The US dollar turned in a mixed performance during the first week
of the New Year. It fell against the Antipodeans and yen
but rose against the other major currencies. The dollar's performance against
emerging market currencies was similarly mixed. It rose against most but fell against the major non-restricted
currencies, like the Turkish lira, the Mexican peso, and the South African rand.
Most importantly, the dollar finished the week on a soft note, and we
expect this to continue into the week ahead.
While US job creation in December, at 252k surpassed
consensus expectations, and the October-November rolls were revised higher by a
combined 50k, it was the weakest monthly jobs growth since August. The wage data were a major disappointment. Average hourly earnings fell 0.2%. The consensus called for a 0.2%
increase. The 0.4% gain in November was
halved in the revision. The year-over-year pace slumped to 1.7%,
the lowest in two-years.
The market's confidence that
the Fed's lift-off will take place near mid-year has been shaken. The implied yield of the December 2015 Eurodollar futures
contract finished the week at its lowest level in a month, nearly 20 bp below
the level seen on Xmas eve. In the week ahead, softer retail sales
and inflation gauges will likely favor the doves and weigh on the dollar.
Technically, the euro could climb toward $1.1875-$1.1900
before the bears make a new stand ahead of the January 22 ECB meeting. This kind of gain off the multi-year low set on January 8 near $1.1755 does not
likely reflect bottom-pickers and bargain hunters as much as a minor bout of
short-covering as the downside momentum appeared to ease. A break of
the $1.1750 are could signal another quick cent decline.
The dollar peaked a month ago against the yen (December 8
~JPY121.85). Sine
then the BOJ has added another (roughly) 1.4% of GDP to its balance sheet.
Over the past month, the dollar appears to be carving out some kind of wedge or triangle pattern, which it
typically thought to be a continuation pattern. The downward sloping top
line is drawn off that December 8 high
and that the high from January 2-3. It comes in near JPY120.35 by the end
of the week ahead. The upward sloping bottom line is drawn off the December 16 low spike below JPY115.60 and the
January 6 low just above JPY118.00. It was closed just above it before the weekend. . On a downside break, which looks likely, we initially target JPY117.50 and then JPY116.80.
After a string of disappointing PMI reports, the UK
surprised investor with its largest jump in manufacturing output in seven
months and the smallest trade deficit since June 2013. Sterling's downside momentum that
had carried to just above $1.50, and the data helped spur a bounce. Those
upticks still lack conviction, and the
short-covering was only sufficient for it to flirt with $1,5175. Technically,
there is potentially into the $1.5250-$1.5300 area. Expectations of a
rate hike continue to be pushed out, and this is what is being reflected in the
latest gains in the short-sterling futures contract. A sub-1% CPI reading
is expected on January 13 and will likely
push the market more in this direction.
The Australian dollar finished last week above its 20-day
moving average for the first time since mid-November. Positive fundamental news from the smaller than
expected trade deficit and larger than expected jump in building approvals
seemed to stall the downside momentum.
It took the broader US dollar weakness to push it higher. The
$0.8200 area was probed, and the next
level of resistance is seen near $0.8250. From a technical perspective,
the Australian dollar looks the most constructive of the foreign currencies we look at here. The RSI and MACDs have
turned up, the 5-day moving average is poised to cross above the 20-day
average, and it closed at three-week highs before the weekend. It also
closed above the downtrend line drawn off the mid-November and late-November
highs and the high seen at the start of the year.
The technical tone of the Canadian dollar is not nearly as
constructive as it is for the Australian dollar. The Canadian dollar is being treated
more like a petro-currency. This allowed the drop in oil prices to
overshadow the 53.5k jump in full-time jobs reported before the weekend.
The US dollar extended its advancing streak against the Canadian dollar
to six consecutive weeks. It approached CAD1.19 before pulling back a
little. Above there, the CAD1.1975-CAD1.2000 offers psychological
resistance. The lower level is equivalent to $0.8350 for Canadian
businesses.
