Near-Term Dollar Outlook and Speculative Positioning

The unexpectedly record low increase in Q2 US Employment Cost Index unwound the some of the dollar's weekly gains and neutralized the near-term technical outlook. Next week's nonfarm payrolls are still critical, and the weakness may put even greater burden on the jobs data to demonstrate that slack is indeed being absorbed.

The Dollar Index was poised to challenge the three-month high set on July 21 near 98.15, but the sell-off following the ECI report reversed the gains scored on the back of the FOMC statement and Q2 GDP (and upward revision in Q1). The five-day moving average barely crossed below the 20-day average for the first time since late-June. It did not close below 96.40 (a retreacement objective and 100-day moving average), but instead finished the week and month near the middle of the 96.00-98.00 trading range.

The euro's five-day moving crossed above the 20-day average a day before the FOMC statement. After the Q2 GDP data and a threat that the Greek government would collapse saw the euro briefly trade below $1.09. It rebounded with the help of month-end demand and signs that the Greek government will survive until at least September. Before the weekend, nearly covered the entire week's range. Both the RSI and MACDs are consistent with a further push higher in the euro, but how fast it reversed the pre-weekend gains, and the relatively soft close suggests the bears are still in control. Initial support is seen near $1.0950. It may require greater confidence of a September rate hike before the $1.08 level can be breached.

The dollar was pushing above JPY124.50, the upper end of its range since mid-June and was stopped cold by the disappointing ECI. The fact that Japan's CPI excluding food and energy rose to 0.6% also discourage ideas that the BOJ the needs to provide additional stimulus. Support for the dollar is seen in the JPY123.00-JPY123.30 area. A break that could signal a move into the JPY122.00-JPY122.50 band.

Since the middle of July, sterling has tried and failed to rise above $1.5700 a handful of times. The technical indicators suggest the bulls may have been luck next week. The BOE meeting is expected to see 2-3 hawkish dissents to what is anticipated to be a majority decision to keep policy on hold. The minutes and the inflation report, with an update in macro-forecasts will be announced at the same time. Before the weekend, sterling traded on both sides of Thursday's range. Even though it finished the week at its highest close in two week, it was still neutral. A move above $1.57 would encourage a run toward $1.5800. Support is seen in the $1.5540-$1.5560.

The Australian dollar nearly posted a potential key reversal before the weekend by making fresh multi-year lows (~$0.7235) before rallying to new highs for the week (almost $0.7370), but like sterling, the close was neutral. The 20-day moving average is found near $0.7380, and the Aussie has not closed above this average since June 25. It also roughly corresponds with the top end of a near-term down channel. There is a bullish divergence in the RSI, and the MACDs are turning higher. The market may be poised test the downtrend line drawn off May, June and July highs. It is found near comes in near $0.7420 by the end of next week. If the RBA cuts rates next week, especially given that it would surprise participants, the modestly positive technical developments would likely be negated.

News that the Canadian economy unexpectedly contracted in May sent the Canadian dollar lower. This was partly masked by US dollar weakness. The greenback failed to take out the July 24 multi-year high just above CAD1.3100. The US dollar closed on its highs, however, and additional near-term gains are likely. The next important technical target is some distance away at CAD1.3450. Support is seen near CAD1.2940.

The September light crude futures contract has fallen for seven consecutive weeks. It has consistently recorded lower highs and lower lows. The MACDs are trying to turn, but the RSI has drifted lower. Initial support is seen near $46.70 and then $45. Resistance is seen near $50.

The fact that the US 10-year yield was little changed on the week masks the 12 bp increase seen in the first four sessions last week. Yields reversed lower on Thursday, and the weak ECI on Friday, pushed the 10-year yield below 2.20% for the first time since July 7-9, which itself was the first time since the beginning of June. Although the 2.0% level is more significant, yields may find support near 2.08%-2.14%. The 2.30% area likely represents the near-term cap.

The S&P 500 flirted with the 200-day moving average at the start of the week. By the end of the week, it was about 2.5% above the lows set on Monday. Nevertheless, the close before the weekend was poor, on session lows. Over the past three months, buying interest has dried up near 2130. The S&P 500 has been in a broad 2040-2135 range since early February. It is not clear what is going to drive it out of that range.

Observations based on the speculative positioning in the futures market:

1. There were no significant (more than 10k contracts) adjustments to gross speculative currency positioning in the CFTC reporting week ending July 28. The run-up to the FOMC meeting may have deterred activity.

2. A clear pattern was speculators to reduce short euro, yen and sterling positions, and expand the short position in the other currencies. Similarly, speculators cut gross long Australian and Canadian dollar futures.

3. The divergence of monetary policy, which we argue is the key driver, also benefits sterling, where the BOE is also expected to raise rates. The net short sterling position is the smallest since last November. We would not be surprised if it turned positive in the coming weeks. The net position in the Swiss franc is moving in the opposite direction. Speculators have been net long francs since mid-March. It is on the verge of turning short.

4. The net short Canadian dollar position (56.1k contracts) is the largest since March 2014. It is likely to grow further. The net short Mexican peso position continues to grow, setting a new record each time it does.

5. Speculators turned to a net long US 10-year Treasury futures position in the previous reporting week and grew it further over the past week to stand at 65.6k contracts. The bulls added 31.9k contracts, lifting the gross long position to 491.5k contracts. The bears covered 6.3k short contracts, leaving 425.9k.

6. Bulls and bears added to gross positioning the light sweet crude oil futures. The gross longs rose by 11.6k contracts to 476k. The gross shorts increased 21.9k contracts to 232.6. This resulted in a 10.3k contract reduction in the net long position, leaving 243.4k contracts.

28-Jul		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-104.0	-113.0	67.8	2.7	171.9	-6.9
Yen	-63.5	-62.3	46.3	-4.6	109.8	-3.4
Sterling	-9.8	-21.5	43.8	8.7	53.6	-3.0
Swiss Franc	0.1	3.4	9.8	-0.1	9.6	3.2
C$	-56.1	-43.6	35.2	-6.2	91.3	6.3
A$	-50.7	-40.9	46.6	-5.8	97.2	4.0
Mexican Peso	-88.8	-81.4	21.8	5.0	110.7	7.9
(CFTC, Bloomberg)