Dollar Outlook

The strong US employment data stopped the dollar's downside correction in its tracks.  It offset the unwinding of the long German bund/short euro hedge that had sent the euro racing toward $1.14.   The Japanese yen and New Zealand dollar fell to new multi-year lows. 

The US job growth was the strongest in five months.  It follows other data that indicate that the Q1 contraction is not a fair representation of the economy.  Although the IMF opined that the Fed should wait until next year to raise rates, lift-off in September still seems to be the most likely scenario.   Next week's retail sales data is expected to show American consumers resumed their shopping in May (consensus 1.1%) after taking April off (flat). 

If we are right, and the dollar's two-month downside correction is over, the Dollar Index should rise above the 97.80 area. Then it should challenge the trend line drawn off the March and April highs which comes in near 99.00 at the end of the month.  We would peg initial support in the 95.80 area. 

The euro reversed lower on June 4 as its became clear that Greece would going to refuse the demands of the official creditors for more austerity.  It traced out a bearish shooting star pattern.  The strong employment report spurred follow through euro selling.  That selling saw the euro fall toward fulfilling the 61.8% retracement objective of its bounce off the $1.0820 area in late April.  That retracement level is found near $1.1035.  The euro pre-weekend sell-off stopped near $1.1050.  A move now above $1.1200 would neutralize the bearish technicals.

The dollar rallied to JPY125.85 before the weekend, spurred by the sharp rise in US Treasuries and Fed expectations.  We often see the dollar-yen rate in ranges, and when it looks like it is trending, it is often moving from one range to another.   The lower end of the new range appears to be in the JPY123.50 area.   The market is looking for the upper end.   As these levels have not been seen since 2002, it is difficult to have much confidence in picking a chart point.   We suspect it may be in the JPY126.50-JPY127.00 area.   

Ahead of the G7 summit, Japanese officials seemed to have tried leaning a little against the tide.  Several talked about the need to avoid disruptive moves.    The sub-text to its G7 partners was that the yen's depreciation was not of their doing.  Three-month implied volatility rose to 10% at the end of May, and although the dollar has risen to new highs, implied vol finished the week at its lowest level since May 26 (~8.78%). 

Sterling may be carving out a potential head and shoulders pattern.  The left shoulder was made in late-April by the spike to about $1.55.  The head was the post-election rally that briefly extended through $1.5800.  The right shoulder may have been carved out in recent days that ended with the spike to $1.5440.  The neckline is near $1.5180, which corresponds to the 100-day moving average (~$1.5170) and the 50% retracement (~$1.5190) of the rally from the multi-year low set in mid-April.  The pattern projects back to those lows.   

The US dollar spent last week range-bound against the Canadian dollar.  Canada reported stronger than expected employment data of its own before the weekend.   It was the only currency to gain against the dollar on Friday.  While Australia and New Zealand are expected to cut rates, the Bank of Canada is on hold.  The second consecutive month of strong full-time jobs growth (the 77.8k full times positions would be the equivalent of the US growing more than 780k jobs in a two-month period), and greater confidence in the US economic recovery story, reduces the need for additional stimulus. Support is seen near CAD1.2370-CAD1.2400, and a break could see CAD1.2250-80.   

The Aussie traded to almost $0.7820 on the back of a stronger than expected Q1 GDP report in the middle of the week, only to fall back to the recent lows near $0.7600 on poor April trade and retail sales and the contrasting strong US jobs data.   Corrective upticks could see it recover into the $0.7660-80 area.   The multi-year low was set in early April near $0.7535.   There is no meaningful chart support below there until the $0.7000 area.  

Technical signals are giving little indication that the broad trading range in the July light sweet crude oil futures contract is about to end.  The lower end of the range is seen in the $56.50-80 area.  The upper end of the range is in the $61.50-70 area.  In the US oil rigs continue to slip but production remains strong.  Inventories were drawn down for five weeks (for a total around 12 mln barrels).  This appears to be largely accounted for by the increased demand by refineries as US gasoline demand is tracking ten-year highs. 

