Yogi Berra, one of the keenest observers
of the human condition, is said to have once remarked "It is tough to make predictions, especially about the
future." And
so it is.
Between the middle of last December and
the middle of March, the Dollar Index
rallied 14.7%. It then fell 6.2%. A 50% retracement would bring it to
94.00, which had generally provided
support in the second half of February. It was from that the Dollar Index staged a new leg up that carried it to
100.40 over the next few weeks.
The decline in the Dollar Index, as well
as its pace, however, has spooked the market. This speaks to two things. First, the stretched positioning in the
speculative market. Specifically, the short euro position had barely been
adjusted though several of the other
currencies had. The Dollar Index, as we have noted before, is not a good
trade-weighted measure and is heavily weighted toward the euro and currencies
that move in its orbit.
Second, traders are fickle about the
dollar's rally. Part of this seems to be a function
of pushing out a Fed rate hike. It is partly that US economy ground to a
virtual halt in Q1. But there is
also a deeper sense that many believe the dollar
is living on borrowed time: That it has been more of a question of euro
weakness than dollar strength.
In thin markets before the weekend, the
dollar staged an impressive recovery. The thinness of market conditions
makes us hesitant to read too much into it, but we suspect that if the dollar has
not bottomed, it has come awfully close.
While the Reserve Bank of Australia possible rate cut may be the
highlight of the first half of next week, the UK election May 7 and the US
monthly jobs report the next day will drive the market. Our constructive
outlook for the dollar requires a jobs report that is not disappointing.
The euro's rally stalled before the
weekend just shy of its 100-day average (~$1.1297) though it still held
on to a weekly gain of 3%. Even the pullback on Friday, it
still closed at the top of its Bollinger
band. It appears that some of the gains were
driven by unwinding of hedges or short positions, and linked to the
sell-off of German stocks and bonds. Key support for the euro may be the
top of the previous range, roughly $1.1050.
Technical indicators favor the dollar over
the yen. The greenback is trying to establish
a foothold above the downtrend line drawn off the March multi-year high (~JPY122.03), and the April high (~JPY120.85)/ It is just below JPY120.20
now. The dollar's 5-day moving average will cross above the 20-day moving
average. The RSI is curling up
while the MACD's are flat on the lows. Rising US Treasury yields also
favor the dollar. The JPY120.75-85 offers initial resistance.
Japanese participation will be light due to the Golden Week holidays.
A strong US jobs data could see a challenge on the JPY122.00 area.
With its steep pre-weekend loss, sterling
has retraced more than 38,2% of its rally that took it from $1.4565 on April 13
to almost $1.56 in the middle of last week. It had traded for the first time
since last August above its 100-day moving average (~$!.5165). The
impressive ten cent rally took place in
the face of a slowing economy and polls that still make it difficult to see a
majority government being forged from the May 7 election.
The RSI has turned down, and the MACDs may
cross lower next week. The 50% retracement is near $1.5030
with the 61.8% retracement slightly above $1.4920. They offer road
markers if not price objectives. The 20-day moving average is $1.4985.
The US dollar had fallen
sharply against the Canadian dollar over the past few week, but staged an
impressive recovery after retracing 38.2% of the its rally since last July's
lows, that came in just below CAD1.20. In fact, the rally in the second
half of the week completely recouped the losses from the first part of the
week.
The test for US dollar bulls now is likely
the CAD1.23 area. The 100-day moving average comes in
near there, as does the 20-day average. It is also the lower end of an
old congestion area; it also corresponds to a retracement objective. The RSI has
turned up, and the MACDs are poised to
cross at the start of the week.
Like the Canadian dollar, what the
Australian dollar gained in the first half of last week it gave back in the
second half. The Aussie rallied from a low near
$0.7530 in early April to a high near $0.8075 in the middle of last week.
It rose above its 100-day moving average for the first time since last
September. With the drop before the weekend, the Aussie had recouped 50%
of what it had lost in recent weeks.
