Respecting FX Price Action

Against the major currencies, the US dollar had a good week.  It appreciated across the board, with two minor exceptions.  The Swedish krona continued to recover from the slide spurred by the larger than expected 50 bp rate cut at the start of the month.  A few data points, including June manufacturing PMI and June CPI were stronger than expected, and helped ease stagflation fears.  

The other exception was the Australian dollar, which sill managed to eke out a marginal gain after pulling back three-quarters of a cent in the last two sessions of the week to test $0.9400.   The gains had been sparked RBA minutes that did not show heightened concern about the Australian dollar, even though on its trade-weighted index was approaching the year's high and buying on against the yen (on carry ideas).   The lower end of the Australian dollar's recent range comes in near $0.9330.  

The New Zealand dollar was the weakest of the majors.  It fell 1.6% on the week following indications that the RBNZ was on hold after delivering a 25 bp rate hike at its fourth consecutive meeting.  The Australian dollar was bought against the New Zealand dollar and exploded through the 200-day moving average (~NZD1.0875). 

Both the euro and sterling lost 0.7% against the dollar.  While we had anticipated the latter's weakness, we were leaning the other way on the former.   We had recognized the risk that the euro would break through the $1.3470-$1.3500 band of support.  Any fraying would be shallow and short as the speculative market was already very short euros, and Asian central banks were reportedly taking advantage of the setback to diversify some of the recently accumulated reserves.  

Despite these misgivings, the price action should be respected.  The break of the support, which included the weekly trend line was not ambiguous.  On one hand, it means that the former support should now act as resistance.  On the other hand, it means downside targets need to be reassessed.  We had initially suggested $1.34 would be the initial target on a break of the $1.3470-$1.3500 support.  However, the poor close before the weekend, and the technical indicators warn that the downside has not been exhausted.  Below $1.34, the $1.3350-75 area may slow the euro's descent.  

Sterling also had a poor weekly close, and although it is not traded below the $1.6950 target we suggested, new losses next week should be anticipated.  While the euro's downside pressure is coming from new shorts, sterling is moving lower as previously accumulated longs liquidate.  A break of $1.6950 opens the door to $1.6885-$1.6900.  

The dollar was turned back as it approached JPY102 before the weekend, which corresponds to the 20-week moving average and the middle of the JPY101-JPY103.  This range has confined the dollar with two minor exceptions for nearly four months.   

The dollar-yen has two external drivers.  US 10-year Treasury yields were unchanged on the week, giving the dollar little fresh impetus.  In fact, the 10-year yield has not closed above its 20-day moving average (~2.53%) since the July 2.  Next week is an important week for US economic data (FOMC meeting, ISM, auto sales and monthly jobs report), and they can be expected to provide direction.   The other external spur is the equity market. 

The S&P 500 finished slightly lower on the week, but the technical tone warns of downside risk.  After setting record highs on July 24, the S&P 500 gapped lower on July 25.  The gap exists between 1984.60 and 1985.79.  The longer the gap goes unfilled, the more negative is the technical implication.  The sharp losses recorded before the weekend in both Europe and North America bodes ill for the Tokyo opening on Monday.  

After the Kiwi, the Canadian dollar was the worst performing of the major currencies, losing about three-quarters of a percent against the US dollar last week.   More than three-quarters of those losses took place just before the weekend.  As we have noted, there had been a large build of speculative long positions, evident in the future market.   The currency losses came despite the S&P/TSX Composite rallying for the last four sessions to post new record highs. 

It is hard to identify the proximate cause of the Canadian dollar's decline that lifted the greenback above CAD1.08 for the first time in a month.  It may have been in sympathy with the decline in the other dollar-bloc currencies or in reaction to the latest sanctions against Russia that the Canadian government announced.  However, one might have expected the sanctions to have weighed on equities as a more direct knock-on.  

                                                                                                   

Lastly, the Mexican peso continues to move in narrow ranges.  Given the yield pickup, the bulls can afford to be patient.  The dollar has not traded below MXN12.90 since June 9.  It has closed above MXN13.00 once in the past month.  Technical indicators are not generating strong signals.

Observations based on the speculative positioning in the futures market:

1. There were three significant position adjustments (more than 10k contracts) in the latest Commitment of Traders report covering the week ending July 22. There was a 24.2k contract jump in the gross short euro position to 147k contracts. This is the largest gross short position since September 2012. Gross long sterling positions were culled by a little more than 14k contracts to just under 72k. The gross long peso position grew by a 12k contracts to almost 99k. Of the remaining 11 gross positions we track, ten changed by less than 4k contracts.

2. Although weekly position adjustments have been small, net positions are significant. The net short euro position of almost 89k contracts is the largest since late-2012. The almost 54k net short yen contracts are the least since late May. The net long sterling position of 27.5k contracts is the smallest since late March. The net Swiss franc position of 7.4k contracts is the largest since 2013. Speculators are long a net 20.6k Canadian dollar futures contracts, and that is the largest since February 2013.

3. Of the seven currency futures we track, the gross long position was generally added to in the last reporting period. The exceptions were the euro that saw a small liquidation (1.4k contracts) and sterling, which as we noted above experienced a large decline (14.2k contracts) in gross longs. There was not a clear pattern among the gross short positions.

4. The net short 10-year Treasury bond futures was reduced to 38.2k contracts from a net short 53.6k contracts the previous period. However, this does not reflect fewer gross shorts. To the contrary, the gross short position increased by 26.4k contracts to 505.6k. The gross longs stuck to their guns and added almost 42k contracts to 467.4k. The reduced net short position was the result of new longs were added to more than new shorts.

week ending July 22		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-88.8	-62.8	58.1	-1.4	147.0	24.6
Yen	-53.9	-62.9	12.0	3.6	65.9	-5.4
Sterling	27.5	38.8	71.8	-14.2	44.3	-2.9
Swiss Franc	-7.4	-6.3	9.6	0.8	17.0	2.0
C$	20.6	15.6	62.1	1.7	41.5	-3.2
A$	38.8	39.7	72.2	1.3	33.4	2.2
Mexican Peso	79.1	69.6	98.8	12.1	19.7	2.6