The question we posed last week was whether important highs
were in place for the euro and sterling, just shy of important psychological level
of $1.40 and $1.70 respectively, or was the price action a short-term technical
correction. The key difference being the first
assessment would imply buying US dollars on pullback, while the second looks to
selling into dollar bounces.
The price action has not resolved the question yet, and it
remains pertinent. The dollar did strengthen against
the European currencies, but weaken against the yen and dollar bloc.
Swedish krona was an exception to this generalization. The slightly
stronger than expected inflation helped ease speculation about a rate cut next
month and this allowed lifted the krona, which was the only major European
currency to appreciate against the dollar.
Position adjusting in general, and especially ahead of the
EU parliamentary elections and Ukraine's presidential election next week, may be more
important than the economic data. The economic calendar features the
flash euro area PMI, the flash HSBC China manufacturing PMI, and the FOMC
minutes.
Although some observers are still holding out the
possibility that the ECB unveils an asset purchase program next month, we read
the official comments as making rate cuts the more likely route. Some institutional investors had been buying
peripheral bonds on the ideas of European QE and with increased risks
then of disappointment began moving back into core bonds (gilt, bunds and
Treasuries). However, the widely recognized link between the euro and the
peripheral bonds appeared to have weakened. In addition, some
participants may be reducing euro balances to avoid the risk of knock-on
effects from the possibility that the ECB adopts a negative deposit rate.
Euro: Last week's low was near $1.3650,
below the neckline of a potential double top found near $1.3675, but just ahead
of the 200-day moving average near $1.3630. It recovered smartly on
Thursday, despite the sell-off of the peripheral bonds. Resistance is seen
around $1.3730, but if it goes, the next immediate target closer to $1.3775.
Yen: We had not expected the US Treasury
to rally last week. That rally, more than any other factor, we think
weighed on the dollar against the yen. The dollar is approaching its
200-day moving average (~JPY101.20). The greenback has not violated this
long-term moving average since last October-November period and quickly
recovered. Below the average is the year's low near JPY100.60.
Upticks by the dollar will run into offers, first near JPY102.00 and then
between JPY102.20-35.
Sterling: The March 2015 short-sterling futures contract fell
about 20 bp last week, with the help of soft labor earnings data and a
quarterly inflation report that appears not to have much confidence in the
sustainability of the economic momentum. Sterling was sold to four-week
lows near $1.6730. The losses were sufficient to push the five-day moving
average below the 20-day average for the first time since early April.
However, we would not put much weight on the cross over because sterling
was already staging a recover. Initially, we look for the $1.6840-50 area
to check upticks. If it does take this area out, offers near $1.6900 may
prove stronger. That said, most observers still would see the BOE
raising rates before the Federal Reserve.
Canadian dollar: The US dollar was confined to fairly
narrow ranges against the Canadian dollar over the past week: CAD1.0850
to CAD1.0925. It is difficult to have much near-term conviction and the
technical indicators we monitor are neutral. We will monitor the
downtrend line drawn off the March 20 high near CAD1.1280 and the late April
and then early May highs. It comes in near CAD1.0900 area the start of
next week and finishes near CAD1.0880. Unless this trend line breaks, the
greenback may have to retest the CAD1.08 lows seen before the disappointing
Canadian jobs data.
Australian dollar: Relatively narrow trading ranges were seen for the
Australian dollar as a consolidative phase tightened its grip. The
$0.9400 are remains the key barrier to the upside, but the enthusiasm for the
downside has waned. The Australian dollar may be tracing out an A-B-C
correction after the big advance that carried it from around $0.8700 at the end
of January to almost $0.9500 in the first half of April. If this is view
is accurate, the Australian dollar should begin to trade more heavily in the
day ahead. A break of the 20-day moving average near $0.9320 would offer
confirmation.
Mexican peso: For the better part of the past
three weeks, the US dollar has been trending lower against the Mexican peso.
Participants were quick to sell into the dollar's bounce last Thursday, and
this was sufficient to not only check its advance but push it back to the low
for the year, set at midweek near MXN12.87. The MXN12.80 offers the next
technical objective. The MXN13.00 area, which had been support,
now should serve as resistance.
Observations from the speculative
positioning in the CME currency futures:
1. The large price swings have been matched by an increase in position adjustments. In the reporting period that ended on May 13, the net speculative euro position swung short for the first time in three months. It was largely a function of stale longs exiting. Almost a quarter of the gross long euro positions were cut (26.3k contracts) to 84.4k, which has now slipped behind the Mexican peso. The gross shorts rose by 8.4k contracts, which, relative to adjustments in recent weeks, is still substantial. The gross short position now stands at 86.6k contracts. This is the largest gross short position.
2. Gross long sterling positions were culled by 12.6k contracts, or about 15%, to 71.2k. The gross shorts were trimmed by 3.7k contracts to 39.4. The net result was the smallest long position since March of 31.8k contracts.
3. The clear pattern during the recent reporting period the was reduction gross long currency positions. The exceptions were the Australian dollar and the Mexican peso. The gross longs rose by 5.3k to 50.1k contracts. This, coupled with a small decline in the gross short position (3.1k to 33.0k contracts), is sufficient to lift the double the net long position to 17.1k contracts, which the largest in a year. The gross long peso position rose 27% to 86.1k contracts. The gross shorts were shaved by 2.3k contracts to 17.5k. This created a net long position of 68.6k contracts, which is the largest since last May.
4. Canada appears to be being pulled away from the other majors and toward the Australian dollar and the Mexican peso. Although the net speculative position is still short Canadian dollars, the gross shorts continue to be trimmed and this leave the net short position of 26k contracts. This is the smallest since last November.
5. The yen was largely sidelined. Gross longs fell by almost 3k contracts and the gross shorts rose by 1.1k contracts to 82.2k. Speculators moved to the sidelines in the Swiss franc, as the net long position was halved to 6.8k contracts, the smallest in two months as both gross long and shorts were pared.
| week ending May 13 | Commitment of Traders | |||||
| (spec position in 000's of contracts) | ||||||
| Net | Prior | Gross Long | Change | Gross Short | Change | |
| Euro | -2.2 | 32.6 | 84.4 | -26.3 | 86.6 | 8.4 |
| Yen | -64.7 | -60.7 | 17.5 | -2.9 | 82.2 | 1.1 |
| Sterling | 31.8 | 40.6 | 71.2 | -12.6 | 39.4 | -3.7 |
| Swiss Franc | 6.8 | 13.2 | 17.0 | -8.2 | 10.1 | -1.8 |
| C$ | -26.0 | -31.6 | 27.0 | -1.1 | 3.0 | -6.6 |
| A$ | 17.1 | 8.6 | 50.1 | 5.3 | 33.0 | -3.1 |
| Mexican Peso | 68.6 | 47.9 | 86.1 | 18.5 | 17.5 | -2.3 |
Currency Positioning and Technical Outlook: Positioning to Overshadow Data
Reviewed by Marc Chandler
on
May 17, 2014
Rating:
Reviewed by Marc Chandler
on
May 17, 2014
Rating:
