The Dollar Blues

Disappointing US economic data and high volatility in the German bunds kept the dollar under pressure.  Over the past week the greenback fell against all the major currencies, save the New Zealand dollar (where interest rate cut expectations have built for as soon as next month).  Most currencies from the emerging markets rose against the dollar, except for a handful of Latam currencies, including Argentina, Brazil, Colombia, and Peru.

While the dollar is still vulnerable to some additional near-term losses, we argue on both fundamental and technical grounds, it is premature to invest as if a new bear market for the dollar has begun.  

The fundamental case for the dollar was based on divergence of monetary policy.  This piece remains in place.  As the Wall Street Journal survey found, an overwhelming a majority of economists (73%) expect the Fed to hike in September.  Meanwhile, there is little doubt that the ECB and BOJ will be continuing to expand their balance sheets under versions of QE well past then.

From a technical perspective, the dollar's losses in recent weeks must be seen in the context of the previous 11-month rally.   The Dollar Index rallied 27.5% between May 2014 and March 2015. The pullback has been about 7.4%.  It has not reached the minimum Fibonacci 38.2% retracement that is often looked for after a large move.  That objective is found near 92.20 while the Dollar Index has only approached 93.00 thus far. The 92.00 area also corresponds to an objective of the possible double top carved out in March and April  (neckline near 96.25).  There is not compelling technical evidence suggesting that a low is at hand.  Resistance is now seen near 94.00.

As we have often noted, the Dollar Index is not a true trade-weighted basket.  Two of the top four US trading partners, (Mexico and China) are not included, and the basket is too heavily weighted to the euro and currencies that move within its orbit, like the Swiss franc and the Swedish krona.  The euro itself has retraced more than 38.2% of its decline that began last year. That level is found near $1.1275.  It should act as support now.   The next retracement objective (50%) and resistance is seen in the $1.1500-30 area.  The measuring objective of its potential double bottom is seen around $1.1600-50.

The dollar remains stuck in a narrow range against the yen.  Resistance is seen in the JPY120.00-30 area.  Support is pegged in the JPY118.50-80 area.  The technical indicators we look at are not generating strong signals.

Sterling has not only retraced 38.2% of its recent multi-month decline, but it is approaching the 50% objective near $1.5880.  Above there, the 61.8% retracement is found around $1.6180-$1.6200.  Further out, some are talking about a potential head and shoulders bottom in sterling that has been carved out this year.  The neckline is found near $1.5550.  It is a ten-cent pattern and projects toward $1.6550.   While technical indicators are consistent with additional gains, this might be a bit much, based on current fundamentals. The first sign that caution is in order is if and when sterling closes below its 5-day average, which now comes in near $1.5710.

The Canadian dollar is benefiting from the weaker general tone for the US dollar.  Technical indicators like the RSI and MACDs are set to turn in the greenback's favor but have yet done so.  A move above $1.2100-10 should be respected as suggesting down move is exhausted.  The US dollar has not distanced itself from the CAD1.20 area, which corresponds to its 38.2% retracement objective of the slide that began last year. A break of CAD1.1950 may encourage near-term participants to look for the 50% retracement that is found near CAD1.1730.  The 200-day moving average is near CAD1.1770.

Like with the Canadian dollar, the technical indicators for the Australian dollar are close to crossing but haven't yet.  There is trend line support just above $0.7900.  The 38.2% retracement of the slide that ended in early April is found near $0.8285; near the 200-day moving average ($0.8320).  Unless the Aussie falls back below that support, higher levels should be anticipated.

The July light sweet crude oil futures contract was little changed on the week.  Although the MACDs have cross lower, prices remain fairly resilient.  Intra-day dips below $60 a barrel have not been sustained.  The early June OPEC meeting is around the corner, and with more than a 25% recovery in prices over the past two months, there is little urgency for OPEC to cut output, unless it is part of a larger agreement, which may still prove elusive.

The 38.2% retracement of the decline since last summer is roughly $66.50.  The potential double bottom projects toward $69, which is near the 200-day moving average (~$68.50).  The 50% retracement is about $72.35. 

The US 10-year Treasury yield rose to 2.36% at the start of last week.  The combination of weak US data, stabilization of the German bund (albeit in volatile trading) and well received quarterly refunding saw yields back off as the week progressed.   The 10-year benchmark yield fell 14 bp on the week, nine of which were seen before the weekend.  Yields can decline a bit further though a break below 2.0% would be important from a technical perspective.  

Since the second week in April, the S&P 500 has been mostly confined to a 2080-2120 range.  It tested the lower end on May 6-7 and probed the topside on May 14-15. Technical indicators do not appear to be particularly helpful now.  The VIX is sitting just above 12.0.  It has not been below there since last December.  If the VIX is going to hold that support, then the SPX 500 will likely punch lower in the coming days.    

Observations from the speculative positioning in the futures market: 

1.  There were four gross speculative position adjustments in the Commitment of Traders reporting week ending My 12.  The gross short euro position was reduced by 17.9k contracts.  It was the third consecutive decline.  It stands at 222.4k contracts now, almost a 50k reduction since peaking in late-March.  The gross short yen position was cut by 11.6k contracts,  about three-quarters of what was added in the prior week.  There are still 61.4k short contracts in speculative hands.  Both the gross long and short Mexican peso positions were adjusted by 10k contracts or more.  The longs grew by 10k contracts to 34k, while the gross shorts were cut by 13.1k contracts, leaving 61.1k.  

2.  The clear pattern among speculators was to reduce gross short currency futures positions.  The only exception was sterling, where the short position rose by 9.2k contracts to 68.3.  The gross short sterling position in the second largest behind the euro.  It is rather surprising given the post-election euphoria.   The gross longs were mixed, with euros, yen, and Canadian dollars pared.  However, these position adjustments paled in comparison to the changes of the gross shorts.  

3.  Speculators extended the Swiss franc and Australian dollars net long positions.  In both cases, it was more a reflection of shorts covering than new longs being establish.  

4. The net long speculative light sweet crude oil position as shaved by 5.5k contracts to 320.2k. Longs were cut by 18.3k contracts (to 512.4k), and the shorts were cut by 12.8 contracts (to 192.2k). 

5.  The net short speculative position in 10-year US Treasury note futures was cut by 51k contracts to 132k.  This was a function of 9,6k contract build of the gross long position to 319.1k and a nearly 10% drop (41.1k contracts) in the gross short position, leaving 451.5k contracts.  

week ending May 12		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-179.0	-190.0	43.3	-6.8	222.4	-17.9
Yen	-23.6	-31.2	37.8	-4.0	61.4	-11.6
Sterling	-30.8	-24.8	37.5	3.2	68.3	9.2
Swiss Franc	10.6	5.3	14.8	0.6	4.2	-4.6
C$	-4.0	-10.1	29.1	-0.9	33.1	-7.0
A$	4.5	0.6	59.4	0.4	54.9	-3.5
Mexican Peso	-27.0	-50.1	34.0	10.0	61.1	-13.1