Dollar Going No Place in a Hurry

The strong US jobs gain reported on July 3 failed to instill any kind of traction for the greenback, which fell against all the major currencies over the past week.  The only exception was sterling.  It slipped by about 0.2% against the US dollar, on the back of some disappointing data and a decline in UK yields.  

The Swedish krona and the Japanese yen were surprisingly strong.  The former gained 1% against the dollar, recouping about 2/3 of what it lost the prior week in response to the unexpectedly large (50 bp) rate cut.  Higher than expected inflation (doubling of the underlying rate to 0.8% year-over-year and a rise of 0.2% at the headline line on the same basis, up from -0.2%).  The yen rose about 0.75%.  It was bolstered by several considerations:  the drop in US Treasury yields, the jitters emanating from the Portuguese bond market, and the weakness in equities. 

For the past five months, the dollar has been largely confined to the 2-yen range (JPY101-JPY103).  There have been four exceptions, three of which took place in early February and then again on May 21.  It only closed below JPY101 once and that was on February 3.  The most interesting technical development is that for the first time since December 2012, the dollar's 50-day moving average is set to fall below the 200-day moving average.  This cross is sometimes referred to as the "golden cross" or the dead man's cross, perhaps depending on what side of the trade one is on.   

That said, we think the dollar is a better buy than sale against the yen.   The four-month trading range should be assumed to remain intact until proven otherwise.  In addition, we think that the US Treasury yields have eased to the lower end of their range as well (10-year ~2.50%). The rebound of Portuguese bonds warns that the immediate safe haven bid may slacken.  

The euro has gravitated around the middle of its two-cent trading range ($1.35-$1.37) that has dominated the price action since May 22.  It was effectively unchanged over the course of the week.  Technical indicators are not generating strong signals.   The 50-day moving average broke below the 200-day moving average on July 4 for the first time since last July.  Within that two-cent range, there is an even narrower range that may be in play in the coming days:  $1.3575-80 on the downside and $1.3650-65 on the topside.  

After appreciating by about five cents in five week, the British pound has spent the past two weeks in a cent range--$1.7080 to $1.7180.   The RSI is flat, though elevated, but the MACD is rolling over.  Given the extended market positioning, the risk seems asymmetrical to the downside.  The UK reports the June inflation and employment figures next week that may help shape interest rate expectations.  We suspect that the combination of factors, including the strength of sterling, more moderate data, macro-prudential measures, some signs of stabilization of the housing market will deter the BOE from hiking rates this year, even though we recognize risks of dissents coming. 

A break of the $1.7050 area would be a warning sign that the consolidation may give way to a more proper correction.  Below there, the $1.6970-$1.7000 would beckon.  At the same time, given that the BOE is still seen to be the first of the major central banks to hike rates, we suspect buyers will emerge on pullbacks. 

The US dollar staged an outside up day against the Canadian dollar before the weekend by first trading below the previous day's low and then on the back of what appeared to be a weak jobs report, rose through the previous days high and closed above it.  We read the data to be more mixed.  The unemployment rate did tick up and there was a net loss of 9.4k jobs.  However, the economy grew 33.5k full-time positions, which would be the equivalent of more than a 300k increase in US non-farm payrolls. 

However, technical indicators had warned that the Canadian dollar's advance was stalling.  Recall that the US dollar fell 3.2% against the Loonie between June 5 and July 3.  The downside momentum had stalled and the late longs were vulnerable.  For the first time in over a year, the net speculative position in the futures market swung to the long side in early July.    Corrective targets for the dollar are CAD1.0750 and CAD1.08. 

The technical signals from the Australian dollar are not as clear.  The Aussie is gravitating around the $0.9400 level.    It continues to hold up well despite the fact that the market now is leaning toward another rate cut after previously pricing in a chance of a hike.  The 10-year bond has drawn interest.  The yield has fallen 43 bp over the past month, but at 3.4% is still well above any other AAA sovereign yield.  In fact, the yield is comparable to Poland, which is an A- credit.   Resistance is seen near $0.9450 and support is about a cent below there.   

The head and shoulders pattern we had identified in the peso appears to be been nullified by the recent price action.   Over the past two week, the dollar has moved in less than a 1% range against the peso.    The immediate range appears to be MXN12.96-MXN13.04.    Mexico 10-year dollar bonds pays essentially the same as the 10-year Australian dollar bond, but the cost of not taking on currency risk, means accepting Mexican credit risk.  

In January the US 10-year yield fell from 3.0% to below 2.6%.  It generally traded in a 2.60%-2.80% range through mid-April, when it entered a slightly lower range of roughly 2.50% -2.70%.  In the second half of May, the yield spent a few days below 2.50%, but by early June it moved back to the 2.50%-2.70% band.  Although we recognize that as the Fed tapers, other economic agents have picked up the slack and they include reserve managers and other private sector asset managers, we do not expect the 10-year yield to spend much time below 2.5%. 

Lastly, we turn to the CRB index.  This broad measure of commodity prices has collapsed.  It has fallen nearly 5% since the June 27.  Half of that was recorded over the past five sessions.    With the losses seen before the weekend, the CRB has retraced 38.2% of the 35% rally from the January low (~272.04) to the late June high (~313.25).   The CRB index has fallen for twelve consecutive sessions through July 11.  The technical indicators are stretched and the index finished the week below its lower Bollinger Band for the first time on weekly basis since last November.  Weak commodity prices hurts producers and is an additional headwind for countries that are face the risk of deflation. 

Observations based on the speculative positioning in the futures market:  

1. There were two significant position adjustments in the latest CFTC Commitment of Traders report for the week ending July 8.   The first was a 13.3k-contract reduction of gross sterling longs.  AT 86.6k contracts still, it is still the largest gross long position among the currency futures.  In fact, it remains larger than the combined gross long position of the euro, yen and Swiss franc.  The second  was a 13.5k contract increase in gross long Canadian dollar futures to 58.2k contracts.   This is the largest gross long Canadian dollar position in nearly 18 months.    The gross long position has more than doubled since late May.  These late longs are vulnerable as we saw before the weekend as the Canadian dollar sold off despite a jobs report that saw the most full-time positions increase in five months.

2.  The 9.9k contract cut of gross long speculative Australian dollar position to 66.7k contracts was just shy of our subjective 10k threshold.  This is a modest pullback from the 15-month high seen in the prior period.  Gross long yen positions were cut by 7.6k contracts to stand at 11.2k.  This is the third lowest in ten years and the other two were recorded this year.    In terms of positioning, what would cause the greatest distress is for sterling-yen to sell-off.

3.  There was a clear bias in cutting longs currency futures positions.  The Canadian dollar was the sole exception.

4.  During the five day reporting period, the US 10-year yields moved from 2.54% to 2.69% and then fell back to 2.55%.  In the futures market, it was the gross longs that felt the pain.  They were cut by 27.8k contracts and stood at 376.7k contracts at the end of the reporting period.  The shorts were virtually unchanged at 473.4k contracts

week ending July 8		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-60.8	-59.3	51.6	-1.1	110.9	-2.6
Yen	-66.4	-58.7	11.2	-7.6	77.5	0.1
Sterling	41.6	56.4	86.6	-13.3	45.0	1.5
Swiss Franc	-6.8	-7.3	9.1	-0.6	15.9	-1.0
C$	10.3	2.7	58.2	13.5	48.0	5.9
A$	36.6	38.9	66.7	-9.9	30.1	-7.6
Mexican Peso	68.8	69.6	82.8	-2.6	14.0	-1.9