Currency Positioning and Technical Outlook: Dollar has Game

It appeared the US dollar was bottoming in the first half of October.  We had noted the possibility of head and shoulders reversal patterns in sterling and the Swiss franc.   These proved for naught, and yet, it still appears the dollar is carving out a bottom. The technical tone for the greenback has improved in recent days.  

There has also been a  shift in the fundamental focus toward somewhat better news from the US and somewhat poorer news from Europe. There is mounting speculation that the European Central Bank will have to have some sort of policy response to the continued decline in private lending, weak growth in money supply, and near record low inflation. 

The Dollar Index, which despite the fact that it is not reflective of US trade flows (two of the US 4 largest trading partners, China and Mexico, are not included, and it is heavily weighted toward the euro and currencies that move in the euro's orbit), many participants see it a rough-and-ready proxy for the US dollar in general.  The key technical development is that it finished last week above the downtrend line drawn off this year's highs in early July and the bounce in early September.   

If that down move is being retraced, the next target for the Dollar Index is the 81.20 area and then the 81.75-90 area, which corresponds to a 61.8% retracement and the 200-day moving average.   We note that the RSI and MACDs suggest additional gains and the 5-day moving average has crossed above the 20-day average.  A move now much below 80.00 would cast doubt on this constructive outlook.  

For its part, the euro has not violated a similar trend line, drawn off the early July and Sept lows. On Monday it comes in near $1.3425.  That area also corresponds to a retracement objective.  By the end of the week it is closer to $1.3460.  The 5-day average has not cross below the 20-day average, but it most likely will on Monday.  The RSI and MACDs are moving lower. Assuming the trend line is convincingly violated, the next target would be in the $1.3300-35 area, which represents the next retracement objective and the 100-day moving average.  The 200-day moving average comes in closer to $1.3270.  Given the magnitude of the decline in recent days, it probably requires a move back above the $1.3600-50 area to negate this bearish technical view. 

The dollar has also not violated its similar downtrend against the Swiss franc.  That trend line comes in near CHF0.9180 at the start of the new week, which corresponds to last month's high, and finishes the week near CHF0.9150. The 5- and 20-day moving averages have not crossed, but they are poised to on Monday.   Once the trend line goes, the immediate objective is near CHF0.9220.  It will ultimately take a break of the CHF0.9420-50 area to raise confidence that a low of some import is in place.  

The dollar posted an outside up-day against the yen and the premium the US pays over Japan (on 10-year government paper) widened back above 200 bp for the first time since mid-October.   The technical tone is constructive, but within the context of the broad trading range conditions that have prevailed for five months now.   The dollar has been making lower highs and higher lows against the yen since the middle of Q2.  Last month's high was near JPY99.00 and this represents the next target.  However, even a move a bit higher, even a little of JPY100, wouldn't violate 5-month only trading range.  A move above September high near JPY100.60, though would suggest something more important is taking place technically.   The weekly technical readings warn of the upside risks to the dollar against the yen.  

Sterling appears to have carved out a double top (reversal pattern) in October, with gains in early and late in the month, stalling out near $1.6260.  It depends on how one draws the neck line, but it can be found in the $1.5890-$1.5915 area.  The pre-weekend low was near $1.5910.   A convincing break of the neck line, perhaps encouraged by accumulating evidence that the data is no longer surprising the market on the upside, would suggest potential toward the mid-$1.5500 area, which also roughly corresponds to a 50% retracement of the rally from the July lows near $1.4800. The 5-day moving average crossed below the 20-day before the weekend and the technical indicators are weak.   Resistance now is pegged in the $1.6040-70 area. 

The Australian dollar posted a key downside reversal on October 23, after poking through the 50% retracement of this year's decline, and has not looked back since. The 5- and 20-day moving averages crossed in the second half of last week.  MACDs are have turned lower, but the RSI is not generating a strong signal.  A break of the $0.9430 area would target the $0.9325 area, though the real technical test may not come until closer to $0.9225.  If this correction in the Aussie is indeed over, the $0.9480-$0.9520 area should hold back stronger gains.  

The Canadian dollar is the only major currency to have gained against the US dollar last week (~0.25%).   Yet the Canadian dollar is not very inspiring.  It has been in a broad range for several months.  The US dollar has found demand near CAD1.02 and supply near CAD1.06.  The technical indicators are not generating strong signals.  Look for narrow CAD1.0350-CAD1.0450 range to dominate until toward the end of the week.  Both countries report Oct employment data on Nov 8.  

The US dollar is likely to push higher against the Mexican peso.  The 5- and 20-day moving averages are set to cross on Monday and, while the RSI is neutral, the MACDs are turning higher. A downtrend line drawn off the early Sept and early Oct highs comes in near MXN13.20 and this is a reasonable near-term objective.   If this near-term view is valid, the greenback should spend little if any time below MXN12.96.

Observations from the speculative positioning in the CME currency futures:

1.  There were mostly minor position adjustments in the most recent reporting week that ended October 29.   Of the 14 gross positions we track, 12 changed by less than 6k contracts, and of those, a third were less than 1k contracts.  Two gross positions were adjusted by more than 10k contracts:  long euros were added to while long yen positions were cut.  

2.  The gross long euro position came with spitting distance of the record high set in April 2007. Many observers focus on the net position, which will fail to reveal how large of a speculative long position has been accumulated.  The cut in the gross long yen position, almost in half from the previous week, is the smallest since March 2012.  

3.  In the week ending Oct 29, the gross long currency positions generally grew, with the yen and sterling being the exceptions.  There was a less of a pattern among the currency shorts, except to note the position adjustments were minor.  

4.  The net long sterling and Swiss franc positions are the largest since the start of the year, but were little changed from the previous period.  The net short Australian dollar position is the smallest since May.  

week ending Oct 29		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	72.4	60.4	137.1	15.7	64.6	3.7
Yen	-71.8	-59.3	13.9	-11.5	85.7	1.1
Sterling	14.3	12.2	59.4	-0.7	45.2	-2.7
Swiss Franc	10.9	10.8	22.2	0.4	11.2	0.3
C$	-5.4	-10.8	28.9	0.5	34.3	-5.0
A$	-22.1	-32.2	22.9	5.2	45.0	-4.9
Mexican Peso	7.2	7.8	28.8	5.1	21.6	5.6