Near-Term Dollar Conviction Went MIA

The US dollar fell against most of the major and emerging market currencies in the past week.   The price action has been choppy, and many participants lack near-term conviction.  Month, quarter, and for many, fiscal-year end considerations also inject additional uncertainty.  Next week can be more of the same.  The week will be cut short by holidays that shut most European market in the second half of the week, and the North American market is unlikely to have full participation when the March employment data are reported on Good Friday, April 3. 

One of the key triggers of the dollar's downside correction, which has extended into the second week, was the re-evaluation of the trajectory of Fed policy.  Although yields at the long-end of the curve rose last week(~5 bp), rates at the short-end yields fell.  The implied yield of the December Fed funds futures contract fell 5.5 bp to 40 bp.  This was mirrored in the December Eurodollar futures contract, where the yield fell to 68 bp. 

The technical issue that participants are wrestling with is whether the dollar's long overdue downside correction is over or another push down should be anticipated.  The technical evidence is mixed, but on balance, it warns that the correction may not be over.  

The Dollar Index did post a key reversal on March 26 and saw some follow through buying on March 27.  However, the momentum stalled at the minimum retracement of the Dollar Index decline from the high set on March 13 near 100.40.  That retracement level is about 97.80, which is just below the 20-day moving average.  It did not close above there even once in the past week.  On the downside, the 96.50 area is has offered support.

Like the mirror of the Dollar Index of which it is the largest component, the euro staged a key downside reversal on March 26.   The follow through selling stopped in front of $1.08.   The $1.1070 area marks the top of the two week range.  A move above there would likely target the $1.12 area. 

The dollar did not trade above JPY120 since March 23.  Although the dollar recovered from the slide to one-month lows (~JPY118.35), it was unable to resurface above the 5-day moving average which it is has failed to close above for a couple of weeks.  Technical indicators warn of the risk that the lows may be re-tested in the days ahead.  In the bigger picture, the dollar has been chopping around a broad trading range since last November. 

Sterling was firm ahead of the weekend, but it was worst performing major currency against the dollar in the past week (-0.50%).   Soft inflation, uncertainty ahead of the election and some dovish BOE comments likely account for sterling's under-performance.    The December short-sterling futures contract was essentially unchanged on the week after setting new contract highs ahead of the weekend.   Sterling itself has repeatedly tried in vain to push above $1.50.  On the downside, good bids were uncovered near $1.48.  Technical indicators, like the RSI and MACDs, are constructive. 

The Australian dollar spent most of the week in the range established on Monday March 23 between $0.7765 and $0.7900.  However, the drift lower in the second half of the week softened the technical tone.  It closed at new lows for the week.  The market is pricing in additional cuts, but many have been leaning against a move at the April 7 meeting.   Still as the meeting approaches, the Aussie may come under more downside pressure.  A break of the $0.7740 area would encourage a return to the recent lows below $0.7600. 

The Bank of Canada meetings on April 15 and comments from the central bank have discouraged ideas of another rate cut now.  The bounce in oil prices failed to offer much support to the Canadian dollar, but the sharp sell-off in oil ahead of the weekend weighed on it.    The US dollar finished the week near its best levels.    Technical indicators suggest US dollar support may be stronger than resistance.   The US dollar has been in a clear, even if choppy trading range against the Canadian dollar for two months.  By rule of alternation, after having approached the bottom of the range, it should test the upper part of the range, which comes in clear to CAD1.28.  

The market rejected the push in 10-year Treasury yield below 1.90% but failed to drive the yield above 2.0%.  Soft auctions, the calendar effect, and next week's jobs data appeared to sap the market of near-term conviction.   Technical condition of the market is neutral, but until a beachhead above 2.0% can be secured the risk seems to be on the downside. 

We disagreed with those in February and early March, who claimed that oil prices bottomed.  A new low in the May light crude contract was recorded on March 18.  The geopolitical tensions in the Middle East spurred a strong advance.  However, the possibility of a deal with Iran on its nuclear program, and no signs that the Mideast tensions are disrupting supplies deterred follow through buying.   Immediate support is seen near $48.25.  A break could see into the $46-$47 area before better bids are found.    We are still unconvinced that a significant low is in place.  

The S&P 500 fell during the first four sessions last week before eking out a minor gain ahead of the weekend.  It spent the entire last two sessions of the week below the 50-day moving average, something not seen since late-January/early February.  The RSI is trying to turn higher after the recovery from the gap lower opening on March 26, but the MACDs have not bottomed.  A move above 2080 would help lift the tone.   Support is seen in the 2040-45 area. 

Observations from the speculative positioning in the futures market:

1.  There was a marked increase of significant changes in the speculative positioning in the currency futures (10k contract of greater adjustment in gross positions).  It was the most active week this year. There were six such adjustments.  The gross short euro position jumped 21k contracts to a record 271.1k.  Both bulls and bears cut sterling positions aggressively.  The gross long position was cut by 11.2k contracts to 35.9k.  The gross short position was cut by 10.5k contracts to 74.5k.  A similar pattern was evident in the Australian dollar.  The gross long position was cut by 11k contracts to 52.1k, and the gross shorts were reduced by 11.4k contracts, leaving 80.4k.  Lastly, the next long Mexican peso position rose by almost 50% to 35k contracts.

2.  The clear pattern was that speculators took advantage of the counter-trend moves to take profits or cut longs.  The gross long positions were cut across the board, with the Mexican peso the lone exception.

3.  There were some interesting trend moves.  The net short euro position has increased for three consecutive weeks after falling for four weeks.  It was the fourth week that the net short sterling position has grown.  At 38.6k contracts, it is more than twice the size at the end of last year.  The net short yen position of 45.9k contracts is half of where it stood at the end of the 2014.  This has been largely a function of shorts covering.  The gross short position has fallen by 40k contracts in Q1, while the gross long position has risen by 10k contracts.  

4.  The speculative net short 10-year Treasury futures position increased to 180k contracts from 108k. The long were cut by nearly 10% to 350.4k contracts.  The shorts rose 32k contracts to 530.2k.  This year the gross long has risen by about 70k contracts while the gross short position has slipped 13k contracts.

5.  Speculators cut their net long light crude oil futures position by 36.6k contracts to 206.9k.  The gross longs were trimmed by 3.4k contracts to 513.6k.  The gross short position rose 33.2k contracts to 306.7k.

Commitment of Traders

week ending Mar 24
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-221.0	-194.0	50.1	-6.2	271.0	21.0
Yen	-45.9	-48.1	39.2	-5.3	85.1	-7.5
Sterling	-38.6	-37.9	35.9	-11.2	74.5	-10.5
Swiss Franc	-4.0	2.2	12.6	-5.5	16.6	0.6
C$	-32.7	-32.8	19.2	-1.8	51.8	-1.9
A$	-28.4	-28.8	52.1	-11.0	80.4	-11.4
Mexican Peso	-41.1	-55.9	35.0	11.3	76.1	-3.5