Two forces lifted US 10-year Treasury yields in the past week.  First it was the sell-off in German bunds, in part encouraged by the diminished deflation risks.  From the June 1 low yield near 47 bp to June 4 high print (~1.0%), the yield doubled last week.  This pushed US Treasury yields higher.  The yield rose a little further on the strong employment data.  On the week, the 10-year Treasury yield rose 20 bp.  Among the major countries, only Japan (+8 bp) and Canada (+18) rose less.  The yield finished above the downtrend line drawn off the early January 2014 high near 3.05%.  The next targets are seen near 2.50% and then 2.65%   

Of note, the 2-year yield rose only seven bp, and most of this took place in response to the employment figures.  The bearish flattening would seem to reflect the international dimension on the long end while the short-end is constrained by the anticipated gradual pace of Fed tightening, once lift-off takes place.   The 2-year yield is bumping against the multi-year highs seen in December 2014 and the January and March this year near 74 bp.  There is little between this and the 90 bp area seen in February and April 2011. 

Rising US yields appeared to exert downside pressure on US stocks.  None of the major bourses rose last week.  Over the week, the S&P 500 lost a little more than 0.5%.  The S&P 500 found support ahead of 2080.  The technical condition deteriorated slightly, with both the RSI and MACDs moving lower, and the 5-day moving average broke below the 20-day average. 

Observations based on speculative positioning in the futures market:

1.  There were four significant gross position adjustments in the currency futures in the CFTC reporting week ending June 2.  The gross short speculative yen position continued to grow rapidly.  The nearly 20k contract increase is the third consecutive week of double digit growth.  During this time, the gross short position has risen by 70k contracts to stands at 132.4k.  The gross short speculative Australian dollar grew by 17.8k to 76.6k contracts.    The gross long and short Mexican peso positions grew significantly.  The gross long position rose 10k contracts to 34k, and the gross short position rose 22.7k contracts to 79.1k.

2.  The increase in gross short positions accounted for the switch back to net short Australian dollar and Canadian dollar speculative positions.  The net Canadian dollar position had been long for the previous two reporting periods, but the 7.8k increase was sufficient to turn the net position short by a thousand contracts.  The net long position was trimmed by 600 contracts to 30.1k.  The net speculative Aussie position had been long for the past four reporting periods, but the 17,8k increase in the gross short position swung the net position to the short side by 13.3k contracts.  The gross longs were trimmed by 1.9k contracts.

3.  The general pattern was to cut gross long currency futures positions as the US dollar rebounded.  There were three exceptions.  The gross long euro position increased by 5.3k contracts to 49.5k.  The gross long Swiss franc position rose by 1.3k contracts to 12.5k.  The gross long Mexican peso position rose 10k contracts to 34.0k.  The gross short currency futures positions were mostly grown. The two exceptions were the euro, which saw a 1.0k contract reduction (to stand at 215k contracts), and sterling, where the gross short position was pared by 1.8k contracts to 58.4k.

4.  The speculative net short US 10-year Treasury position fell by 10k contracts to 73.6k. This was a function of both longs and shorts being trimmed (15.8k and 25.8k contracts respectively).   The speculative net long light sweet crude oil futures position was reduced by 8.5k contracts to 339.5k. This was almost wholly the result of the liquidation of 7.6k long contracts (leaving 494.5k) and an increase of a little less than 1k short contracts (to 154.9k contracts).

week ending June 2		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-166.0	-172.0	49.5	5.3	215.0	-1.0
Yen	-85.7	-62.2	46.7	-3.5	132.4	19.9
Sterling	-25.7	-25.5	32.8	-1.9	58.4	-1.8
Swiss Franc	8.4	8.3	12.5	1.3	4.2	1.3
C$	-1.0	7.3	30.1	-0.6	31.1	7.8
A$	-13.3	6.4	63.4	-1.9	76.6	17.8
Mexican Peso	-45.1	-32.5	34.0	10.0	79.1	22.7
(CFTC, Bloomberg)

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