Oil prices have fallen for seven consecutive weeks. The risk is still on the downside,
even though the February WTI futures contract spent most the week bouncing
along the recent trough. Saudi Arabia's last move, to cut the discounts
offered in the US and Europe, demonstrate its resolve to preserve market share.
At the same time, the apparent liberalization of US rules on condensate
exports could boost US exports by another mln barrels a day by the end of the
year, according to some industry estimates. This will intensify the competition in third markets. Over time, the decline in prices will boost demand. There are already preliminary signs that the decline in gasoline prices
in the US is boosting demand.
The drop in oil prices, the absence of
earnings growth in the jobs report, and the increased jitters in the equity
market, ahead of Q4 earnings season pushed
US 10-year bond yields below 2.0%. This is beginning to look like the upper end of yields. Yields recorded a low near 1.86% in
the mid-October flash crash and
1.88% on January 6. A break could extend the range another 10 bp or so initially, but there is increasing
talk of a move toward 1.50%.
The S&P 500 filled the gap from the higher opening on
December 18 that we anticipated. The recovery off the January 6 low was sharp. In some ways, it looks similar to the lows from
the middle of October and the middle of December. However, the technical
indicators, like the RSI and MACDs are not as constructive, A break of the
2030-2065 range will likely suggest the direction of the near-term trend.
Even though the weekly close was above the 50-day moving average, on
balance we have a slight near-term bias
to the downside.
Observations based on the speculative positioning in the
futures market:
1. There were two significant changes in gross
speculative position in the futures markets in the Commitment of Traders for
the week ending January 6. The gross short euro
position increased by 11.6k contracts to 207.1k. The gross short sterling position grew by 10.4k to
64.7k contracts. There was only one other gross
position adjustment more than 5k contracts. It was the 7.7k contract cut
of gross long Australian dollar positions
to leave 17k.
2. There was a clear
pattern. Speculators added to the gross short position of all the
currency futures we track. The longs were more mixed but were added to in
the euro, yen, sterling and peso.
3. It seems as if there was some pre-holiday position
squaring, and those positions are being re-established. The gross short euro position peaked
in early November near 239k contract and fell to 183k in the middle of
December. There are a few exceptions. The gross long and short yen positions are smaller now than
mid-December, but the net position is little changed at 90.1k contracts short.
Before Xmas, it stood at 87k. The
market has been building a larger net short sterling position, which is now about
20% bigger than it was on before Xmas. At 64.5k contracts, the net short
peso position is about twice the size of the position
at the end of November.
4. The net short 10-year Treasury note futures
position slipped to 243k contracts from 261k the prior week. However, this is still a large increase from the 163k net short
position in early December. The gross long position rose almost 30k
contracts over the past week to 311.5k. In late October, the gross long
position was 457k contacts and fell to 273k contracts in the middle of
December. It has risen for the past three weeks. The gross short position increased by almost 12k
contracts to 554.7k. This is the largest gross
short speculative position since 2006. It has grown by about 90k contracts
since the end of November.
| week ending Jan 6 | Commitment of Traders | |||||
| (speculative position in 000's of contracts) | ||||||
| Net | Prior | Gross Long | Change | Gross Short | Change | |
| Euro | -161.0 | -152.0 | 46.0 | 2.8 | 207.1 | 11.6 |
| Yen | -90.1 | -96.3 | 33.2 | 4.3 | 123.2 | 1.9 |
| Sterling | -25.6 | -19.3 | 39.2 | 4.1 | 64.7 | 10.4 |
| Swiss Franc | -24.2 | -16.5 | 5.5 | -3.3 | 29.7 | 4.3 |
| C$ | -17.1 | -14.0 | 31.3 | -1.5 | 48.4 | 1.6 |
| A$ | -48.7 | -40.7 | 17.0 | -7.7 | 65.6 | 0.3 |
| Mexican Peso | -64.5 | -63.8 | 18.7 | 2.8 | 83.1 | 3.4 |
News Stream May Favor US Doves and Spur Dollar Consolidation
Reviewed by Marc Chandler
on
January 10, 2015
Rating:
Reviewed by Marc Chandler
on
January 10, 2015
Rating:
