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#Post#: 246--------------------------------------------------
King Dollar: Not Just the Driest Towel on the Rack
By: Marc Chandler Date: December 7, 2014, 2:35 am
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The US dollar remains king. It continues to be supported by
the divergence in growth and interest rate differentials. Even
though the ECB did not take fresh action this past week, there
is little doubt that it will in early 2015. The aggressive
monetary policy in Japan, where the BOJ is expanding its balance
sheet by 1.4% (of GDP) a month for as long as the eye can see,
also stands in sharp contrast to the US, where the market has
largely priced in a hike in Q3 15. In the coming weeks, it is
difficult to envision anything that will undermine this general
theme.
There are three main events before the end of the year for
global investors. First, is next week's second TLTRO.
Disappointing participation (less than 125 bln euro take down)
would boost confidence that the ECB will take more action early
next year. In turn this would likely weigh on the euro and
underpin European bonds and stocks.
Second, on December 14, Japan goes to the polls. There is
little real challenge to Abe. The DPJ has been poorly organized,
and has not been able to tap into the popular anxiety over
Abenomics and the controversial political issues, like nuclear
power and allowing military involvement to defend other
countries. The LDP and Komeito coalition enjoys a
super-majority and polls suggest it will retain it.
Third, the FOMC concludes its last meeting of the year on
December 17. The statement could modify or remove the reference
to "considerable period" in the forward guidance. This would be
seen as a hawkish development, would likely lift the dollar.
The economy has performed well, which the Fed will likely
recognize. Its perspective on oil's impact has already largely
been presented by Fischer and Dudley. The Fed will see the
slide in prices are positive for household consumption, and will
see the downward pressure on prices as temporary.
Euro: Look for another leg down. The MACDs have lower after
approaching levels since in October. The RSI is turning down
from 50. The next target is near $1.2150-$1.2200, but the $1.20
level, approached in 2012, and $1.1880, the low from 2010 are
more significant objectives. Counter-trend bounces are likely
to run out of steam now in the $1.2350-$1.2400 area. The only
note of caution is that the euro is trading below its lower
Bollinger Band (~$1.2315), and while new lows were made in the
second half of last week, the newest downticks were hard to
sustain.
Yen: The dollar shot through the JPY120 level, and there
appears to be only weak efforts, thus far, too slow its ascent.
The dollar is also trading above its upper Bollinger Band
(~JPY120.90). We suspect the JPY120 area should now act as
support. Initially, short-term participants may turn less
aggressive as the next round figure is approached (JPY122), but
many have high conviction that the dollar is on its way to
JPY125 and JPY130, if not beyond.
Sterling: The $1.5600 level has been frayed in recent weeks, and
it finally closed below it ahead of the weekend. Technical
indicators are consistent with further losses, but the pendulum
of market sentiment, pushing out rate hike expectations appear
to have largely run its course. Stronger economic data helped
put in the top for the December 2015 short sterling futures,
pushing up the implied rate about 10 bp lower on the week. The
place to express a bullish sterling view is not so much against
the dollar, but on the crosses, especially the yen. It is
trading a little above JPY189, which is a six-year high. There
is potential toward JPY200.
Dollar-bloc: Contrasting employment data and further weakness
in oil prices pushed the Canadian dollar to marginal new
multi-year lows. We continue to look for CAD1.1670-CAD1.1725
on a medium-term view. Immediate support is pegged near
CAD1.1325. Losing less than 0.1% against the US dollar in the
past week meant the Canadian dollar was the strongest of the
majors against the dollar. The Australian dollar was the second
weakest, losing almost 2.2% against the US dollar. The Aussie
finished last week on its lows and with a seven-day losing
streak. The $0.8400 area should act as resistance as the
Aussie make its way toward $0.8200 and then $0.8000.
Mexican peso: The peso lost almost 3% against the dollar last
week. It was third worst performing emerging market currency
behind the Russian rouble (-6.5%) and the Colombian peso
(-4.2%). The dovish central bank statement, falling oil prices,
and skepticism over the PRI's reform agenda have encouraged
foreign hedge funds and international investors to reduce
exposures. The dollar appears headed toward MXN14.60. The
dollar did finish the week above the upper Bollinger Band
(~MXN14.245), which may inject a cautionary note into the
activity at the start of next week,but the central banker's call
for a weaker real exchange rate is likely to override technical
considerations.
US 10-Year Yield: Strong economic data is giving US bonds a bit
better traction. After starting last week near 2.15%, it
finished the week at 2.32%. The 2.40% area is key. We remain
sensitive to the a return of the so-called Greenspan Conundrum.
This refers to a period in which the Fed was raising short-term
interest rates, but the long-term interest rates were stable or
declining. From non-dollar investors point of view, the total
return may be attractive even if one anticipates somewhat lower
prices going forward. The yield is better than most other major
countries, and the expected appreciation of the dollar will
offset some price erosion.
S&P 500: New record highs were recorded before the weekend
despite the higher US yields. The modest pullback at the start
of the week filled the downside gap we had previously drawn
attention to from the sharply higher opening on November 21.
While the RSI is suggesting scope for additional gains, the MACD
has been flagging. That said, the S&P 500 has been moving
broadly sideways for the past couple of weeks. Since November
22, we have been warning that European stocks can outperform the
S&P 500. It is working, and of course, it works better on a
currency hedged basis.
Oil: The January light sweet oil futures contract broke below
$64 a barrel on December 1, but generally consolidated last
week. It failed to make a new low despite Saudi Arabia's
decision to increase its discount to US and Asian customers to
$2 below the official price. Technical indicators are not
generating strong signals; warning of the risk of near-term
consolidation before the next leg down. Already, reports
indicate that given the discounts, the price of some US shale
oil is near $50 a barrel already.
Observations based on speculative positioning in the futures
market:
1. To the extent there was a pattern in the latest Commitment
of Traders report for the period ending December 2, it was that
there were only minor position adjustment. Of the 14 gross
currency positions we track, only two changed by more than 5k
contracts. The gross short euro position was reduced by 6.5k
contracts to 216.6k. This is about 23k contracts lower than the
recent peak in early November. The bears grew their gross short
peso position by 14.3k contracts to 73.2k. This is a record
gross short peso position. The peso fell about 3% in the three
sessions since the Commitment of Traders report on the back of
weak data, official comments, the drop in oil prices and the
resurgent dollar.
2. Whereas the market has marginally reduced its short euro
position, it has continued to extend gross short yen positions.
They are short 152.7k contracts. This is a new high for the
year, though still below (~4.5k contracts) the high from the end
of last year.
3. The speculative net short US 10-year Treasury futures
position more than doubled over the last reporting period to
163k contracts from 73.3k the prior period. The bulls took
profits on 42k long contracts. Recall that yield fell to 2.15%
on December 1. They are still long 344.4k contracts. The bears
added 45k contracts to bring the gross short position to almost
507k contracts. The yield finished the week just above 2.30%.
Marc Chandler
Marc to Market
www.marctomarket.com
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