Currency Positioning and Technical Outlook: Dollar Tone Improves

It took the break of the JPY100 level to trigger a broad based US dollar rally.  This rally lifted the dollar's technical tone and suggests additional gains are likely.  However, the out-sized gains ahead of  the weekend warn of the risk of a consolidative phase first.

After trying for nearly a month, the market finally pushed the dollar through the JPY100 level and the up move accelerated to almost JPY102 within 24 hours.  The triangle or wedge pattern that has been convincingly broken projects into the JPY104-JPY105 area.    Pullbacks toward JPY100.70 will likely be seen as a new buying opportunity. 

There has been a significant backing up of US interest rates.  The 10-year yield has risen near 30 bp since the start of the month, and is nearing the upper end of this year's range.   The rise in US rates follow a decline from mid-March through late-April that had taken the 10-year yield from  2.08% to almost 1.60%   We find that the dollar is often sensitive to interest rate differentials.  The sharp backing of US rates has more than offset the sell-off in the Japan's 10-year government bond and this has lifted the Treasury premium over Japan to its widest level in a month.

On the other hand, we find the euro-dollar exchange rate often tracks the US-German 2-year interest rate differential.  Even though the euro slipped to new four week lows before the weekend, the premium the US offered over Germany was near the lower end of the range that has confined it since early April.   This disconnect also supports the case for a consolidative phase.  During this period, a euro bounce into the $1.3030-60 area may offer a new selling opportunity.  In the bigger picture, we look for the euro to retest the year's low near $1.2750 in the second half of Q2. 

The Swiss franc appears to be selling off in sympathy with the Japanese yen, or perhaps in part driven by similar forces.  Swiss 2- and 3-year interest rates remain negative, and in the quest for yield the franc is shunned.  This leaves the euro to retest the year's high near CHF1.2570, which is also the highest it has been since the SNB imposed a cap on the franc (floor for the euro).    A move above there will fan hope expectations for CHF1.30.  

Sterling's break down  through a 2-month uptrend on an intraday basis warns that the $1.56 area, which has been repeatedly tested with little satisfaction, marks a more significant top.   At the same time, the fact that sterling closed above the trend line is consistent with our sense that a period of consolidation, at least in the early part of the new week, is likely..   During this phase, sterling can recover toward $1.5420-50. 

The weakest currency over the past week was not the Japanese yen, but the Australian dollar.  It lost about 3% compared to the yen's 2.6% decline.  The Australian dollar traded below $1.00 for the first time since last June.  It too managed to finish barely above there before the weekend.  The technical bounce we expected early in the new week to alleviate the over-extended technical condition could see the Aussie trade toward $1.0070-$1.0100. After the correction, we look for the Aussie to test the trend line drawn off the 2011 and 2012 lows.  It comes in near $0.9800 now and $0.9850 by the end of the quarter. 

The Canadian dollar, like nearly every other major and emerging market currency was sold off hard at the end of last week.  Like the UK, Canada also reported constructive data, and like sterling, the Canadian dollar found little succor from the favor news stream.  The US dollar's rally against the Loonie ran out of steam near important technical levels in the CAD1.0150-70 area.  A move above there warns of scope for another cent gain toward CAD1.0250, but we are more inclined to see downside consolidation back into the CAD1.0060-80 area. 

Fitch's upgrade of Mexico's credit rating pushed the dollar below MXN12.00 for the first time since 2011, which itself was the first time since 2008.  The 2001 dollar's low took the form of a  double bottom and was carved out of many weeks around MXN11.45.  That said, the dollar recovery in the second half of last week created bullish (dollar) divergences in some technical indicators.  Not only was the break of MXN12.00 not sustained on a weekly basis, but the divergence warns that more backing and filling may be necessary before a sustained break materializes.  This also is consistent with more talk of another rate cut following disappointing industrial production figures (-0.3% in March rather than -0.1% the consensus forecast) before the weekend.  

Observations from the CME speculative currency positioning:

1.   The gross short yen positions increased by 10.4k in the week ending May 7.     This is consistent with ideas that the speculators were anticipating a break out after the Golden Week holidays ended.  Some cast conspiratorial allusions to the fact that the dollar broke above JPY100 prior to news that Japanese investors had bought (a relatively small amount) foreign bonds in the past two weeks.    Anticipation more than malfeasance is the more likely explanation.  

2. Gross short Canadian dollar positions were culled by 13.4k contracts to a still high 77.7k.    It was the third consecutive week of short cover covering after peaking just shy of 100k in late-April.  During this short-covering the US dollar fell from near CAD1.03 to almost CAD1.00.  The sell-off in the Canadian dollar after CFTC reporting period suggests the short-covering may have stalled.  

3.  The long Australian dollar positions fell almost by almost 20k contracts, leaving a mere 6.6k still standing.  This is the smallest gross long position since mid-2010.  It had peaked in late March near 141k contracts.  The Australian dollar's further sell-off into the weekend, widely publicized bearish comments by a high profile hedge fund manager, and poor (piling on?) press, warns that the net speculative position may have switched to the short side.  

4.  The net speculative euro position has hardly moved in recent weeks.  The net position has been short between 30k and 34k contracts for four weeks.   Over this time, the euro has largely been confined to a $1.30-$1.32 trading range.  

week ending May 7		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-33.5	-30.1	52.5	-4.3	86.1	-0.9
Yen	-78.6	-71.1	27.9	3.0	106.4	10.4
Sterling	-63.1	-58.6	31.1	0.5	94.6	4.9
Swiss Franc	-6.2	-8.3	7.3	-0.8	13.5	-2.9
C$	-51.9	-67.8	25.7	2.5	77.7	-13.4
A$	6.6	30.2	61.5	-19.8	54.9	3.8
Mexican Peso	138.0	139.0	144.1	-1.9	5.6	-1.7