Currency Positioning and Technical Outlook: Dollar Firm, but Look for Near-Term Pullback

With the help of the unexpected ECB rate cut and better than expected US economic data, the US dollar showed the kind of strength the technical reading suggested was likely last week.  However, the market appears to have run ahead of itself and the immediate risk is for a setback in the dollar.

The fundamental drivers may have been exaggerated.  The ECB's refi rate cut is largely symbolic in nature as the interbank rate trades closer to the zero deposit rate and is largely unchanged from where it was prior to the ECB's surprise move.  The implied yield of the December 2014 Euribor futures contract was three basis points lower on the week.  

Similarly, the 14 bp jump in the US 10-year Treasury yield in response to the stronger than expected establishment survey exaggerates the likelihood of the introduction of tapering at the December FOMC meeting.   What looks like improvement is really noise around a signal of steady but gradual improvement in the labor market.  The 3-month average of private sector payroll growth is just below 190k.  The 6-month average is 175k, while the 12-month average stands at 196k.  

Moreover, price pressures, as shown by the core PCE deflator of 1.2%, are still threatening deflation and was recognized as such by none other than Bernanke himself, when he was a Governor on the Federal Reserve in the early 2000s.   Without inflation moving back toward the Fed's target, there is no urgency to taper.  

Euro:  Convincingly violated the July-September up trend line and the 5-day moving average has crossed below the 20-day average.  The US jobs data failed to drive the euro below the ECB-spurred lows, which correspond to a (50%) retracement of the rally since July (~$1.3290).  The euro traded below its 100-day moving for the first time in two months, though was unable to close the North American session below there.  The euro is also flirting with the lower of its Bollinger Bands set at two standard deviations below the 20-day moving average.    Technical indicators allow scope for further euro losses, but they may prove limited before a bounce.  Resistance is now seen in the $1.3450-80 area.  

Yen:   Remains well within a consolidative range that has been carved out over the past six-months. The US Treasury premium (10-year) over JGBs has widened by about 25 bp over the past week or so to reach a new two-month high above 215 bp.  At the same time, the Nikkei appears to have found support near 14000.  While these developments should underpin the greenback and the technical readings are constructive,  it is not clear that the upside has much to offer.   The dollar has not enjoyed two consecutive closes above JPY100 in four-months.  

Sterling:  Appears to be continuing to carve out a top of some importance.  Sterling spent last week within the range established the previous week and the upticks were capped be a (61.8%) retracement objective of the pullback since recording what we suspect is the second of a double top near $1.6260. The neckline, seen near $1.5900 contained sterling downticks at the start of the week and the soft close ahead of the weekend warns of a potential retest.  However, like we suggested with the euro, those downticks are likely to be short-lived.  

Swiss franc:  Shed a little more than 4% against the US dollar since October 24.  The greenback is trading at two-month highs against the franc.  It was kept in check at the end of last week by the (38.2%) retracement of the slide since May (~CHF0.9250) and coincides with the 100-day moving average.   While we anticipate additional gains (~CHF0.9350-CHF0.9475), we are more inclined to buy dollar pullbacks than chase this rally.  

Canadian dollar: Slipped to its lowest level in two-months before the weekend.  The US dollar hit down trend line drawn off the mid-July, late-August and early-September highs a little above CAD1.05.   Technical indicators and the cross-over of the 5- and 20-day averages are constructive.  A move above the trend line would target CAD1.0560 initially, with stiffer resistance near CAD1.06.   Support is seen ahead of CAD1.04.  

Australian dollar:  Encouraged by a dovish monetary policy statement by the Reserve Bank of Australia, the Aussie was pushed convincingly below $0.9400 for the first time in a month.  The down draft halted near the (50%) retracement of the advance off the August 30 low, which was found near $0.9325.   Scope for corrective upticks extends toward $0.9400-25.   The New Zealand dollar is particularly interesting from a technical perspective.  The US dollar has carved out a potential head and shoulders pattern.  A convincing break of the  $0.8200 neckline would suggest potential toward $0.7850.

Mexican peso:  After approaching the Oct high near MXN13.3450, the dollar revered course before the weekend.   However, the pullback failed to violate the greenback's uptrend.  Support is seen around MXN13.10 and the upper end of the multi-month trading range is near MXN13.45.  

Observations of speculative positioning in the CME currency futures:  

1.  There were two significant position adjustments.  The gross long euro positions were slashed by 32.7k contracts.  Gross short yen positions grew by 12.6k contracts.    Ten of the remaining 12 gross positions we monitor were changed by less than 5k contracts.  

2.  All the currency futures, but the Australian dollar, saw gross short positions increase.  The gross short Australian dollar position was reduced by less than 1k contracts.    Gross long currency futures positions were mostly trimmed, with the exception of  yen and Mexican peso.  

3.  The modest decrease in gross long sterling positions and a modest increase in gross shorts was sufficient to swing the net position back in favor of the shorts for the first time since late September.  

4.  The Commitment of Traders report shows that speculators were reducing their short dollar position ahead of the ECB meeting, where a surprise rate cut was delivered, and stronger than expected US jobs data.  It ought not be surprising to see these trends continue into the next CFTC report.  

week ending Nov 5		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	33.1	70.6	103.3	-32.7	70.2	4.8
Yen	-73.8	-62.4	18.7	1.2	92.5	12.6
Sterling	-2.4	10.2	51.2	-6.6	53.6	5.9
Swiss Franc	8.1	11.5	20.5	-2.2	12.4	1.1
C$	-18.0	-15.2	26.8	-0.4	44.8	2.3
A$	-25.1	-23.2	22.4	-2.7	47.4	-0.8
Mexican Peso	5.2	4.9	29.5	1.7	22.3	1.5