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#Post#: 134--------------------------------------------------
The Dollar: More of the Same
By: fxvictory Date: October 26, 2014, 3:17 am
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The US dollar gained on most of the major foreign currencies
last week, but the overall tone, leaving aside the yen, was
largely consolidative in nature. The greenback was soft in the
first half of the week but recovered in the second half.
The Australian and Canadian dollars were the only major
currencies that managed to hold onto some of their gains (0.55%
and 0.40% respectively). The yen was the weakest of the majors,
losing 1.2%, as the panic from the week before died down.
Equity markets were mostly higher, with the Nikkei's 5.2% rise,
leading the major markets. US 10-year Treasury yields rose 8
bp. Core bonds generally traded heavier, but European peripheral
bonds were firmer, in line with the calmer conditions.
We were never persuaded that last week's turmoil would prevent
the Fed from completing its tapering operation, and see that in
the market, cooler heads are prevailing. Talk of "tapering the
tapering" has diminished, and no one is taking too seriously the
prospects of QE4. Nevertheless, we note that both the December
2015 Fed funds and Eurodollar futures contracts were unchanged
on the week at 46 bp and 77 bp respectively.
Perhaps offsetting the diminished interest rate support for the
dollar has been speculation that more action from the European
Central Bank and the Bank of Japan could be imminent. Reports
suggested that the ECB may consider adding corporate bonds to
its asset purchase program. There were also report suggesting
that the BOJ sees risk that inflation may fall, and this could
prompt an extension of the already aggressive Qualitative and
Quantitative Easing. We are skeptical that either will
materialize in the coming weeks. The BOJ meets next week and
the ECB the following week.
Technically, the euro looks poised to continue to consolidate.
Most of last week's price action took place within the
$1.2625-$1.2886 range set on October 15. In recent session, the
euro flirted with the lower end and slipped to about $1.2615.
The euro spending the second half of the week below the 20-day
moving average, which comes in near $1.2690. This is the nearby
cap. Of note, the nearly four-cent bounce in the euro has not
been accompanied by a sharp change in euro positioning The
confidence of the euro bears is palpable and quite widespread.
The bearishness toward the yen was more evident in the price
action than in the euro. We had identified the yen's gains as
among the most exaggerated in last week's technical note. The
dollar's recovery last week recouped 61.8% of its slide from the
push marginally above JPY110 on October 1. It closed above its
20-day moving average in the two sessions before the weekend for
the first time since early this month. The RSI has been
recovering, and the MACDs have now crossed higher. The risk is
that the speculation of more action by the BOJ is getting ahead
of itself. This may help cap the dollar, where a trendline
drawn off the early October highs comes in around JPY108.70-80
next week.
From a technical perspective, sterling continues to look
constructive. Bullish divergence continue to be evident in the
daily RSI and MACD. It could be important that the $1.60 area
largely held in the second half of last week. It appears that
sterling may be carving out a head and shoulder near $0.8650.
Before the weekend, the Aussie tested both sides of the pattern.
It closed firm, in an outside day, though off its high and just
below the previous day's high. This is still impressive because
of increased speculation that the central bank is considering
cutting interest rates. This chart pattern is notorious for
false breaks, and the technical indicators do not appear to be
generating strong signals.
The US dollar pulled back against the Canadian dollar to
challenge the past month's uptrend. It is found near the 20-day
moving average, just above CAD1.1210. The US dollar could not
get back above CAD1.13 in the first half of the week and came
down to test CAD1.1180-CAD1.1200 in the second half of the week.
It has been unable to close below the 20-day average for a
month. The MACDs are turning lower, though the RSI is in
neutral.
The US dollar has also been riding the 20-day moving average
higher against the Mexican peso. It comes in now near MXN13.48.
The greenback has lost some momentum in recent day but has not
pulled back from the highs very much. There is no compelling
technical evidence to conclude a dollar top is in place.
Last week we anticipated that the S&P 500 could recover toward
1940, and it finished jut above there on the week. It retraced
more than 61.8% of the drop from the record highs. To keep the
bullish momentum intact, the 1920 area should remain intact. On
the upside, there is previous congestion in the 1980-1995 area.
There was an interesting gap that was created last week that is
found between 1905.03 and 1909.28. This is Monday's high
(October 20) and Tuesday's low. That it has not been filled
suggests it is unlikely to be a "normal" gap. The "measuring
gap" takes places in the middle of a move. That would also
project the S&P 500 toward 1990.
US 10-year yields trended higher last week but remained unable
to return to its former range. On the top side, yields look
capped in the 2.30%-2.40% area. On the downside, the new range
may extend to 2.10%-2.15%. The MACDs are consistent with higher
yields, while the RSI is soft.
The CRB Index has been hugging the 270 area since October 15.
It represents two-year lows. Although technical readings are
stretched, especially MACDs, there is still no sign of a
convincing low. The 2012 low, which itself was a two-year low,
was near 267. The 2010 low was just above 247. The December
crude oil futures contract lost $1 last week and recorded lower
highs for the last three sessions. Bids around the $80 level
are being absorbed without much consternation. The market still
feels heavy. The $83 level may be the top of the near-term
range. A break of $80 could see a push toward $76.
Observations from the speculative positioning in the futures
market:
1. Despite the large swings in the spot market, position
adjustments in the currency futures were limited. There was
only one gross position adjustment larger than 10k contracts.
Gross short yen positions were culled by 25.6k contracts to
98.4k. This was the largest short-covering since March.
2. Speculators responded to the large price swings by reducing
positions. Of the 14 gross positions we track, nine were
reduced. Gross long positions were cut except in the Japanese
yen, where they grew by less than 4k contracts. Gross euro long
euro positions were flat, but at 60.2k contracts, it remains the
largest gross long position among the currency futures. Short
positions were also generally reduced but did edge higher in the
euro, Australian dollar and Mexican peso.
3. The net short euro position has grown for three consecutive
weeks. Speculators are accumulating a large short position in
the dollar-bloc currencies and the Mexican peso. The net short
Canadian dollar position of 21.5k contracts is the largest since
late-May. The 31.5k net short Australian dollar contracts are
the largest net short position since March. Speculators are net
short 21.1k peso contracts, which is the largest since
late-February.
4. The net short 10-year US Treasury speculative futures
position was reduced to 90k contracts from 123k. Speculators
piled into the longs, growing the gross position by almost 37k
contracts to 456.7k. The short added a slight 3.6k contracts to
546.7k.
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