Currency Positioning and Technical Outlook: Thin Conditions Dominate

The lack of participation in the global capital markets, in general, and the foreign exchange market, in particular, can make for erratic price action punctuating an eerie calm.  Order flow and position adjustment (passive, as in triggering of stops, or more active ahead of year end) may exert greater influence than is often the case. 

Here is an overview on how we see the technical condition of the dollar against a selected group of foreign currencies into the year end. 

Euro:  After posting a big reversal day on December 18 in response to the Fed's tapering, the euro moved lower.  In the following two sessions, (December 19-20), the euro slipped another half cent to test the initial retracement objective of the advance from early November (~$1.2755) that is found near $1.3615.  The euro failed to make a new session low despite the sharp upward revision in Q3 US GDP (4.1% vs 3.6% and 2.6% initially).  A break would initially signal potential into the $1.3525-50 area.  On the top side, a move back above $1.3720 spur a move toward the recent highs, just above $1.3800.   The MACDs have turned lower, but the RSI appears to be curling higher. 

Dollar Index:    Although this basket is heavily weighted toward the euro and Europe more generally, it has outperformed the euro due to the weakness of the yen and Canadian dollar.  The US dollar's upside momentum since the FOMC meeting faded as the Dollar Index hit the 61.8% retracement (~82.82) of the losses since Nov 8 high of almost 81.50 and corresponds with the tend line down off the Nov highs.  The RSI and MACDs are move constructive than in the euro and the 5-day moving average is set to cross above the 20-day average in the coming days.   That said, the price action before the weekend and the weak close cautions against chasing the market higher.

Yen:    The yen lost a little less than 1% against the dollar last week, falling to new five year lows in the aftermath of the Fed's tapering decision.  The RSI and MACDs, though did not confirm the price action by making new highs.  The price action ahead of the weekend was not very encouraging.  Key support is see near the 20-day moving average, which the dollar has not traded below since Nov 8.  It comes in near JPY102.80 (rising around 15 pips a day).  

Sterling:     The technical signals are not strong for sterling.  It has moved above the $1.6400 level several times this month, but has managed to close above there only once (Dec 10).  Support is seen in the $1.6220-40 area.  Inclined to favor the upside, but risk-reward considerations are not very attractive at current levels.  

Swiss franc:   The dollar bounced off the lows that had been carved out over the last 10 days or so just below CHF0.8850.  However, it ran out of seem near CHF0.9000.    The RSI is turning down, but the MACDs are have crossed to the upside.   We inclined to see a test on CHF0.8900 in the days ahead; yet there are better risk-reward opportunities.  Moreover, even in the best of times, the Swiss franc is not always very liquid and over the holiday period this will be especially true.  

Canadian dollar:   The US dollar has tried to established a foothold above CAD1.07 a handful of times this month, but has failed to do so.  Although the greenback made new three-year highs against the Canadian dollar, the RSI and MACDs have failed to confirm the price action, warning of the of the risk of a near-term pullback.  Initial support for the US dollar will likely be encountered in the CAD1.0625-50 area.  A break of CAD1.0560 is needed to signal a deeper correction.  

Australian dollar:  Before the weekend and helped by position squaring the Australian dollar posted its biggest advance in nearly 2-months.  While the RSI has turned higher, the MACDs have yet to turn.  A move above $0.8970-$0.9000 would help lift the technical tone.  Yet, watch the 20-day moving average, which comes in near $0.9040, and has kept counter-trend up moves in check since early November.  

Mexican peso:   The near-term technical outlook for the peso is not clear.  Neither the RSI or MACDs are generating any strong signals and the price action remains range-bound.  The dollar has not been above MXN13.10 or below MXN12.80 for nearly three weeks.  

For 2013, our "big trade" was buying the peso for Australian dollars.  It worked out solely because of the Aussie leg (-14%) as the peso was little changed (-0.6%).  This year, we are going to stick with the long peso leg, but switch from the Aussie short to a short Canadian dollar position.   Currently the cross is trading above MXN12.12.  The MXN12.00 is initial support and then MXN11.85.  However, if our fundamental and technical analysis is correct, we think there is potential toward MXN11.20 in 2014.

Observations on speculative positioning in selected CME currency futures:  

1.  Net and gross position adjustments among speculative participants was minimal in the reporting period covering the days leading up to the FOMC meeting.

2. The clearest tendency was to add to gross short positions, except for the euro and sterling, where they were trimmed.

3.  Gross short Canadian dollar positions continue to grow, though the increase in the net short positions was more a function of longs being cut than new shorts building. The 65.5k net short position is the largest in seven years and just behind the record in late 2006.   In any event, the gross short position of 90.6k contracts is second only to the yen, where the gross  shorts stand at 152.4k contracts.  

week ending Dec 17		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	27.9	15.9	97.8	6.1	69.9	-5.9
Yen	-130.0	-130.0	22.2	4.1	152.4	4.6
Sterling	17.8	18.4	62.3	-8.7	44.5	-8.1
Swiss Franc	12.0	12.0	25.3	3.1	13.3	3.1
C$	-65.5	-57.5	25.1	-5.9	90.6	2.1
A$	-51.6	-45.9	13.8	-5.4	65.4	0.4
Mexican Peso	15.7	22.5	40.4	0.5	24.8	7.3