Dollar Bulls may Pause

The US dollar's strong advance in the second half of May showed signs of tiring as last week drew to a close. It could be a function of month end flows, but the magnitude of the dollar's advance and the near-term event risk will likely encourage more defensive activity.

Next week's calendar is chock full of events, including RBA, ECB and BOE central bank meetings, OPEC's semi-annual meeting, as well as a slew of economic data, including eurozone flash CPI, the monthly PMI readings, and the US jobs report. The risk is for some backing and filling and in the current context this could give the dollar a heavier bias.

The euro recorded its low in the middle of last week near $1.0820. It briefly traded above $1.10 before the weekend. The initial scope extends toward $1.1060. A break of that could see $1.1135-50. On the downside, a loss of $1.0920 warns of a retest on the lows.

The dollar rose to its highest level against the yen since 2002, reaching JPY124.45 on May 28. The pace of the move elicited cautionary comments, but Japanese officials are not talking the yen down, if not because of the ambiguous economic, then not wanting to antagonize its trading partners ahead of the G7 Summit (June 7-8). Technically, the dollar is stretched against the yen. It closed above its upper Bollinger Band for three consecutive sessions, which has not happened since the BOJ surprised the market at the end of last October by expanding its QE operations (on a 5-4 vote). The decline in US 10-year yields and the weakness in equities also warns of the risk of a near-term pullback. The Nikkei advancing streak continued last week. It has not recorded a losing session since May 13.

Sterling has shed six cents since May 14 and four cents since May 22. The technical tone remains poor and the five-day moving average has broken below the 20-day average. We had suggested scope toward $1.5200, and it made a low just below $1.5240 before the weekend. The technical indicators are not suggesting a low is in place. A break of $1.5200 could spur another cent decline especially if it coincides with a firmer dollar environment and signs that the UK economy is continuing to slow. Sterling has not risen above the previous day's high since May 21. When it does, it may signal a corrective phase. The pre-weekend high was a little above $1.5340.

We had identified a technical pattern (double bottom) in the dollar against the Swiss franc that we believed projected to CHF0.9650. It poked through CHF0.9540 but then sold off, hitting a new five-day low before the weekend. It was the only major currency to stronger than the dollar for the week (~0.25%). The failure of the dollar near CHF0.9540, despite news that the Swiss economy contracted in Q1, is consistent with a consolidative/corrective phase for the dollar.

The other currency that we had thought was particularly vulnerable last week was the Canadian dollar. It lost 1.5% last week. Corrective forces were kept in check ahead of the weekend by the unexpected contraction in the Canadian economy in the first quarter. The US dollar has risen from CAD1.1920 on May 14 to a high of almost CAD1.2540 on May 28. It has moved from the lower Bollinger Band to the upper band, which comes in just above $1.2500 now. Consolidation is also the most likely scenario for the coming days and helped perhaps by the jump in oil prices. Initial US dollar support is seen in the CAD1.2400-20 area.

The New Zealand and Australian dollars were the weakest of the major currencies last week, falling 2.8% and 2.2% respectively. The New Zealand dollar has fallen to new multi-year lows. It has fallen 6.4% since May 14. Poor data and dairy price indications have increased pressure on the RBNZ to cut rates. The central bank meets June 10. Disappointing data also weighed on the Australian dollar. It has essential unwound the six-week uptrend over the past two weeks. The RBA meets on June 2. A rate cut would surprise the OIS market that has about a 10% chance of a 25 bp rate cut discounted. The Aussie's decline probably buys it some time. A bid has emerged in front of $0.7600. A move through $0.7680 could spur a cent gain.

The July sweet crude oil futures ended May with a bang. The nearly 5% gain before the weekend was the largest since mid-April. The previous day, it had surpassed a 38.2% of the advance since mid-March but managed to recover into the close. This combined with the impulsive move on May 29 warns that prices may re-challenge the $63.60 high seen in early May.

The US 10-year Treasury yield fell 11 bp in the last week of May and 27 bp since peaking near 2.36% on May 12. Yields fell in each of session last week. Well aware of next week's slew of important US economic data, technical condition of the bond market suggest yields can fall toward 2.0% in the coming days. One of the factors that had lifted US yields appeared to have been the extended flash crash in Germany. This too has ended. The 10-year bund yield finished the week below 50 and its lowest level since May 4 after peaking near 78 bp. The next target is near 40 bp.

The S&P 500 slipped lower this past week after setting a marginal new record high the previous week. After selling off before the weekend, the S&P 500 recovered to close near the middle of the week's range. The technical indicators we use are not generating strong signals. A break of the 2100 area would set up a test on the 2080 area, but it will likely take the loss of 2040 to indicate anything important.

Observations based on speculative positioning in the futures market:

1. There were mostly minor adjustments in the currency futures positioning in the CFTC reporting week ending May 26. The week was shortened by the Memorial Day holiday that closed the futures market. The yen was the sole exception. The gross long position was cut by more than 20%, or 13.2k contracts to 50.2k. The gross short position jumped by more than a quarter (27k contracts) to 112.4k. One of the things that have fueled the yen's decline to multi-year lows has been the rebuilding of speculative short positions. It has risen by 51k contracts over the past two weeks. The yen bears have not been this aggressive since late 2012.

2. The general pattern was to rebuild short currency futures positions that had been pared in recent weeks. The gross short positions increased for all the currency futures we track but sterling. It saw a decline of 4.3k contracts to 60.2k.

3. The speculative community remained net long Swiss franc, Canadian dollar, and Australian dollar currency futures. None of the net positions is larger than 8.5k contracts.

4. The net short US 10-year Treasury futures positions were hardly changed at 83.5k contracts (-2.3k) in the latest reporting week. Gross longs and gross short positions were trimmed by 6.8k and 9.1k contracts respectively.

5. The net long light sweet crude futures position was also little changed. There was a 4.k contract increase to 348k contracts. The longs were scratched 2.6k contracts, leaving 502k. The short were pared by 7.2k contracts to 154k.

week ending May 26		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-172.0	-168.0	44.2	5.5	216.0	8.9
Yen	-62.2	-22.0	50.2	-13.2	112.4	27.0
Sterling	-25.5	-23.4	34.7	-6.4	60.2	-4.3
Swiss Franc	8.3	9.4	11.2	-0.9	2.9	0.2
C$	7.3	4.3	30.7	5.5	23.4	2.5
A$	6.4	7.3	65.2	0.1	58.8	1.0
Mexican Peso	-32.5	-31.3	23.9	0.2	56.5	1.4