The dollar set new highs for the year against the euro, yen, Swiss franc, the Swedish krona, Australian and New Zealand dollars, and Chinese yuan last week. There was some consolidation ahead of the weekend, but the divergence meme remains intact. Two developments next week may underscore it: Biden's initial proposals for the large (~$3 trillion) infrastructure effort (Wednesday) and jobs report (Friday) that is expected to be particularly strong (600k+).
It seems notable that the dollar remained bid even tho the US 10-year yield backed off around 15 bp from its high. Sentiment seems as bullish the dollar now as it was bearish at the end of last year. Yet, sentiment often tracks the price action and does not lead it. There also has been a significant position adjustment among the currency futures, which we will include in our technical outlook below.
Our target for the euro ($1.1770) and Dollar Index (92.75) have been met, and the greenback is approached our JPY110 objective in the yen. We will identify new targets but reiterate that our medium to longer-term outlook for the dollar remains negative. The widening of the twin deficits will be its kryptonite when the divergence turns to convergence. Given the slowness of the vaccine rollout in Europe, we suspect that may be late Q2 or early Q3.
Dollar Index: The Dollar Index moved above its 200-day moving average (~92.60) for the first time since last May. It has risen in eight of the past 11 sessions and is near the upper Bollinger Band (~92.93). The momentum indicators are still constructive, but the MACD is especially extended. The 93.20 area may offer an initial target, but the next important area is 94.00. It reached a high near 94.30 as the US polls were closing in early November. The peak in H2 20 was set in late September around 94.75. A move back below the 200-day moving average would disappoint, but it may take a break of 92.00 to give the bulls second thoughts.
Euro: We suggested the euro put in a double high near $1.1990 earlier this month and the break of the neckline around $1.1880 projected to $1.1770. This was met as the euro was sold to almost $1.1760 last week. There was some respite ahead of the weekend, but the euro's upticks were weak and shallow. The $1.1800-area provided a cap, and the 200-day moving average is at $1.1870 and rising. A (38.2%) retracement of last week's drop comes in near $1.1835, and the halfway point is $1.1855. The bears may be lurking there. The lower Bollinger Band will start the new week near $1.1755. However, the down move does not appear exhausted, and the next important target is $1.16-$1.17. The net long euro non-commercial position (speculative) in the futures market snapped a five-week decline in the reporting period through March 23. However, the increase was not due to new longs being established; rather, shorts were covered. The bulls have liquidated their long euro exposure for four weeks running and by about 33k contracts to leave them still long 195.5k, the lowest since last July. Positions remain elevated and bottomed closer to 140k-150k in the last few years.
Japanese Yen: After spending a week and a half drifting lower, the dollar short up against the yen over the past two sessions. It briefly poked above JPY109.80 ahead of the weekend to record a new high since last June. The upper Bollinger Band is just above our JPY110 target. If the "drift lower" was a flag pattern, then it would project toward JPY112-JPY113. When the pandemic first struck last year, the dollar jumped to around JPY112.25 (the 2019 high was ~JPY112.40) before selling off sharply (~JPY101.20) and rebounding back to JPY111.70. The momentum indicators pulled back a little but are turning back up from elevated levels. Initial support is around JPY109.40, and a break of JPY109 would be disappointing. The speculative market began the year with a net long yen position of around 47k contracts. The net long position has been slashed aggressively starting in February. It finished the month near 28.6k, but this month has switched to a net short position of 53.5k contracts. The net short position was slightly larger at the end of February last year. The story here is that speculators have been amassing a large gross short position consistently for the last ten reporting periods that extend back to the middle of January. The gross short non-commercial yen position surged from 14.1k contracts to 81k. It peaked last year near 110k contracts.
British Pound: Sterling fell in eight of nine sessions through last Wednesday and broke below the $1.3800-area, which had held back steeper losses. It reached a low near $1.3670, well shy of the GBP1.36 target of either the double top (~$1.40) or rectangle pattern ($1.38-$1.40). Sterling was sold below the lower Bollinger Band, but it recovered over the past two sessions and recovered above $1.38 ahead of the weekend, which is the (38.2%) retracement of the sell-off since last testing $1.40 on March 18. The momentum indicators are stretched but pointing lower. A move above $1.3840-$1.3875 would lift the tone. It houses retracement objectives and the 20-day moving average. The net short speculative sterling position in the futures market bottomed shortly after the vaccine was announced last November around 20k contracts and steadily to a climax of almost 36.1k net long in early March. It has fallen by about 40% to 21.8k contracts. It has been largely driven by the bulls. The gross long position rose from about 27k contracts to nearly 68.3k. It peaked in late February, and since around 16.5k contracts, or almost a quarter of the position, has been liquidated.
Canadian Dollar: After posting a key upside reversal on March 18, the US dollar continued to recover against the Canadian dollar. It reached almost CAD1.2630 last week after bottoming at new three-year lows on the 18th near CAD1.2365. The momentum indicators give the greenback scope for additional gains, but the CAD1.2600-area corresponds to a (61.8%) retracement of the US dollar's decline since the start of the month. Initial support is around CAD1.2500-CAD1.2530. The Bank of Canada indicated that it would stop and not renew several emergency liquidity measures. This is seen increasing the likelihood that it will announce intentions to taper the C$4 bln a week of federal bonds it is buying at its April 21 meeting. The big move for speculators in the futures market took place last December as the net short position of 21.3k contracts was switched to a net long position of about 10k contracts. It moved up to a little more than 15k contracts a few times this year but has fallen back to about 5.1k contracts. The gross long position rose by 10.6k in December and another 11.5k contracts in January. They slipped in February and are little changed here in March. The bears also adjusted. They covered nearly 21k short contracts in December and grew them back by 13.1k contracts in January. February saw a small decline, and so far in March, the bears extended their short position a little.
Australian Dollar: The Aussie was sold to a marginal (1/100 of a cent) low for the year on March 25 (~$0.7563) and rebounded ahead of the weekend. The rebound carried it to a three-day high (almost $0.7640), where the five-day moving average is also found. The MACD is trying to bottom out in oversold territory, while the Slow Stochastic is still falling. Three data points may be important for the Aussie: the Chinese PMI (expected to tick up), Australia's February trade balance, and the US employment data. We note that despite China expressing its disapproval over Australia's foreign policy by reducing trade, Australia reported a record trade surplus in January (A$10.14 bln). A pullback in line with the median forecast in Bloomberg's survey (~A$9.5 bln) would be the third-best ever. If the Australian dollar cannot build on the pre-weekend recovery, it would appear to have carved out a topping pattern that could see it push toward $0.7400-$0.7500. Speculators went from a net short position of around 10.8k contracts in early December to a net long position of almost 5.5k by the end of January. The net position fell back to favor the shorts since February (-1.6k contracts) and switched again to the long side, peaking near 8.1k in mid-February. In the last two reporting periods, the net long position has been cut by a quarter. The bulls bought in December and January, growing their gross long Aussie position to 60.5k from around 40.5k contracts. They trimmed the position to about 55k in February and built it back to nearly 62k contracts near the middle of March and now holds 59k contracts long. The bears were short 63.6k contracts in early January, the most since last June, and brought them today to 50.2k before adding almost 2.9k in the most recent reporting period.
Mexican Peso: The US rose for five consecutive sessions against the Mexican peso, rising from almost MXN20.28 to nearly MXN20.97. With the help of an unexpected gain in January retail sales and the unanimous decision by Banxico to leave the overnight target at 4.0%, the greenback's gains were pared, and it finished a little above the week's lows set last Monday, a tad below MXN20.53. The momentum indicators point in opposite directions, with the MACD drifting lower and Slow Stochastic headed higher. The trendline drawn off the January and February lows comes in near MXN20.50. It had been violated on an intraday basis a couple of weeks ago but did not close below it. A convincing break of the MXN20.35 area could signal a return toward MXN20.00. Speculators in the futures market began the year with a small net short peso position. They went net long in February through the middle of March. However, this reversed aggressively, and the net short position jumped to 29.5k before recovering in the most recent reporting period. The net short speculative position was about 20.9k contracts. The gross long position peaked in December at almost 72.9k contracts and finished the year with around 57k contracts. The position chopped around a bit but was almost 57.7k contracts in mid-February. It fell to nearly 40k contracts before rebounding to 52.4k in the latest reporting period. The gross short position doubled in November-December to reach 65.5k contracts. About 18k contracts were covered through early March. They have risen in the past three weeks to stand at 73.3k in the reporting period ending March 23. It is the largest gross short position since late 2019.
Chinese Yuan: The dollar rose for the fifth consecutive week against the yuan. Net-net, over the period, the yuan has fallen by almost 1.3%, making it the fourth-best performing emerging market currency. Year-to-date, it is the third-best behind the Hong Kong Dollar (-0.2%) and the Indian rupee (+0.75%). Last week was the first week this year that the dollar held above CNY6.50. Talk continues about foreign investors liquidating Chinese bonds and stocks. The US dollar's broad gains from the start of the year through early March were absorbed by China as the yuan remained resilient by being in a narrow trading range. However, recent dollar strength has been allowed to bleed through in yuan turnover. We had thought the CNY6.55-area was the upper end of the acceptable range, and the dollar tested the CNY6.5470 last week. Even though the currency is closely managed, it rarely trades more than two standard deviations from its 20-day moving average (Bollinger Bands), and the upper one will begin the new week just above last week's highs. If the dollar continues to enjoy broad gains, officials may tolerate a move toward CNY6.60.
Disclaimer
Reviewed by Marc Chandler
on
March 28, 2021
Rating:
