Currency Positioning and Technical Outlook: Euro and Sterling Momentum Fades

Unbeknownst to many, the Canadian dollar was the strongest of the major currencies last week, appreciating almost 0.5% against its US counterpart.  The euro (and the Swiss franc and Danish krone which are nearly pegged to it) gained half as much.   The weakest currencies were the Australian dollar, with the help of the governor of the central bank giving the market a clear target ($0.8500), and the Scandis, which have reported soft data and where Sweden's Riksbank could cut rates next week.

The breadth of the dollar's decline in recent weeks appeared to have narrowed to essentially the euro and sterling.  The take away from last week's price action is that those two currencies have seen the upside momentum fade and some deterioration of their technical condition.  It could simply be some pre-cautionary position adjustment ahead of the FOMC meeting and year-end.

The dollar had fallen against the euro and sterling even as the Bloomberg survey showed a doubling of the number of people who expect the Fed to taper next week over their November survey to a full third.  The technical condition suggest, as counter-intuitive as it may be, that the dollar may strengthen if the Fed does not announce a slowing in its purchases.

The euro's upside momentum faded after three attempts to establish a foothold above $1.3800 failed.  The Relative Strength Index has turned lower  and the MACDs are poised to cross.  The $1.3700 area has offered initial support.  It probably will take a break of the $1.3600 area, however, suggest an outright correction as opposed to a consolidative phase.

Sterling put its high on December 10, a day before the euro's peak, and moved lower.  Despite more strong data (construction spending) before the weekend, sterling traded below its 20-day moving average for the first time since mid-November.    Initial support is seen now near the old highs from Oct around $1.6240.  The key to the medium term outlook is the trend line drawn off the year's low set in early July just above $1.48 and the Nov 12 low near $1.5850.  It comes in on Monday near $1.6130 and rises to about $1.6165 by the end of next week.  Both the RSI and MACDs have turned lower, though without the development of more bearish divergences.  

The dollar quietly slipped to new two-year lows against the Swiss franc in the first half of last week, before a light bout of short-covering helped it record some modest upticks.  The greenback finished last week on a soft tone and the CHF0.8945-CHF0.9000 band needs to be overcome to heal the technical damage.  The MACDs have not turned up and the RSI is neutral.  That said, there appears to be little in the way of technical support for the dollar ahead of the CHF0.8550-CHF0.8500 area.  

The dollar made a new five year high against the yen in Asia before the weekend, and then reversed lower in Europe and North America.  Although the pullback was nearly a big figure, the dollar largely held above JPY103, which is where the 5-day moving average can be found.   The yen's corrective upticks appear to be largely position squaring ahead of the Tankan Survey (early Monday in Tokyo), the FOMC meeting, and reflecting some cross adjustments, especially against sterling.

There are bearish divergences in the daily RSI.  Although the dollar as made new highs this month, it was not confirmed with new highs in the RSI.   There are less pronounced bearish divergence in the daily MACDs. Key support extends from JPY102.00 to JPY101.60.  

The Australian dollar appeared to have been stabilizing before the governor of the central bank offered the market a specific downside target, which the bearishly disposed market was happy to run with.  While we envision the $0.8500 area will be visited next year, the downside momentum eased ahead of the weekend and the Aussie finished near session highs.  Initial resistance is seen in the $0.9000-20 area and again near $0.9080.  A move above $0.9140, roughly the 20-day moving average, which had turned back three attempts to recovery since early November, is needed to begin repairing the technical damage.  

The US dollar recorded an outside up day (traded on both sides of the previous day's range and closed above the high) on Thursday last week.  It initially saw follow through buying on Friday.  However, it reversed lower and finished on the session lows.  Support for the US dollar is found in the CAD1.0560-CAD1.0530 area.   A convincing break could spur a move toward CAD1.04.  The MACDs are rolling over.  The RSI has moved trended gently lower over the past week, but is now at the lower end of where it has been since late October and is not generating a strong signal.   On the upside, the US dollar tried three times in vain to close above CAD1.07 and this area marks the near-term cap.  

The US dollar remains within the broad trading range against the Mexican peso seen since late September between roughly MXN12.80 an MXN13.20.    Mexico's Congress approved liberalization in the energy sector and this appeared to help spark a peso recovery at the end of last week.  It may require a convincing break of the MXN12.75 area to signal a break out.  The technical indicators are not generating strong signals presently.  

Observations on the speculative positioning in selected CME currency futures:

1.  The net long euro and Swiss franc positions continued to grow.  Of note, the net long franc position nearly doubled and, at 12k contracts,  is the largest since early 2013, which itself was a two year high.  

2.  The largest gross position change was the 14.4k contract increase of the speculative short Canadian dollar position.  It stands at 88.6k contracts, which represents a doubling since early November.  The other substantial gross position adjustment (more than 10k contracts) was the re-establishment of long peso positions.  The 12.3k contract increase offset the prior week liquidation of nearly 11k gross long contracts. 

3.  The net short yen position was reduced for the first time in five weeks, but at 130k contracts, remains extreme.  

4.  The gross and net sterling and Australian dollar positions were little changed.  Recall in the previous CFTC reporting period, the gross long sterling position jumped 17k contracts and the gross short Aussie position grew by almost 14k contracts.  

5.  The gross long euro position of nearly 92k contracts is the largest among the currency futures.  Its gross short position of almost 76k contracts slipped into third place behind the gross short yen position (~148k contracts) and  gross short Canadian dollar positions (~89k contracts).  

week ending Dec 10		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	15.9	9.3	91.7	9.4	75.7	2.8
Yen	-130.0	-133.0	18.1	-3.2	147.8	-6.9
Sterling	18.4	18.4	71.0	-2.9	52.6	-3.0
Swiss Franc	12.0	6.5	22.2	7.7	10.2	2.3
C$	-57.5	41.6	31.0	-1.5	88.6	14.4
A$	-45.8	-44.3	19.1	-1.1	65.0	0.5
Mexican Peso	22.5	8.9	40.0	12.3	17.4	-1.3