Dollar Bulls Bend but Don't Break

The US dollar fell against the major currencies and many emerging market currencies last week. Punished by disappointing data, it threatened to breakout of ranges that have confined it. However, the third consecutive upside surprise on core CPI helped the greenback stabilize ahead of the weekend. The price action reinforces our sense that after trending for several months, the dollar has entered a consolidative phase. Trading is choppy, and positioning is still stretched, but the divergence of monetary policy trajectories will likely prevent sharp dollar losses. 

The Canadian dollar may be an exception.  The combination of a less dovish central bank, higher than expected inflation and stronger than expected retail sales, coupled with the 30% rally in oil prices over the past month, sent the Canadian dollar sharply higher.  Indeed, the Canadian dollar was among the best performing major currency (2.6%), behind another petro-linked currency the Norwegian krone (3.4%) and Swiss franc (2.8%), where Grexit fears found succor.

Even though it was the biggest weekly advance in four years, the pre-weekend price action is potentially a bearish signal for the Canadian dollar (hammer).  The US dollar appears to have found support near CAD1.2080.  This corresponds to three standard deviations from the 20-day moving average (Bollinger Bands are two standard deviations from the 20-day average).  The CAD1.2300-30 area offers initial resistance, but it probably requires a move back above CAD1.24 to signal the breakout was false.   

The euro rallied three and a quarter cents of the low set at the start of the week near $1.0520.  It ran out of steam near $1.0850.  The RSI and MACDs are constructive, and the five-day moving average is above the 20-day.  Slow stochastics is crossing higher.   The broad range that has confined the euro for over a month now is seen $1.05-$1.1050.   The double top that we discussed last week has now been complimented with a double bottom.   

The cyclical recovery in the euro area, which is expected to be extended in next week's flash PMI readings are largely offset by the ECB's asset purchases and the drop in yields.  A little more than half of the outstanding German bunds now have negative yields, for example.  In addition, many perceive that the risks of a Greek EMU exit has increased. 

While the euro gained almost 2% against the dollar last week, the yen gained roughly half as much (1.1%) making it the worst major performer against the greenback.  The dollar was pushed to almost JPY118.50 before finding a decent bid.  The dollar shed about 2.25 yen last week from the high near JPY120.85 seen at the start of the week.  Technical indicators are not generating strong signals.  The weakness in global stocks and the drift lower in US Treasury yields may deter dollar buyers against the yen.   Since late-November or early-December, the dollar has been confined to a JPY116-JPY122 range.  Within that the JPY118-JPY121 denotes the near-term range. 

Sterling briefly traded above $1.50 before the weekend for the first time since the FOMC meeting on March 18, when it reached $1.5165.    Its 2.3% gain against the dollar was the biggest in several years.  It nearly posted a key reversal week:  It recorded a new low for the move down near $1.4565, taking out the previous week's low, before rallying through the previous week's high (~$1.4995).  It failed to close above there, however.    The technical indicators are supportive.  Our caution stems from political uncertainty as the election now is within three weeks.  

The Australian dollar rallied nearly 3 cents of the lows seen at the start of last week.  Despite its 1.3% net gain against the US dollar, it was the second poorest major performer after the Japanese yen.  The strength of the recent string of data, including the jobs report, has seen the market scale back expectations for an RBA rate cut next month.  The odds implied by the derivatives market has fallen from 80-85% to 55-60%.  To signal a breakout, the Australian dollar needs to rise above $0.7950, and ideally $0.8000.  It failed before the weekend near $0.7850.  Support now is seen in the $0.7700-$0.7730 band.   A break of $0.7665 would warn of a return to the lows near $0.7550. China's policy initiatives since local markets closed before the weekend include banned brokers extending margin for umbrella trusts, allowing fund managers to lend shares to short-sellers, increasing the number of stocks that can be shorted, and a 100 bp cut in required reserves to counter the economic slowdown may be a bit of a wild card for the Australian dollar at the start of the new week

Oil prices rose to new highs for the 2015.  The June light sweet futures contract rose to almost $59.00.  It has been bumping against the top of its Bollinger Band, but the technicals are constructive, and higher lows were set each day last week.   The $57 level may offer support now, and the $60-$60.50 is the technical hurdle. 

US 10-year Treasury yields continue to trade in a roughly 1.83% to 2.0%.  Disappointing US economic data weighs on yields.  However, despite the decline in US yields, the premium over Germany widened.  The German 10-year yield is below eight bp and the US is near 1.90%. .  German yields are negative out through nine years.  Over half of German debt has a negative yields (~$8 bln) and in Europe, some $2 trillion of debt have negative yields. 

The S&P 500 is also in a range.  The range since early February is roughly 2040 to 2120.  At midweek, it tested the 2100, but broke down at the end of the week and slipped below 2080.  The technical indicators deteriorated , and the risk is additional losses at the start of next week.  A break of 2070 would warn of a move back to the lows of the range.  A break of the range would open the door toward 1980 the lows for the year. 

Observations based on the speculative positioning in the futures market:

1.  Position adjustments were mostly minor in the CFTC reporting week ending April 14.   Mexican peso futures accounted for the biggest adjustments.  The net position swung from short almost 23k contracts to being long 8.4k, for the first time since early last October.   This was a function of 21.3k new longs being established while the shorts covered 10k contracts.  Technically the dollar appears poised to retest the MXN15.50 area, putting the late longs at risk.

2.  Even though the gross position adjustment were small, speculators added to the gross long and short positions in the euro (5.8k and 2.9k respectively) and the Canadian dollar (0.9k and 1.5k respectively).  While they added to the gross long yen positions (1.5k), the gross short yen positions were essentially unchanged (less than 50 contracts).  Speculators continued to move to the sideline on sterling with both longs and shorts parted (3.6k and 1.9k respectively).

3.  The speculative net short 10-year Treasury was pared by 50k contracts to 112k.  This was more a reflection of new longs being established (48.1k) rather than shorts covering (-2.4k).

4.  The speculative net long light sweet crude oil futures grew by 30.1k contracts to 282.2k.  The longs rose by 7.1k contracts to 528k.  A little more than 23k short contracts were covered, leaving 245.8k.

week ending Apr 14		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-212.0	-215.0	45.3	5.8	257.6	2.9
Yen	-23.1	-24.5	54.8	1.5	77.9	0.0
Sterling	-36.0	-34.3	34.0	-3.6	70.0	-1.9
Swiss Franc	0.2	0.1	12.2	-0.5	12.1	-0.6
C$	-30.6	-30.0	23.0	0.9	53.6	1.5
A$	-42.4	-40.3	55.1	-0.9	97.5	1.3
Mexican Peso	8.4	-22.9	63.5	21.3	55.2	-10.0