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#Post#: 303--------------------------------------------------
Near-Term Views
By: Marc Chandler Date: January 24, 2015, 10:59 pm
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The US dollar extended its gains against all the major
currencies and most emerging market currencies over the past
week. The ECB's asset purchase program was a key driver, but
the euro, though it fell a little more than 5.5 cents from the
mid-week high to Friday's low, was not the weakest of the
majors. That distinction goes to the dollar bloc.
The New Zealand dollar lost 4%., encouraged by a soft inflation
report. Next week central bank meeting will likely drive home
the point that the tightening cycle is over. We suspect the
next move will be a cut. The Australian dollar shed 3.6%.
Expectations for a rate cut as early as next month are growing.
The Canadian dollar lost 3.4%, spurred by the Bank of Canada's
surprise 25 bp rate cut.
Given the price action and the long anticipation of the ECB's
asset purchase program, we had thought there was a reasonable
risk of a sell the rumor buy the fact type of activity. This
did not materialize. Instead, the ECB's decision accelerated
the existing trends: European stocks and bonds moved sharply
higher, and the euro tumbled. The euro fell to $1.1115 before
a modest short covering bounce lifted it back to almost $1.13
before the weekend, which is around where the lower Bollinger
Band is found.
With the Greek election likely to be inconclusive in the early
part of the week and the Italian presidential election process
just beginning, political uncertainty is set to intensify. At
the same time, while the FOMC statement is unlikely to change
substantively, other economic data, including Employment Cost
Index and Q4 GDP will likely show the continuing strength of the
world's largest economy. Our fundamental analysis continues to
point to a strong dollar and a weaker euro.
However, the technical indicators are still urging caution. The
RSI and MACDs are stretched. The Stochastics did not confirm
the move to new lows. A euro bounce toward $1.14-$1.1450 will
likely be seen as a new selling opportunity. On the downside,
the $1.10 area offers psychological support, but the low from
2003 near $1.0750 is the next important technical level.
The Japanese yen was the strongest of the majors against the
dollar and was a little softer than flat. Despite repeated
tries, the dollar was capped just below JPY118.90. The RSI
leaves room for a further dollar pullback though the MACDs are
trying to turn. It is difficult to get excited. We have often
suggested that the dollar-yen pair is mostly range-bound. When
it looks like it is trending it is moving from one to another.
Since the middle of November, the dollar has been confined to a
JPY115.50 -JPY121 trading range with few exceptions.
The weakness in the euro dragged sterling lower. It slipped
below $1.50 for the first time since July 2013. There is a
small bullish divergence in the RSI, which did not confirm the
new lows at the end of the week. Even though the short euro
positions are extended, we suspect that the political
uncertainty there makes sterling the better candidate than the
euro to try to pick a near-term dollar high if that was one's
inclination. Initial resistance is seen in the $1.5080-$1.5120
area.
The dollar's high against the Swiss franc since the SNB's
unexpected removal of the currency cap is just below CHF0.8840.
A move above there could spur a move toward CHF0.9000-CHF0.9150.
Support is pegged near CHF0.8500.
With the risk increasing of a rate cut by the Reserve Bank of
Australia as early as next month, the Australian dollar broke
below $0.8000 for the first time since 2009. It was like a
small dam bursting (not a big one like when the SNB abandoned
its cap). The Aussie fell almost to $0.7880 before stabilizing.
Technically it is overextended. It finished the week well
below its lower Bollinger Band (~$0.7985). On a medium term
basis, we remain bearish. However, we suspect new shorts may be
at a disadvantage.
The Canadian dollar is also over-extended. Technical indicators
do not appear to be signaling an imminent top for the US dollar.
The US dollar pulled back in response to the stronger than
expected Canadian retail sales and the tick up in core CPI.
However, that pullback was seen as a new US dollar buying
opportunity. Some consolidation is likely near-term. Initial
support is seen in the CAD1.2360 area.
While US Treasury yields are often seen as driving other rates,
in the current environment, it appears that the sharp declines
in European bond yields are giving US bonds a bid. The Federal
Reserve statement is likely to be mostly the same as before,
recognizing that it can continue to be patient. However, if the
FOMC is going to prepare the market for a hike around the middle
of the year, the March FOMC meeting, which is followed by a
press conference, will be more important.
The large jump in US oil inventories and reports suggesting that
some countries have boosted their output (apparently more than
offsetting the loss of a couple hundred thousand barrels a day
from Libya) will likely keep prices on the defensive. There
has been a choppy consolidation over the past couple of weeks.
This is helping to alleviate the over-sold condition, but there
is no convincing technical sign that an important low is in
place.
Observations from the speculative positioning in the futures
market:
1. There were three significant speculative position adjustment
of more than 10k currency future contracts. The gross short
euro position grew 14.1k contracts to 232.7k. It has risen by
50k contracts since mid-December. The record was set in
mid-2012 at 251k contracts. Speculators covered 16.1k gross
short yen contracts, leaving 104.4k contracts still short. The
net short yen position of 77.9k contracts is the smallest since
early November last year. The speculative short Swiss franc
position was nearly halved to 18k contracts (from 31.3k). It is
interesting to note that the net speculative position remains
short 9.8k franc contracts.
2. Despite the seemingly universal bearishness toward the euro,
the gross speculative long position of 52k contracts is bigger
than the gross position of the next two largest combined. The
speculative community has 35.3k gross long sterling contracts
and 26.5k gross long yen contracts.
3. The speculative net short sterling position of 37.1k
contracts is the largest since July 2013. Since the end of
October 2014, the gross short position has doubled to 81k
contracts.
4. The net short speculative US 10-year Treasury futures
position was reduced to 146k contracts from 182k. This was a
function of 37.5k new gross long contracts (to 376.3k) and 1.5k
new gross short contracts (to 521.9k).
week ending Jan 20
(speculative position in 000's of contracts)
Net
Euro
Yen
Sterling
Swiss Franc
C$
A$
Mexican Peso
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