The Dollar

In terms of market positioning We have argued that the dollar’s rally in December largely reflected short-covering ahead of year end, upon which momentum traders jumped aboard and that it would come off again early in the New Year. The IMM Commitment of Traders positioning is not comprehensive and in others ways flawed, but it does seem somewhat representative of short-term speculative forces. The shorts appear to have overplayed their hand or overstayed their welcome. Consider that as of last Tuesday, the net euro position was short 37.8k contracts. There was only one time (Sept 08) that the net short euro position was that large since at least the early 1990s. As of early last week, the speculative camp was net short all the major currencies. There seems to be scope for additional position adjusting and this will likely weigh on the US dollar. We note that the 5 day moving average is crossing above the 20-day in the euro. A similar bullish cross over took place last week on the Swiss franc. On the other hand, the speculative market is long Canadian and Australian dollars and at the upper end of the recent historical market positioning. However, momentum is still a tail wind. Australia has reported a series of stronger than expected data in recent days and this has renewed speculation of further rate hikes after the RBA took on a more neutral tone last month. Higher commodity prices underpin sentiment.