Currency Positioning and Technical Outlook: Dollar Poised to Move to Lower End of Ranges

The US dollar rose to new highs at the end of last week on the back of relatively constructive data.  The ECB's forward guidance was unchanged, rates will be at current levels of lower for the foreseeable future.  The BOE is expected to indicate in the coming week that its rates will also remain low for some time as well.  Disappointing Japanese data (retail sales, industrial production, PMI) underscores the importance of the BOJ's ongoing aggressive quantitative easing. 

However, the disappointing US jobs data stopped the dollar's advance cold in its tracks.  The employment data was the third development that should make market participants think again about Fed tapering next month.  First, the FOMC statement gave no indication of reducing purchases in September, which many had expected given that there is no FOMC meeting in August.  The FOMC statement added emphasis to the soft inflation readings, which leads to the second development.  The GDP report showed the deflator fall below 1% and the manufacturing ISM saw the price component fall below the 50 boom/bust level. 

The weakness in the employment report was not limited to the below average non-farm payrolls and the downward revision to the past two months, but also included a decline in hourly earnings (which may have knock on effects on income and consumption) and a shorter work week, which depresses output more than the increased number of workers would boost it.  

The overall technical condition of the dollar was weakened by the price action after the US employment data.   Within the ranges that have been established in recent weeks, the dollar is likely to test the lower end.  We expect market participation to be subdued and this may make for thinner liquidity and, potentially choppier price action in response to news developments.  

Euro:   Immediate resistance is seen in the $1.3300-10 high and then $1.3350.  The June high, near $1.3410 represented a 4-month high and marks the upper end of the range.  On the downside, a break of $1.3180 is needed to signal a top is in place.  

Yen:  For the last couple of weeks, we have brought to your attention the downtrend line drawn off the May 22 high (~JPY103.74), the July 8 high (~JPY101.50) and the July 19 high (just below JPY100.90).  It came at the end of last week near JPY100.25.  The dollar approached it before the jobs data and reversed lower.  The bottom end of the range is seen near JPY97.65.  A break of that, which also corresponds to a 50% retracement of the dollar's mid-June to early July rally, would signal a move toward JPY96.75. 

Sterling:   New lows since July 25th high near $1.5425 were recorded prior to the US jobs data and sterling proceeded to rally through, and closing above the previous day's high.  This sets up a potential key reversal.  A move above $1.5310 would signal a tested on the late July high  The lighter participation and the BOE's quarterly inflation report may restrain the upside in the first part of the week ahead.  Support is pegged near $1.5100. 

Swiss franc:  The dollar held resistance at the end of the week near CHF0.9400.  It appears poised to move to the lower end of the range, which is seen near CHF0.9130-80.   We continue to note that while the franc is highly correlated with the euro, that correlation has been fairly stable in recent months in the mid-to-high 0.80 range.  The big change is the franc's correlation with the yen.  On a 60-day rolling basis, it was inversely correlated (percentage change) as recently as April and now stands around 0.76, a five year high. 

Canadian dollar:   The US dollar held in better against the Canadian dollar.  A good base has been built near CAD1.0250.  The upper end of the range is seen in the CAD1.0430-80 area.  The greenback finished last week above the 20-day moving average for the first time since early July.  The weakness in the Canadian dollar in the face of  firm oil prices is a useful reminder that the relationship is more complicated than often presented.  The 60-day rolling correlation of the returns of the Canadian dollar and oil (percent change) is near 6-month lows below 0.30.

Australian dollar:  The Aussie made new three year lows before the weekend as expectations for a rate cut on August 6th (in Sydney) increased and the market began discounting another cut as well.  Initial resistance is seen near $0.9000.  Any kind of bounce on the "sell the rumor buy the fact" type of activity following the rate cut will likely be sold. 

Mexico Peso:  The dollar peaked just below MXN12.90 in the middle of last week, stopping just shy of a 50% retracment of its down move off the late June high near MXN13.46, which came in just below MXN12.95.  The greenback pulled dropped sharply (~1.5%) after the employment data and finished near on the session lows.  A break of MXN12.60 would encourage support seen around MXN12.40.  One cautionary note is that on August 8, Mexico will report July CPI figures and a move back into the central bank's range (2-4%), may fan expectations for another rate cut. 

Observations on speculative positioning in the CME currency futures:

1.  The net speculative short positions were reduced the currency futures tracked here except the Australian dollar.  The net long speculative Mexican peso position rose.   The net short euro and Swiss franc positions are poised to switch to being net long.

2.  The gross long currency positions rose, except the Japanese yen.  Gross short positions were generally cut, with the exception of small (less than 1k contracts) in sterling and peso.  The main exception was the Australian dollar, where the gross shorts rose by 10.8k contracts.  The position adjustment in the run-up to the FOMC, ECB and BOE meetings was not so much short covering as fresh US dollar sales and foreign currency purchases.

3.  The 10.8k contract increase in the gross short Aussie position and the 15.1k increase in the gross long euro position was the only two significant (more than 10k contracts) adjustment.  Of the 14 gross positions we track, 10 were adjusted by less than 5k contracts and half of these were 1k or less.

4.   The gross long euro position remains the largest (78.2k contracts) followed by the Mexican peso (61.0k contracts).  After that there is a big drop-off with the yen, sterling and Aussie around 20k contracts.  The yen remains the largest short (100.4k contracts), followed by the Aussie (92.1k contracts) and the euro (86.7k contracts).

week ending July 30		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-8.5	-27.9	78.2	15.1	86.7	-4.3
Yen	-82.1	-87.5	18.2	-4.3	100.4	-9.7
Sterling	-49.5	-49.7	20.2	1.0	69.6	0.8
Swiss Franc	-1.3	-5.4	9.5	3.2	10.8	-1.0
C$	-11.4	-16.8	9.5	3.2	10.8	-1.0
A$	-72.6	-64.0	19.5	2.2	92.1	10.8
Mexican Peso	24.9	19.8	61.0	5.5	36.2	0.5