Dollar Bulls Reclaim Whip Hand

The US dollar's consolidative phase appears to have ended with the January employment report. Employment growth accelerated, and average hourly earnings rebounded.   There was a 10-11 bp increase in both short- and long-term interest rates.

The increase in the implied rates of the Fed funds and Eurodollar futures strip indicate that sentiment has swung back toward where we have steadfastly been, and that is to favor a mid-year Fed hike.   We feel more confident that the Federal Reserve will modify its forward guidance at next month's meeting to dilute the idea that the first rate hike is at least two meetings away, which is how Yellen helped investors understand what the FOMC statement meant by "patience".

The euro flirted with the 20-day moving average during most of the past week, despite the high drama between Greece's new government and its official creditors that worries investors.  The euro has not managed to close above this average for nearly two months.   The euro spent the last four sessions of last week traversing essentially the same two-cent range $1.13-$1.15.  The bears have to push the euro through the $1.1265 to open the dollar to a return to the lows (~$1.11 and beyond).

The dollar pushed through the JPY119 level for the first time since January 12 in response to the better US employment data and the backing up of US rates.  There is a down sloping trend lie drawn off the early December cyclical high and catching the highs from early January.  It comes in near JPY119.50 and falls toward JPY119.20 by the end of the week ahead.  A break of that trend line may require gains in equities and/or a rise in US premium over Japan.  Initial target would be the JPY121 area.

Sterling had appeared to carve out a head and shoulders bottom pattern.  The neckline came in just below $1.5200 when it was violated in the middle of last week, and sterling accelerated to $1.5350 before running out of steam.  The pattern projects toward $1.5450.  The neckline now comes in near $1.5185, and it is not unusual to retest the neckline after violating it.  However, given the retracement objectives, the loss of the neckline would signal the downtrend has resumed, and losses to below $1.4950 are likely.  The poor close before the weekend leaves the bottom pickers vulnerable next week despite the fact that all three PMIs were stronger than expected, suggesting improved momentum at the start of Q1.

A Swiss newspaper unsourced report claiming the Swiss National Bank adopted a CHF1.05-CHF1.10 informal range spurred a flurry of activity, but it is not very clear what it means. Instead, that the source spun the market.  The effectiveness of this type of intervention may be short-lived if the SNB does not defend it.  The euro traded on both sides of CHF1.05 every day last week and finished the weekly slightly below it.  The reserve data for January suggests SNB sold CHF50-CHF60 bln, with the sharp appreciation of the franc lowering the valuation impact.   The fact that the SNB is believed to have continued to intervene, which means its balance sheet continues to grow, provides evidence, we think, that the ownership structure (cantons and individuals) was not the decisive consideration in triggering the abandonment of the previous cap.  It was a tactical move, not strategic.

The Australian dollar rallied 2.5 cents off the $0.7625 low seen after the central bank surprised some by cutting the cash rate by 25 bp to 2.25%.  The recovery of the US dollar and RBA signaling the door is open to another rate cut saw the Aussie the $0.7780 area.  Still it closed above the downtrend line drawn off the January 21 high.  However, it settled on its lows, and the next level of support is seen near $0.7720.

The best two weeks for oil in some seventeen years failed to do the Canadian dollar any favors.  It is off about 1% against the US dollar over that time.  Over the past four sessions, the US dollar built a shelf in the CAD1.2350-70 area.  The swing in market sentiment about the Fed, coupled with ideas that the Bank of Canada will cut again helps keep the Canadian dollar on the defensive.  The greenback had a strong close, and after testing the bottom end of the range, a probe high can be expected.  The near-term target is CAD1.2550-CAD1.2600.

The two-week advance in oil prices seems largely technical in nature.  Production in the US, and globally remains strong, even if the rig count in the US continues to fall. Global output is thought to be moving toward two mln barrel a day in excess of demand.   Inventories continue to rise.  The technical indicators we use warn of some more upside risk in the days ahead.  Basis, the March crude oil contract, the five day moving average has crossed above the 20-day average for the first time since last September.  A move above $53.60 likely signals a move beyond the $54.25 high and toward what we expect to be a peak $56-$57.00.

US 10-year Treasury yields look set to rise further.  Growth in Q4 14 was disappointing and may be revised down further after the jump in imports that widened the December trade deficit, but the strength of the US employment report spurred a reassessment of views on the Fed's lift-off.  The entire curve increased around 10 bp.  Assuming retail sales, especially excluding autos, gasoline, and building materials, bounce back from December's weakness, as average hourly earnings did, US 10-year yields may push toward 2.00%-2.05% area.

After falling to its lowest level since mid-December, the S&P 500 gapped higher on Tuesday and accelerated to the upside.  Shortly after the US employment data it tested the upper end of this year's range and faded.  The close was unconvincing, and the near-term technical indicators are not generating a strong signal.  Three of the four pullback going back to Q4 14 had gaps from V-shaped bottoms.  The gap is between last Monday's high (2021.66) and Tuesday's low (2022.71).  A move below the 2035 area would likely spur a move to close the gap and maybe more.

Observations from the speculative positioning in the futures market:

1.  There were not significant (more than 10k contracts) adjustment in the gross speculative positioning in the currency futures.  This made for minor changes in net positions in the CFTC reporting week ending February 3.  

2.  The gross long positions were trimmed in all the currency futures we track though none by more than 4.4k contracts.  The adjustment to the gross short position was more mixed, and the numbers somewhat larger than the adjustment of gross longs.  The average gross long position  was adjusted by 2k contracts while the average gross short position was adjusted by almost 4.5k contracts.  

3.  There have been a few substantial adjustments to net speculative positions already this year.  The net short euro position has risen by 49k contracts to 196k.  The net short yen position has been reduced by 24.2k contracts this year to 59.6k.  The net short sterling position has grown by 17.2k contracts to 42.4k.  The net short Australian dollar position has increased by almost 17k contracts to 56.2k while the net short Mexican peso position has been trimmed by 15.1k contracts to 48.2k.  

4.  The net short 10-year Treasury futures position increased to 119k contracts from 108k the previous week.  The gross long position slimmed by 5.3 k contracts to 341.4k and the gross short position increased by 5.6k contracts.  

week ending Feb 3		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-196.0	-185.0	47.7	-2.8	244.0	8.8
Yen	-59.6	-64.7	25.6	-0.9	85.2	-6.0
Sterling	-42.4	-45.3	36.2	-2.4	78.6	5.4
Swiss Franc	-5.4	-7.4	8.4	-0.5	13.7	-2.5
C$	-27.3	-24.0	24.6	-4.4	51.9	-1.0
A$	-56.2	-48.9	16.0	-0.1	72.1	7.1
Mexican Peso	-48.2	-44.6	23.6	-3.1	71.8	0.5