Currency Positioning and Technical Outlook: Dollar Remains Out of Favor

The US dollar fell against all the major currencies over the past week.  Helped by speculation that the Bank of England will likely hike rates before it currently envisions, sterling rose to its highest level since April 2011, as it tacked on almost 2% last week.  Even the Japanese yen strengthened against the dollar, despite the rise in equities and an increase in the US interest rate premium over Japan.  We had generally anticipated the weaker dollar, but did not expect the yen to have participated.

The technical indicators we use are not providing any compelling reason to try picking a top in the foreign currencies or a bottom to the US dollar, though we recognize that sterling is a bit stretched and bumping against the upper Bollinger Band.  This raises the risk of some consolidation at the start of the new week.  Yet with the March 2015 short sterling futures still falling (implying a yield of just over 100 bp compared with the current 50 bp base rate), the consolidation may be shallow and brief.  

Initial support for sterling is seen in the  $1.6680-$1.6700 area, though the bulls are unlikely to be really deterred unless the $1.66 level goes.  The RSI and MACDs are trending higher and five-day average crossed above the 20-day average on Thursday, February 13.   The 2011 high near $1.6750 is the next immediate target, but a move toward $1.70 in the coming weeks would not be surprising.  The euro has approached a key retracement objective against sterling near GBP0.8160.  A convincing break could spur a move toward GBP0.8000. 

The euro is at the upper end of its six-week trading range.   The technical indicators are positive and the five-day average crossed above the 20-day average on Tuesday, February 11.  The upper Bollinger Band is near $1.3740, which also corresponds to the late January high and the 61.8% retracement objective of the decline from the December 27 multi-year high near $1.3900.   We suspect that pullbacks toward $1.3630-50 will be seen as new buying opportunities.  

The dollar initially extended its recovery from the JPY100.75 area seen on February 4-5.  However, the momentum faltered in the JPY102.60-70 area.  In fact the dollar recorded lower highs in each of the last four sessions.   The MOF and CME data suggests at least part of the reason why:  Japanese investors have sold foreign bonds for six consecutive week.  Foreigners have sold Japanese stocks (and covered their short yen hedges) for three weeks in a row.   In the CME futures, the speculators (a proxy for momentum and trend followers) have been reducing short position for seven consecutive weekly reporting periods through February 11.  The gross position short position has been cut by more than 40% over this period. 

The technical indicators, however, are not generating clear signals at the moment.  We are more inclined to still for a weaker yen.  Rising through the previous day's high would be the first sign that the dollar's correction may have run its course.  The 20-day moving average provided support in November and December.  Since it was convincingly violated, the moving average has capped bounces.  It is found now near JPY102.55. 

The Australian dollar looks to have legs.  Even the disappointingly weak jobs data was not able to derail the short-covering  rally, spurred on by the shift in the RBA's stance from its easing bias to neutrality.   The next upside target is near $0.9085,which corresponds to the 38.2% retracement of the drop from last October's high near $0.9760 to the recent low about 11 cents below that high and the mid-January high.    A break of that could spur a move toward $0.9160, and possibly $0.9200, before the bears try to pick another top.  The $0.8930-60 area offers support.  

The Canadian dollar's technicals are not as clean.  The RSI warns that momentum has waned, though the MACDs are still trending lower.  A bounce in the greenback could see a test on the CAD1.1020-35 area.  A break of this could spur ideas that the correction has run its course with a 2.5% USD pullback.  On the downside, we had suggested potential toward CAD1.0850. 

The Mexican peso has been frustrating.    It has lagged behind the recovery many of the other emerging market currencies over the past week, which has seen the Indonesian rupiah rally 2.8%, the South African rand almost 2% and the Turkish lira 1.7%.  The peso rose about 0.3% against the dollar over the past week.  Technical indicator are not generating strong signals.  The dollar has spent the last eight sessions between roughly MXN13.20 and MXN13.40.   We are more inclined to sell into a dollar rally than buying a further pullback, but are most comfortable on the sidelines pending better risk--reward opportunities. 

Observations from the speculative positioning in the CME currency futures: 

1.  Position adjustments were minor in the most recent reporting week that ended on February 11. There were not gross position adjustments more than 10k contract.  In fact, there were only two adjustments more than 5k contracts (gross euro longs grew by 7.4k contracts and gross short Australian dollar positions were pared by 9.6k contracts).  Eight of the 14 gross positions we track changed by less than 2k contracts.

2.  Speculators generally lightened up on gross long positions, the exceptions were the euro, which we already noted, and sterling, which added 1k long contracts.  Short positions were mostly reduced, except, ironically enough the euro and sterling, and the Swiss franc.  Yet all together these added less than 3k contracts.

3.  In terms of gross short positions, there are still some substantial positions, warning of the risk of more serious position adjustment.  Speculators remain most short the Japanese yen, with 92.5k contracts, but Canada with 86.7k gross short contracts is not far behind.  And there are 82k gross short euro contracts.  There are 57.6k gross short Australian dollar contracts.

4.  The gross long positions are highly concentrated.  There are 75k long euro contracts and 53k long sterling contracts.  Canada's 28k contracts puts it at a distant third place.  The others have less than 15k long contracts.

week ending Feb 11		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-6.9	-13.6	75.0	7.4	82.0	0.8
Yen	-78.8	-76.8	13.7	-2.2	92.5	-0.3
Sterling	10.7	11.0	53.2	1.1	42.5	1.4
Swiss Franc	0.6	2.2	12.2	-1.1	11.6	0.6
C$	-58.9	-60.3	27.7	-1.7	86.7	-3.1
A$	-47.4	-55.5	10.2	-1.5	57.6	-9.6
Mexican Peso	-33.9	-34.5	9.7	-4.0	43.6	-4.6