Dollar Stretched, but will it Correct?

The US dollar had a good week, gaining against all the major currencies. Strong economic data underpinned it, and what we suspect is a mistaken belief that the debate about an earlier rate hike by the Fed has truly intensified.

Ironically, the strong data failed to instill any traction in US bond yields. The 10-year yield was flat on the week, unable to sustain upticks above 2.40%. The 2-year yield rose about six bp, though still below 50 bp. It is in the middle of the August range. Moreover, despite the fears expressed by some hawks at the Fed about the risk to prices, few have noted the 8.5% decline in the CRB index over the past two months and the five-week slide in the price of West Texas crude oil.

Broadly speaking, the dollar is stretched from a technical perspective. Yet, the fundamentals, including the upcoming ECB meeting, with new staff forecasts, the launching of the TLTRO, and the Scottish referendum in the first half of September, may stiffen the resolve of the dollar bulls, who are only now experiencing gratification on their long held views.

Euro: In the second half of last week, the euro struggled to stay above the lower Bollinger Band (2 standard deviations below its 20-day moving average). The 20-day moving average contained euro upticks at the start of the week. The euro has not traded above its 20-day average since mid-July. It comes in near $1.3270. The $1.3230 level approached in the second half of last week corresponds with a retracement objective of the euro's rally that began last July near $1.2755 and peaked in early May just below $1.40. A break of that area would target the low from last September near $1.3100. One note of caution here is that the RSIs have failed to confirm the new lows recorded, and the MACDs are over-extended. The take away is to sell into bounces.

Yen: After trading for the better part of the past four months in a JPY101-JPY103 trading range, the dollar finally broke out--and without the help of firmer US yields. Indeed, the US 10-year premium spent most of the past seven sessions below 190 bp and in the lower end of where it has traded over the past year. The dollar spent most of the second half of last week above the top of its Bollinger Band. This has been seen four times previously this year and generally marked a near-term high. The JPY103.50 area held on the corrective down ticks ahead of the weekend, and JPY103 should remain intact if the breakout is for real. The highs from early April were set near JPY104.10. A convincing break of it would target JPY105.

Sterling: The downtrend in sterling extended to its seventh consecutive week. In this time, it has fallen about 6.5 cents from its mid-July peak near $1.7200. Last week, it broke below its 200-day moving average for the first time since last August. The bottom Bollinger Band comes in near $1.6535, and sterling has been tracking it lower. The next level of chart support is pegged in the $1.6460-$1.6500 area. Resistance is seen in the $1.6625-50 area.

Swiss Franc: Like the euro, the lastest franc losses have not been confirmed by the technical indicators. The greenback was establishing a foothold above the CHF.0.9100 area, a retracement objective of the greenback's decline from July 2013. Additional support for the dollar is seen in the CHF0.9070-85 area. Initial resistance is seen near CHF0.9160 and then CHF0.9225. For its part, the euro is trading in narrow ranges against the franc, near its weakest level since last 2012.

Canadian Dollar: The US dollar has tried in vain to rise through CAD1.10 more than a handful of times this month. However, it is not clear that the greenback bulls have given up. It may take a break of the 200-day moving average (~CAD1.0880) or the mid-August low (~CAD1.0860) to signal the capitulation. The first decline in Canadian CPI may encourage speculation that the BoC will lag behind the Fed in raising rates. Still, the strength of the retail sales (4-5x stronger than expected and the May series was revised higher as well) points to a robust Q2 GDP figure that will be reported next week (~2.6% after 1.2% in Q1), which will mean its pace of growth exceeded the US.

Australian Dollar: The Aussie briefly slipped to a new 3-month low, just below $0.9240 on August 21, but quickly snapped back, leaving bullish divergences in its wake. It finished the week above its 20-day moving average for the first time in nearly a month. The initial target on the upside is $0.9350-75.

Mexican peso: Technical indicators are not generating a strong signal in the peso. The dollar built a four-day base near MXN13.03. We suspect the greenback can test the MXN13.15-MXN13.1850 area without much consternation.

US Treasuries: The US 10-year yield has not closed above its 20-day moving average here in August. It has not even traded above that average since August 5. It is found just below 2.45% now. A break could see 2.50%-2.53%. The 2-year yield is a bit perkier, and from a technical perspective, shows more potential to rise. The RSI and MACDs are heading higher. The weekly close was the best so far this month. The modest curve flattening is not consistent with the hawks' claim about the dangers that the Fed is slipping behind the inflation curve.

S&P 500: It took the market the better part of a month to close the gap that was created with the lower opening on July 25, which signaled the 4.5% pullback. New record highs have been recorded. The technical tone is constructive, and the next target is near 2003. It has been climbing the five-day moving average for nearly two weeks. It is found near 1984 now, and its break would be the first sign the bulls are getting tired (again).

CRB Index: New six-month lows were recorded last week. There is a bullish divergence in the daily RSI, and the MACDs are in deep negative territory. The downside momentum seemed to slow around 288, a key retracement of the advance earlier this year. However, the market continues to struggle to sustain even the most modest of upticks. New lows are likely in the coming days. The initial target is near 285-286.

WTI: The front-month October futures contract posted a potential key reversal on August 21, as it made a new low for the move initially and then rallied to close above the previous day's high. However, there was not follow through buying ahead of the weekend, and the contract appears set to retest the low of $92.50. Risk extends to $92.00 and then $90 a barrel. Resistance is seen $94.00-50.

Observations based on speculative positioning in the futures market:

1. There were several significant position adjustments in the most recent Commitment of Traders report covering the week through August 19. Gross short positions in the euro, yen and sterling jumped by more than 10k contracts, The gross long Australian position rose by more than 10k contracts. Only five of the 14 gross positions we track rose by less than 5k contracts. Taken together this reflects increased activity, and may be a function of trending markets.

2. Specifically, the gross short euro position rose by 18k contracts to 195.6k. The gross short yen position rose by 11.6k contracts to 105.2k. The gross short sterling position rose 12.4k contracts to 58.9k. The gross long Australian dollar position rose by 11k contracts to 65.7k.

3. That said, there was a clear bias in adding to long currency futures positions, which seems to be largely a reflection of bottom picking. The lone exception was the Canadian dollar, where the longs were pared by 2.2k contracts to 41.8k. Gross short positions were also grown, though there were two exceptions. The gross short Swiss franc position was trimmed by less than 1k to 21.7k contracts, and the gross short Mexican peso position was reduced by 8.2k contracts to 43.8.

4. At 72.2k contracts, the gross long sterling position remains the largest among the currency positions we track. At 195.6k contract, the gross short euro position remains the largest.

5. The net short US 10-year Treasury speculative position slipped to 43.5k contracts from 50.2k. Gross long and short positions grew. The gross long position rose by 20.6k to 483.1k contracts. The gross short position rose by 14k contracts to 526.6k.

week ending Aug 19		Commitment of Traders

	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-139.0	-126.0	56.8	5.2	195.6	18.0
Yen	-87.3	-81.1	18.0	5.5	105.2	11.6
Sterling	13.3	18.8	72.2	6.9	58.9	12.4
Swiss Franc	-15.5	-17.4	6.2	0.9	21.7	-0.9
C$	7.3	18.0	41.8	-2.2	34.6	8.5
A$	36.6	29.5	65.7	11.0	29.2	4.0
Mexican Peso	12.4	0.0	56.2	4.3	43.8	-8.2