Currency Positioning and Technical Outlook: Dollar Powers Ahead

The US dollar finished last week well bid. It is at six week highs against the euro. It recovered from the brief dip at the start of the week below JPY103 and finished the week above JPY104.00. The Australian dollar fell to new multi-year lows, as did the Canadian dollar. Most emerging market currencies also fell. 

The notable exception to this general pattern was sterling. Strong retail sales helped ease some anxiety that had been creeping in about sustainability of the UK’s expansion.

It was the apparent resiliency of the UK and US economies that was the main fundamental development in recent days. The poor US jobs data had sparked some speculation that the economy was sufficiently fragile that the Federal Reserve would have to re-think its tapering tactics that it just had unveiled last month. The combination of the healthy gain in a key component of retail sales (excluding autos, gasoline and building materials), stronger than expected regional Fed surveys (Empire and Philly) and a Beige Book that seemed to slightly upgrade the economic assessment, pointed in the direction of continued exit from QE. A number of Fed officials, not of all who are voting members on the FOMC, encouraged this conclusion by investors.

Before the weekend, the euro slumped to almost $1.3500. It finished the North American session below its 100-day moving average (~$1.3665) for the first time since September. A break of this area could open trigger a new wave of long liquidation that could carry the single currency toward $1.3450. The euro’s technical condition has deteriorated and the five days average is trending below that 20-day average.

As poor as the euro’s technical readings are, sterling’s are positive. The RSI an MACD are turning higher. Sterling stalled in front of the $1.6460 area, which corresponds to a 50% retracement of the losses seen since the multi-year high above $1.6600 was seen briefly on the first trading session of the year. A move above $1.6500-20 is needed to signal the resumption of the uptrend. Support has been established in front of $1.6300.

The greenback also finished last week above its 100-day moving average against the Swiss franc (~CHF0.9075), an area it has been flirting with, but for which it was unable to sustain a convincing break. The CHF0.9130 area offers immediate resistance.

The dollar finished the week little changed against the yen, but this overlooks the ride it took. It first fell to JPY102.85 in follow through selling after the US employment report, but proceeded to recover back to almost JPY105 as the dollar buying strategy on pullbacks continues to be seen. The RSI and MACDs are still pointing lower, but rather than signal a new leg down in the dollar, we suspect a consolidation phase is more likely.

The technical condition of the dollar-bloc currencies is poor and the Canadian dollar is challenging the Australian dollar for leadership of decline. Economic data from both countries have encouraged rate cut speculation. The Bank of Canada meets next week. A rate cut is highly unlikely, though dovish comments by the central bank are likely. This could trigger a bout of short-covering, perhaps on a sell-the-rumor-and-buy-the-fact type of activity. Key support for the US dollar is seen in the CAD1.0880-CAD1.0900 area.

Australia reports Q4 CPI figures and a subdued report could fan rate cut expectations. The Australian dollar traced out a big outside down week and many market participants are looking for $0.8500 in the coming weeks. Ironically, the New Zealand dollar was dragged lower, even though the market sees a growing risk of a rate hike at the end of the month. The $0.8500 area now marks important resistance and the Kiwi can make its way toward $0.8100.

The US dollar trended higher against the Mexican peso last week and reached its best level since September.  It has approached the upper end of the Q4 '13 trading range.  Although the technical indicators are not generating strong signals, we suspect the market has moved too far too fast.  The dollar closed marginally above its Bollinger Band (+/- 2 standard deviations around the 20-day moving average).   Support is seen near MXN13.15.  The  top of the range appears to be around MXN13.3450.  

Outside of the currencies we usually review here, we observe among the clearest technical signal may be that the euro is poised to weaken against the Swedish krona. It has traced out a large head and shoulders pattern and finished last week below the neckline. The left shoulder was carved in mid-November near SEK9.00. The head was put in place in mid-December near SEK9.10. The right shoulder was formed in the first half of this month. The neckline can be found around SEK8.82. If this is indeed a valid pattern, the measuring objective is near last summer lows around SEK8.55.

Observations from the speculative positioning in the CME currency futures:

1. The net speculative position switched from long to short Swiss francs.  It is the first net short position in 5 months. It was more the result of longs being cut (6.2k contracts) than shorts being added (+1.5k contracts).

2.  The net speculative Canadian dollar position stands at a new record short of 67.3k contracts.  Gross shorts rose 10.5k contracts to 101.6k.  As noted above,  we suspect the Canadian dollar is vulnerable to a short squeeze after the central bank meeting on January 22.  

3.  In three of the seven currency futures we review here, there was a reduction of both gross shorts and longs (yen, Australian dollar and Mexican peso).  In the previous reporting period, there were four currencies were subject to such position adjustments  (yen, sterling, Swiss franc and Australian dollar).  

4.  The net long euro position fell for the third consecutive week.  The net short yen position was reduced for a third week as well.  

week ending Jan 14		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	9.2	14.5	87.1	-1.1	77.8	4.2
Yen	-118.0	-129.0	10.8	-0.6	128.8	-11.4
Sterling	11.2	18.2	54.4	-0.3	43.2	6.7
Swiss Franc	-2.9	4.7	12.6	-6.2	15.5	1.5
C$	-67.3	-60.5	34.2	3.7	101.6	10.5
A$	-52.0	-56.9	10.4	-3.8	62.4	-8.7
Mexican Peso	13.7	17.6	32.5	-6.0	18.8	-2.1