Currency Positioning and Technical Outlook: New Ranges?

There were three important price developments among the major currencies in the past week.

First, encouraged by more hawkish signals from the Bank of England, in contrast to the Federal Reserve, Bank of Japan and the European Central Bank, sterling was bid to new multi-year highs.The Commitment of Traders data show the continued building of gross long sterling positions, and this was prior to the pound sustaining the move above $1.70.

Still, sterling was not the strongest of the major currencies and the euro actually narrowly outperformed it (0.4% vs 0.3%). The market appears stretched as sterling approached the upper Bollinger Band. Although sterling closed two consecutive sessions above $1.70, including on a weekly basis, its foothold is precarious near-term. Pullbacks will likely be bought. The key issue is how shallow of a dip. A break of $1.6975 would signal a deeper pullback and the next objective would be closer to $1.6920.

The second important price development was the euro itself. Although a week ago, the euro had appeared poised to fall through the $1.3500 level, the bears ran into a wall of buyers, including, market talk suggested, reserve managers. The euro's upside though seems to be capped the bearish underlying sentiment and the expected divergence of monetary policy.

This leaves the single currency in a range. The immediate near-term range is roughly $1.3560 to $1.3650, The broader range appears to be $1.3500-$1.3700. This will keep implied volatility grinding lower, even though near 5%, it has already slipped to fresh multi-year lows. The fact that three-month implied volatility is above the historic (realized) volatility is also consistent with this outlook.

The third significant technical development was the breakdown of the US dollar against the Canadian dollar. It took a rise in Canadian retail sales twice what the consensus expected (1.1% vs. 0.6%) and a greater rise in inflation to two-year highs (2.3% on the headline and 1.7% on core) to push the US dollar below CAD1.08 for the first time since early this year. The US dollar closed below its 200-day moving average (~CAD1.0780) for the first time since Q1 13.

While the breakout is noteworthy, the technical readings caution against expecting strong follow through gains in the Canadian dollar immediately. The RSI and MACDs are not generating strong signals, and the US dollar finished below the lower Bollinger Band (~CAD1.0785). That said, the CAD1.0800-20 area should offer initial resistance now. On the downside, a break of CAD1.0740 signals a test on CAD1.07. The Bank of Canad meets on July 16 and after this string of data, it will likely be a bit less dovish in its neutrality.

The Canadian dollar spent most of the first part of the year inversely correlated to oil prices. The correlation has swung positive in recent weeks. At about 0.3 (60-day percent change), it is the highest for this year, but still about half of last year's peak and a little more than a third of the peak in 2012.

Meanwhile, the dollar remains confined to its two-month trading range against the yen between JPY101 and JPY103. In fact, within that range, a narrower JPY101.60-JPY102.60 contained the bulk of the price action. Three-month implied volatility finished last week at its lowest level since at least 1996 (~5.7%) and, similar to the euro, is about 100 bp on top of the historic (realized) volatility.

The 200-day moving average is found at the lower end of the dollar-yen's narrow range (~JPY 101.65) and the greenback has not sustained a break of this since before Abe was elected. On the other hand, the euro broke below its 200-day moving average against the yen on June 9-10. The downside momentum has not been sustained, but the euro's upticks have been capped by it in recent days (now just below JPY139). A move back above it could spur a quick move to JPY140, but may offer more formidable resistance.

The Australian dollar has been confined to a clearly identifiable range since the start of the Q2 between $0.9200 and $0.9400. It managed to finish the North American session about six times above the $0.9400 level, four of those times have been in the last fortnight, but there has been no breakout. The Australian dollar has been fairly resilient to the decline in iron ore prices and a somewhat more dovish central bank. Yet, the rule of alternation suggests that after testing the top side in vain, a push lower is likely. The initial target is near $0.9335.

The US dollar posted a reversal in the form of an outside down day against the Mexican peso on June 18 and experienced follow through selling the subsequent two sessions. Even though before the weekend the dollar briefly traded above the June 19 high, it finished on its lows. A break now of the MXN12.95-MXN12.96 area would signal a move to MXN12.90 and possible a re-test of the lows near MXN12.80, which has held since last October.

Lastly, turning to the technical condition of the 10-year US Treasury yield, we note that it remains above the downtrend line drawn off the January, April, May and early June highs. However, rather than signal a new uptrend, it appears it has entered a new trading range. The 2.66% area has capped the upside, while the buyers seem to pullback as yields approach 2.55%. In a broader picture and over the slightly longer term, the 2.50% on the downside looks secure and on the upside, a combination of factors, like more supply, stronger growth, uptick in inflation, could see yields can approach 2.80%, which has been the larger range since mid-January.

Observations from the speculative positioning in the futures market:

1.  There were three significant position adjustments in the latest Commitment of Traders report for the week ending June 17.  The  gross short euro positions were extended by 12.3k contracts to 113.2k.  However, the net position changed by about 4.6k contracts because, it appears that  new buyers came in when the $1.35 spot level help.  The gross longs rose by 7.7k contracts to 51.4k contracts.  Sterling bulls have been emboldened by the more hawkish commentary from the BOE and the gross longs rose by 15.2k to 100.4k contracts.  This is the largest gross long position in seven years.   The gross long peso position was cut by 15.3k contracts to 91.2k, putting it in second place behind sterling for the largest gross long positions.  

2.  The net speculative position in the Swiss franc swung back to the long side for the first time since late May.  It was a product of new gross longs being established (5.7k contracts), perhaps encouraged by ideas negative rate by the ECB will see franc test its ceiling.  Frankly, switch back to net long position is also a product of the general light participation (small numbers).  

3.  A combination of an almost 50% increase in gross long yen positions (to 17.8k contracts) and a paring of gross short positions (-8.2k contracts to almost just below 86k) stopped the four-week streak during which the net short yen position rose.  At 68.0k contracts, it is the smallest net yen position in a month.  

4.  In the US Treasury market, neither bull nor bear seemed inspired.  The gross long position was trimmed by 6.2k contracts to 365.7k.  The change was little more than a rounding error.  The gross short position grew by 7.7k to to 451.6k contracts, which is also too small to read much of a signal.  Over the CFTC reporting period, the price of the September 10-year note futures changed by five ticks.  

week ending June 17		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-61.8	-57.2	51.4	7.7	113.2	12.3
Yen	-68.0	-82.2	17.8	5.9	85.9	-8.2
Sterling	52.6	35.8	100.4	15.2	47.8	-1.5
Swiss Franc	3.5	-3.0	15.3	5.7	11.8	-0.9
C$	-21.5	-24.1	34.6	4.3	56.1	1.7
A$	27.0	28.2	61.1	-1.1	34.0	0.2
Mexican Peso	69.1	90.2	91.2	-15.3	22.2	5.8