Currency Positioning and Technical Outlook: Dollar and Yen Downside Risks Persist

The British pound was the only major currency to have gained against the US dollar over the past month.  Its 2% gain helped it finish November at its highest level since August 2011. The dollar rose against the other majors, with its 4.1% rise against the Japanese yen being the largest.

 The dollar-bloc currencies, alongside the Norwegian krone were also laggards, losing between 1.2% (Canadian and New Zealand dollars) and 3.6% (Norwegian krona and Australian dollar).  The Swedish krona fell 2.5%.   Most emerging market currencies also fell against the dollar over the past month.  This is not the of price action one would expect if the yen's carry trade status has been rekindled, as many observers have claimed in recent weeks as the yen has fallen.

The US dollar's weakness seen over the past week is very narrowly based, largely concentrated against the euro (and its two shadow currencies Swiss franc and Danish krone) and sterling.   Given that the US Dollar Index is heavily weighted toward Europe, it has traded heavier, but it is not truly reflective of its overall performance.  It finished last week with its seventh consecutive session of recording lower highs.  Technical indicators warn of scope for additional near-term declines.  Key support is seen around 80.00.

Of the currencies reviewed here, the Australian dollar may have the greatest potential for a trend change in the period ahead.  The MACDs are about to turn and the RSI did not confirm the new 12-week low.  The Aussie bears struggled to sustain the downside momentum in the second half of last week. The first real test of the Aussie bears comes in near $0.9200.   If the technicals are anticipating fundamentals, it may suggest either better than expected data and/or a central bank that continues to seem to be in no hurry to cut rates again from record lows.  That said, we still do not want to rule out a rate cut in late Q1 2014.

Maybe it was the lack of participation in the second half of last week, but the euro's (upside) momentum appeared to stall around $1.36.  A retracement of the euro's fall from the $1.3830 area is found near $1.3630, which also corresponds to the top of the Bollinger Band.  The technical indicators we look at are still constructive for the single currency.  A break to the upside would encourage another run at the $1.38 area.

Sterling's advance has taken it to within striking distance notable resistance in the $1.6400-25 area.  It is where the long-term trend line drawn off the 2009 high near $1.70 and the 2011 high near $1.6750 intersects.  It is also a retracement objective of the decline since from the 2007 high near $2.1150.  If offers in this area are successfully absorbed, technically potential may extend into the $1.70-$1.73 area. Support is likely what appeared to be a double top in October near $1.6260.  

The dollar finished November at its highest level against the yen since May.  It appears to have broken out of the six month consolidative pattern.  The next target is JPY103.75, but the measuring objective of the chart pattern may be closer to JPY109.  

The yen is also weak against the euro.  The euro is pushing through to new five year highs and although the JPY140 area may mark psychological resistance, but the JPY141 area may be more significant from a technical perspective as it represents a key retracement (61.8%) of the euro's slide from JPY170 in 2008 to last year's low near JPY94.  

Sterling is at its best level against the yen since late-2008.  At the end of last week, it approached the 38.2% retracement of the more from the 2007 high near JPY251 and the 2009 and 2011-2012 low near JPY117. A break above here would suggest a move toward JPY180-JPY185. 

The Korean won's appreciation against the yen is also noteworthy.   It is trading at 5-year highs against the yen and is approaching the JPY10 level, which is thought to be important for Korean corporations and, consequently, politicians as well.   The won is also strengthening against the US dollar too.  Some reports suggest that Korean officials have been intervening by buying dollars.  

Besides the Hong Kong dollar, which is of course pegged to the US dollar, the Korean won was the only Asian currency to have gained against the dollar in November (~0.25%).  Over the past three months, the won has gained almost 5% against the dollar.  This is second in the region, behind the Indian rupee, which was still recovering from the June-August swoon.  Officials will likely escalate their defense especially if the yen remains weak and the dollar threatens the KRW1000 level.  We note that in the past week, foreign investors have bought back about 2/3 of the Korean shares they had sold in the first part of the month.  

The US dollar finished November at 2-year highs against the Canadian dollar.  The next target is seen in the CAD1.0660-80 area.  A break of that could open the door to another 1-2 big figure move (CAD1.0760-CAD1.0860.  It is notable that the Canadian dollar failed to get any traction before the weekend despite better than expected GDP figures (Q3 2.7% annualized).   

The greenback has been consolidating against the Mexican peso and the technical indicators are not particularly helpful presently in handicapping the direction of the breakout.  The range that has dominated in recent sessions is MXN13.03-MXN13.1450.  However, a breakout will not be confirmed until the wider MXN12.96-MXN13.20 band broken.  

The latest CFTC Commitment of Traders report on the CME currency futures is delayed by the Thanksgiving holiday.  We will resume our position analysis next week.