Dollar Bulls Ahead

The US dollar had another good week, rising against all the major currencies.  The strength of the US employment report, especially in the context of disappointing eurozone and UK PMI data, ensured that the consolidative phase was short-lived.   After dropping nearly two big figures, the dollar quickly snapped back against the yen, even though US interest rates remained soft.

It was sterling that was the weakest of the majors, slipping 1.7% against the dollar.  The UK economy has lost momentum since the middle of the year, even though the data continues to be solid.  At the same time, many participants appear to be pushing the first BOE rate hike into Q2 15, perhaps after the May election, than in the first quarter as we have been consistently maintaining.    

Although the net speculative positioning in the futures market swung back to favor longs in the week than ended September 30, sterling continued to sell-off in the second part of the past week.    It finished the week below $1.60, for the first time since last November.  Sterling may trade may still trade above that psychological level, but provided it does not push above $1.6100, there is potential toward $1.5725.  

Euro upticks were turned back from 1.2700-15.  This area is likely to become formidable resistance. More immediately, the $1.2550 area may cap the near-term.   The charts suggest initial potential toward $1.2450 in the coming days, but the $1.2135 area is the next major objective.  It corresponds to a 38.2% retracement of the euro's large multi-year uptrend from $0.8230 in October 2000 to $1.6040 in July 2008.  

The technical picture of dollar-yen seems fairly straight forward.   If we are right, the dollar does not really trend against the yen except for the movement from one trading range to another, then the lower end of the new trading range appears to have been set, at least on a preliminary basis at JPY108.  This also means that the JPY110 level is not the top end of the range.  We suspect the upper end of the range will be closer to JPY115, though we wouldn't preclude some overshoot.  

We suspect that a large part of the motivation for the rash of Japanese official comments cautioning against too fast of a yen depreciation is aimed to signalling to its partners, especially the US, that it is not purposely engineering the sharp slide.  The US Treasury will soon be updating its foreign exchange and international economy report.  Perhaps Japanese officials do not want to give the protectionists more fodder, especially ahead of the November election.  Part of the commentary also appears genuine that too fast of an adjustment may cause hardship for importers to hedge while not helping exporters that much.  

The dollar-bloc continues to trade heavily as well.  The net speculative positions in the Canadian dollar are short again, for the first time since June.  The net speculative position in the Australian dollar also switched to the short-side for the first time sine April.   The US dollar closed at its upper Bollinger Band, set two standard deviations above the 20-day moving average (~CAD1.1245).  The year's high was set late in Q1 near CAD1.1280.    Above there, the next objective is near CAD1.14. Over the medium term, we see potential toward CAD1.16-CAD1.17.

The Australian dollar continues to trade heavily, and like the euro and sterling, made new lows for the year before the weekend and after the US jobs report ($0.8645).  The next significant target is $0.8500.  Over the medium-term, the bears have their sights set on $0.8000.  

As we saw with the dollar-bloc, so too with the Mexican peso.  The net speculative position swung to the short side.  For a week in August, the net speculative position was short, but this was a one-week wonder.  The net short position has not been sustained since March.  Peso bears are in control, and there is potential for the greenback to trend toward MXN13.75.  Ahead of that, there are a few levels for participants to monitor.  First is the MXN13.52 area, the top of the Bollinger bands. The second is MXN13.54, the high from last week.  Third is the year's high set in January near MXN13.60.  

The US 10-year yield initially rose in response to the US jobs report.  However, the yield was unable to push through the 2.50% area, and finished near session lows around 2.43%.  The soft close warns of a re-test of last week's lows near 2.38%. A return to the year's low set in August of 2.30% cannot be ruled out.    

Even though the US employment data was stronger than we had expected, it does not alter the fact that most recent economic data have been reported below expectations. Economists have also revised down, slightly Q3 GDP forecasts.  Price pressures also remain subdued, and the impulse from foreign economies, commodity prices, and dollar strength serve to cap inflation expectations. The CRB index fell to new multi-month lows  (~275) to close in on the year's low set in January near 272.

Observations based on the speculative positioning in the futures market: 

1.  There were two significant (more than 10k contract) adjustment to gross positioning in the future market.  First, the gross short yen position grew 17k contracts to 158k.  This reflects a rapid accumulation.  The gross short position has doubled since mid-July and is up 2/3 since mid-August.  Second, the gross short Canadian dollar position jumped by more 13k contracts, or more than 50%, to 37.6k contracts.   This is the largest gross short position since the end of July.  

2.  The gross position adjustment were sufficient to switch the net speculative positioning in the Australian and Canadian dollars and the Mexican peso to the  short side.  In the Australian dollar and peso's case it the switch was a function of both longs being cut and short growing.  The Canadian dollar saw an increase in both longs and shorts.    On the other hand, sterling swung to a small net long position.  This was more a result of shorts being covered (-4.1k contracts to 50.7k), than longs growing (0.6k contracts to 54.2k).  

3.  The clear bias was for gross short foreign currency positions to grow.  Sterling was the sole exception.   The rise of the gross short positions reflects the bullish dollar trend and momentum.  At the same time, gross long positions mostly increased.  Here Australian dollar and Mexican peso were the exceptions.  The increase in gross long positions seems to indicate some bottom picking attempts.  

4.  The net speculative position in the 10-year US Treasury futures swung back to the short side by 12.5k contracts from being long 8.8k in the prior period.   This was a function of gross longs being trimmed by 10.2k contracts (to 449.9k) and new 11.2k new short contracts (which lifts the gross position to 462.4k).  

week ending Sept 30		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-138.0	-142.0	67.0	6.4	204.6	1.9
Yen	-121.0	-105.0	29.9	1.5	150.8	17.0
Sterling	3.6	-1.1	54.2	0.6	50.7	-4.1
Swiss Franc	-12.6	-13.4	12.0	3.6	24.6	2.8
C$	-4.6	3.1	33.0	5.3	37.6	13.0
A$	-2.0	8.3	43.2	-4.0	45.2	6.4
Mexican Peso	-7.3	10.5	48.9	-9.4	56.2	8.4