by the RSI.  Perhaps the 5-day moving average may offer some guidance.  The euro has finished the North American session above it only four times in March after six times in February. and only once for two consecutive sessions (back in the middle of February).  In addition, we note that euro has not closed above its 20-day moving average since Feb 13.  It will come in just above $1.2940 on Monday and is falling more than 10 pips a day. 

Yen: Since peaking on March 12 near JPY97.60, the dollar's momentum has flagged.  Many in the market expect the yen to be sold off at the start of the new Japanese fiscal year and as the BOJ is set to announce new QE efforts.  We remain less sanguine.  We think the yen's 13.7% decline against since mid-November 2012, when the Japanese election was called, reflects the market discounting a more aggressive monetary (and fiscal) policy under the Abe government.   In the last two weeks, the dollar has has twice held support near JPY93.50.  A break of this could see a range extension to just above JPY93.00.  It requires a convincing break of that to signal a return to the JPY91.00 area.   JPY94.50 offers initial resistance on a closing basis. 

Sterling:  We had been monitoring what appeared to be a head and shoulders bottom in sterling.  Sterling reached $1.5270 and reversed, dropping almost 2 cents before bottoming, and returning to the neck line of the pattern near $1.5200.  It is not uncommon for the a retest of a neck line in a head and shoulders pattern, though this time it was rather deep.  Even though the price action was disappointing, a number of technical indicators suggest it may be premature to abandon the idea altogether.  The RSI and MACDs are still trending higher and sterling held above the 20-day moving average.  In addition, sterling finished the month above the down trend line drawn of the Jan 2 high near $1.6380, the mid-February high just below $1.5850, and March 22 high near $1.5250.  It is falling around 20 pips a day. 

Canadian dollar:  The Canadian dollar was the best performing of the majors last week, gaining almost 2/3 of 1% against the US dollar.  The Canadian dollar's gains pushed it to the best level in more than a month.  This saw the greenback test the CAD1.0145 area, a retracement objective of  the rally off the low of the year set  Jan 11 near CAD0.9820.  A break of this CAD1.0145 area is needed to signal a continued correction that could carry the US dollar toward CAD1.0050.  On the upside, the greenback faces resistance in the CAD1.0200-20 area. 

Australian dollar:  The Aussie had begun the week with a test on the $1.05 level, which had not been seen since January 24.  However, as with most of the other major currencies, it failed to sustain the upside momentum and returned to support around $1.04 in the second half of the week.  It was the best performing major currency in March, gaining a little more than 2% against the US dollar.  Technical indicators suggest this advance is getting long in the tooth, even if not yet generating sell signals.  On the downside, it probably requires a more dovish than expected RBA statement and a break of the $1.0350 area to force the bulls to retreat. 

Mexican Peso:  The peso, still considered an emerging market currency, even though Mexico is a member of the OECD, actually was even stronger than the Australian dollar in March, gaining roughly 3.6%, which is as much as the Australian and New Zealand dollars combined.   Without much momentum, the US dollar ground to a new low since Q3 2011.    MACDs and slow stochastics appear to be about to turn, but with the potential of telecom and energy sector reforms, coupled with attractive yield pick up, we think market psychology is such that pullbacks in the peso will continue to be bought.


We share the following observations on positioning in the currency futures.

1.  The net speculative position remains short the euro, yen, sterling, Swiss franc and Canadian dollars.  The gross long position in these currencies continues to be reduced.  The speculative community is long the Australian dollar and Mexican peso and it added to those gross longs in size (40.1k and 17.8k contracts respectively).

2.  The Canadian dollar is saw a sizable adjustment of gross positions, but only a small reduction in the net short position. Speculators have been reducing the net long position and then growing the net short position for nine consecutive week.  There is still a substantial gross short Canadian dollar position.

3.  The 40.1k contract increase in the gross long Australian dollar position is significant.  In most weeks, there are only a few gross positions adjusted by more than 10k contracts.  These late longs, however, cannot be happy as the Aussie peaked in the spot market the day this reporting period ended.  The Australian dollar then fell nearly a cent.

4.  The record net short sterling position continued to increase.  The sterling bears have been in the driver's seat for eleven consecutive weeks; first liquidating the net long position and then expanding the shorts.

week ending March 26		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-49.1	-44.9	41.3	-7.7	90.4	-3.5
Yen	-89.1	-80.0	46.9	-8.5	136.1	0.7
Sterling	-66.6	-61.5	38.2	-0.9	104.7	4.2
Swiss Franc	-12.2	-11.0	8.7	-2.5	20.9	-1.3
C$	-62.6	-65.3	26.3	-13.1	88.9	-15.8
A$	85.5	54.1	141.1	40.1	55.6	8.6
Mexican Peso	128.0	109.0	150.7	17.8	22.6	-1.0