The Dollar: More of the Same

The US dollar gained on most of the major foreign currencies last week, but the overall tone, leaving aside the yen, was largely consolidative in nature.  The greenback was soft in the first half of the week but recovered in the second half.  

The Australian and Canadian dollars were the only major currencies that managed to hold onto some of their gains (0.55% and 0.40% respectively).  The yen was the weakest of the majors, losing 1.2%, as the panic from the week before died down.  Equity markets were mostly higher, with the Nikkei's 5.2% rise, leading the major markets.  US 10-year Treasury yields rose 8 bp. Core bonds generally traded heavier, but European peripheral bonds were firmer, in line with the calmer conditions.   

We were never persuaded that last week's turmoil would prevent the Fed from completing its tapering operation, and see that in the market, cooler heads are prevailing.  Talk of "tapering the tapering" has diminished, and no one is taking too seriously the prospects of QE4.  Nevertheless, we note that both the December 2015 Fed funds and Eurodollar futures contracts were unchanged on the week at 46 bp and  77 bp respectively.  

Perhaps offsetting the diminished interest rate support for the dollar has been speculation that more action from the European Central Bank and the Bank of Japan could be imminent. Reports suggested that the ECB may consider adding corporate bonds to its asset purchase program.  There were also report suggesting that the BOJ sees risk that inflation may fall, and this could prompt an extension of the already aggressive Qualitative and Quantitative Easing.  We are skeptical that either will materialize in the coming weeks.  The BOJ meets next week and the ECB the following week.    

Technically, the euro looks poised to continue to consolidate.  Most of last week's price action took place within the $1.2625-$1.2886 range set on October 15.  In recent session, the euro flirted with the lower end and slipped to about $1.2615.  The euro spending the second half of the week below the 20-day moving average, which comes in near $1.2690. This is the nearby cap.  Of note, the nearly four-cent bounce in the euro has not been accompanied by a sharp change in euro positioning  The confidence of the euro bears is palpable and quite widespread.  

The bearishness toward the yen was more evident in the price action than in the euro.  We had identified the yen's gains as among the most exaggerated in last week's technical note.  The dollar's recovery last week recouped 61.8% of its slide from the push marginally above JPY110 on October 1.  It closed above its 20-day moving average in the two sessions before the weekend for the first time since early this month.  The RSI has been recovering, and the MACDs have now crossed higher. The risk is that the speculation of more action by the BOJ is getting ahead of itself.  This may help cap the dollar, where a trendline drawn off the early October highs comes in around JPY108.70-80 next week.  

From a technical perspective, sterling continues to look constructive.  Bullish divergence continue to be evident in the daily RSI and MACD.  It could be important that the $1.60 area largely held in the second half of last week.  It appears that sterling may be carving out a head and shoulder bottoming pattern.  The left shoulder was carved on October 3-4 around $1.5950.  The head was by the spike to $1.5875 on October 14-15.  The right shoulder may have been set by last week's test on $1.60.  The neckline comes in around $1.6160, falling to $1.6130 at the end of the week.  The measuring objective would project toward $1.6360, which is just shy of the 38.2% retracement of sterling's drop since the July 15 high near $1.7200.  

The Australian dollar has traced out a wedge or triangle formation. The top comes in near $0.8825 and will finish the week just below $0.8800. The bottom is found near $0.8720, rising to $0.8760 at the end of the week.   Before the weekend, the Aussie tested both sides of the pattern.  It closed firm, in an outside day, though off its high and just below the previous day's high.  This is still impressive because of increased speculation that the central bank is considering cutting interest rates.  This chart pattern is notorious for false breaks, and the technical indicators do not appear to be generating strong signals. 

The US dollar pulled back against the Canadian dollar to challenge the past month's uptrend. It is found near the 20-day moving average, just above CAD1.1210.  The US dollar could not get back above CAD1.13 in the first half of the week and came down to test CAD1.1180-CAD1.1200 in the second half of the week.  It has been unable to close below the 20-day average for a month.  The MACDs are turning lower, though the RSI is in neutral.   

The US dollar has also been riding the 20-day moving average higher against the Mexican peso. It comes in now near MXN13.48.  The greenback has lost some momentum in recent day but has not pulled back from the highs very much.  There is no compelling technical evidence to conclude a dollar top is in place.  

Last week we anticipated that the S&P 500 could recover toward 1940, and it finished jut above there on the week.  It retraced more than 61.8% of the drop from the record highs.  To keep the bullish momentum intact, the 1920 area should remain intact. On the upside, there is previous congestion in the 1980-1995 area.  There was an interesting gap that was created last week that is found between 1905.03 and 1909.28. This is Monday's high (October 20) and Tuesday's low.  That it has not been filled suggests it is unlikely to be a "normal" gap.  The "measuring gap" takes places in the middle of a move.  That would also project the S&P 500 toward 1990.  

US 10-year yields trended higher last week but remained unable to return to its former range. On the top side, yields look capped in the 2.30%-2.40% area.  On the downside, the new range may extend to 2.10%-2.15%.  The MACDs are consistent with higher yields, while the RSI is soft.    

The CRB Index has been hugging the 270 area since October 15.  It represents two-year lows. Although technical readings are stretched, especially MACDs, there is still no sign of a convincing low.  The 2012 low, which itself was a two-year low, was near 267. The 2010 low was just above 247.  The December crude oil futures contract lost $1 last week and recorded lower highs for the last three sessions.  Bids around the $80 level are being absorbed without much consternation.  The market still feels heavy.  The $83 level may be the top of the near-term range.  A break of $80 could see a push toward $76.  

Observations from the speculative positioning in the futures market:

1.  Despite the large swings in the spot market, position adjustments in the currency futures were limited.  There was only one gross position adjustment larger than 10k contracts.  Gross short yen positions were culled by 25.6k contracts to 98.4k.  This was the largest short-covering since March.  

2.  Speculators responded to the large price swings by reducing positions.  Of the 14 gross positions we track, nine were reduced.   Gross long positions were cut except in the Japanese yen, where they grew by less than 4k contracts.  Gross euro long euro positions were flat, but at 60.2k contracts, it remains the largest gross long position among the currency futures.   Short positions were also generally reduced but did edge higher in the euro, Australian dollar and Mexican peso.

3.  The net short euro position has grown for three consecutive weeks.   Speculators are accumulating a large short position in the dollar-bloc currencies and the Mexican peso. The net short Canadian dollar position of 21.5k contracts is the largest since late-May. The 31.5k net short Australian dollar contracts are the largest net short position since March.  Speculators are net short 21.1k peso contracts, which is the largest since late-February.  

4.  The net short 10-year US Treasury speculative futures position was reduced to 90k contracts from 123k.  Speculators piled into the longs, growing the gross position by almost 37k contracts to 456.7k.  The short added a slight 3.6k contracts to 546.7k.  

week ending Oct 21		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-159.0	-155.0	60.2	0.0	219.6	4.1
Yen	-71.7	-101.0	26.6	3.8	98.4	-25.6
Sterling	-4.5	-2.8	36.6	-6.5	41.1	-4.9
Swiss Franc	-17.9	-17.6	7.6	-3.5	25.5	-3.2
C$	-21.5	-16.2	28.8	-6.9	50.4	-1.5
A$	-31.5	-30.3	14.0	-0.4	45.5	0.8
Mexican Peso	-21.1	-5.8	30.1	-9.7	51.2	5.7