The 61.8% retracement is near $0.7740, and the 20-day moving average starts the new
week at $0.7760. The technical indicators are
consistent with additional losses. An RBA rate cut in an offered market
may have more impact than in a bid market. A rate cut would also be understood in part as a protest against the
Aussie's strength.
The June light crude futures contract
encountered strong offers in front of $60 a barrel. This is the upper end of the range seen since mid-December
last year. The RSI is trying to turn lower. The MACD flat-lined near the highs for most of April.
Initial support is seen in the
$55-$56 area. The 100-day moving
average, which it traded above last week
for the first time since last August, comes in at $53.70.
The US 10-year Treasury yield rose 20 bp
over the course of last week, despite some disappointing data. Two factors that contributed to the increase was the
active new corporate bond sales, which often uses Treasuries as a hedge, and
the sell-off in European bonds that may have dragged the US down as well.
There is a band of congestion just above last week's 2.12% high and
extends to the 2.25% area. A strong employment report could see this area
approached while a weak report would
likely see a rejection of the 2%+ yields and a return to the lower end of the
range around 1.85%.
The S&P 500 gained almost 1% before
the weekend, which was not quite enough to retrace the week's decline seen
after a new record high was posted at the
start of the week. It did break the streak at three of
lower highs. The technical indicators are not generating a strong signal. The market fared well in
the face of the sharp rise in yields. US shares may have also been
positively impacted by the big position unwind that also had been expressed as short US and long Germany or
European equities.
Observations based on the speculative
positioning in the futures market:
1. There were three significant (more than
10k contracts) position adjustments in the Commitment of Traders reporting week
ending April 28. The gross short euro position was trimmed by 13k
contracts, leaving 248.5k. It remains near the record set in March near
271k gross short contracts.
The gross short yen
position was cut by 11.8k contracts to 54.2k. It peaked
last December near 153k contracts. The gross
long Mexican peso position was cut by 12.3k contracts to 38k.
2. The overall pattern was to cover short
currency positions. Of the seven currency futures we track all but sterling saw a reduction of gross short
positions. The gross longs, outside
of the peso, were little changed. The largest was the euro where the gross long position increased by 3.9k
contracts. The 50.7k gross long euro
contracts are the second largest gross long position, trailing the
Australian dollar where speculators hold 53.8k contracts.
3. The speculative net short 10-year
Treasury futures was reduced from 153k to
98.6k contracts. This was a function of 40.4k new long positions (now 363.6k
contracts) and a cut of 14.4k short contracts (leaving 462.1k).
4. The
net speculative long crude oil futures position was trimmed by 8.2k contracts
to 314.8k. Both the longs and shorts grew. The gross long position
edged up by 2.4k contracts to 521.7k. The gross
short position rose by 10.6k contracts to 206.9k.
| week ending Apr 28 | Commitment of Traders | |||||
| (speculative position in 000's of contracts) | ||||||
| Net | Prior | Gross Long | Change | Gross Short | Change | |
| Euro | -197.8 | -214.7 | 50.7 | 3.9 | 248.5 | -13.0 |
| Yen | -5.5 | -14.5 | 48.7 | -2.8 | 54.2 | -11.8 |
| Sterling | -34.2 | -26.3 | 33.2 | -1.6 | 67.4 | 3.3 |
| Swiss Franc | 1.3 | 0.3 | 11.1 | 0.0 | 9.8 | -1.0 |
| C$ | -20.9 | -27.1 | 33.9 | 0.5 | 54.8 | -5.6 |
| A$ | -27.4 | -34.6 | 53.8 | -1.8 | 81.2 | -9.1 |
| Mexican Peso | -23.4 | -13.7 | 38.0 | -12.3 | 61.4 | -2.6 |
Dollar's Demise Exaggerated: Technicals Anticipate Turn in Fundamentals
Reviewed by Marc Chandler
on
May 02, 2015
Rating:
Reviewed by Marc Chandler
on
May 02, 2015
Rating:
