Commitment of Traders and Technical Outlook FX

In the week ending May 8, speculative players generally bought dollars against the major currencies in the futures market according to the latest Commitment of Traders report.  There were two notable exceptions, the yen and sterling.  Short yen positions were reduced and long sterling positions were added.  

Last week, we noted that after a period of divergence, our reading of both technical and fundamental factors aligned in the US dollar's favor.  That continues to be the case.   The gaps left on the euro and Swiss franc's daily and weekly bar charts are important.  One need not be a technician to appreciate that 1) that gaps in the major currencies are rare and 2) they reflect an important shift in market psychology.  Prices in the most liquid currency pair in the $4 trillion a day market adjust incrementally.  A gap is a break of that incremental adjustment.  It is a mark down.  

The news stream and marginal new information that will hit the market in the week ahead are likely to underscore the weakness of Europe, outside of Germany.  It will offer stark contrast to the anticipated evidence that the US economy continues to expand at a modest clip and the Japanese economy, which likely expanded at the fastest rate in the G7 in the Jan-Mar period after contracting 4 of the past five quarters.  

Euro:  The net short speculative euro position increased to 144k contracts in the week through May 8 from 107k the previous week.  This was almost entirely from new shorts being established.  They jumped 38k contracts to stand at 180k contracts.  This represents about a 50% increase since early April.  While this is large, it is below the record set in January just above 200k contracts.  It is however, interesting to note that the commercials have a net gross long position of almost 253k contracts, which is itself a record.    

The speculative euro bears are in the driver's seat.  If the gap that runs from $1.3166-$1.3180 is a measuring gap, the price objective is in the $1.2860-80 area.  If it is a head and shoulder pattern that broke down, it would project to around $1.25.   Watch the 5-day moving average.  It is catching the euro's highs and the euro has not closed above it since the first of the month.   It finished the week just below $1.2970.  The euro remained below the $1.30 level for two consecutive days at the end of the week for the first time since Jan 19-20.  

Yen:    The net short yen position was pared to 41.1k contracts from 50.2k.  This was a function of both new longs being established (+2.3k) and shorts being cut (-6.8k).  During the reporting period, the dollar was confined to about a 1 yen range in the spot market.   The consolidative tone may be the market carving out a near-term dollar bottom.  To demonstrate this though the dollar needs to re-establish a foothold above JPY80  A trend line off the March high comes in now near JPY80.50, which also corresponds to the 20-day moving average.  The RSI and MACDs suggest better potential for dollar gains then declines against the yen in the period ahead.    

British pound:  Speculators still were scooping up the pound  and the net long long position grew by almost 9k contracts to 25.3k.  Shorts were cut by 2.3k, while the longs rose almost 6.6k to stand  just below 60k.  

Sterling longs are vulnerable.  Sterling peaked on April 30 near $1.63.  It was still near $1.62 on May 8 the last day of the reporting period.  It then fell and finished the week at its lowest level since April 20.  It also finished the week below its 20-day moving average for the first time since April 16.  The 5-day moving average is poised to fall below the 20-day moving average.  

There is a clear uptrend line in sterling.  It can be drawn off the Jan 13 March 13 lows.  The April 16th low comes close to it.  It comes in near $1.5980 at the start of next week.  A clear break of this will likely see many sterling longs forced out.  Technical indicators favor the downside as well.  A break of the trend line could spur a move toward $1.58 initially.  

Swiss franc: Speculative interest remains light.  The net short position rose to 16.5k contracts, an increase of about 2k.  Longs were pared by a little more than 700 contracts and the longs increase by twice as much.  

Last week we identified the significance of the the CHF0.9200 level.  The dollar gapped higher against the franc and that gap is found between CHF0.9185 and CHF0.9195.   If it is a measuring gap, it projects to about CHF0.9330.  That area also corresponds to the high from mid-March and a retracement objective.  A move above there would likely suggest potential toward CHF0.9600. 

Canadian dollar: The net speculative long position was cut by 10k contracts to 60.1k and it  still remains the largest net long currency futures position.  Longs were cut by 14.5k to just below 70k contracts.  The last day of the reporting period saw the US dollar rise above C$1.0 for the first time in a few weeks.  

The technical tone is less clear than some of the other currencies.  Perhaps it is the drag from the decline in commodity prices and the weakness in the equity markets that is muddying the waters.  While fundamentally the North American story looks superior, these factors and market positioning suggest that the Canadian dollar may do better on the crosses than against the greenback.  A range of CAD0.9900 to CAD1.0100 may confine the bulk of the price action in the period ahead.  

Australian dollar:  The net long position was cut in half to 25.1k contracts from 52.3k and is the smallest of the year.  Shorts jumped in, rising by 10.6k contracts, perhaps encouraged by expectations of further rate cuts by the RBA and weakness in commodity prices.  Longs were forced out and 16.5k contracts were culled.  Still, at 72.1k contract, the gross long is the largest in the currency futures.  

The bids for the Australian dollar near $1.00 are getting absorbed.  It finished the week near its lows and seems poised to take out that support.  A break, especially if it to be accompanied by weakness in commodities and equities, could spur a quick move toward $0.9880-$0.9900.  It may take a move back above $1.01 to stabilize tone at this juncture.  

Mexican Peso:  The net long peso position was reduced by about 5k contracts to 37k.  This was almost solely driven by longs being pared, though at almost 53.5k they remained substantial.   The peso continued to sell-off after the reporting period and dollar finished the week at 4-month highs against the peso.  More longs were likely cut.  Shifting interest rate expectations and the more risk averse environment appear to be the prime drivers.   

The dollar's advance and weekly close above the MXN13.50 gives scope for a further advance toward MXN13.75.  Initial support for the dollar is likely near MXN13.30.  Patient medium term investors may find this pullback in the peso to provide a new opportunity to gain exposure to what generally appears to be a promising fundamental story and elections in which PRI which has reinvented itself as a reform party looks likely to capture the presidency in the summer elections.