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#Post#: 309--------------------------------------------------
Is the Dollar's Momentum Easing? Is Deeper Pullback in the Stock
Market Likely?
By: Marc Chandler Date: February 1, 2015, 7:28 am
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The US dollar turned in a mixed performance in the last week of
January. It slipped against the euro, yen, sterling and the
Swedish krona, while rising against the other G10 currencies.
The Swiss franc was the weakest of the majors, losing about 4.5%
of its value against the dollar, encouraged by signs the Swiss
National Bank may have intervened.
The dollar also rose against most of emerging market currencies,
except for a handful of eastern and central European currencies.
The Russia ruble depreciated by nearly 10% following the S&P's
removal of its investment grade status, and a compromise struck
with Greece to discuss further sanctions given the increase in
hostilities in east Ukraine.
In addition to technical factors, which we pointed out last
week, an important consideration that has stalled the dollar's
upside momentum are the doubts about a mid-year rate hike. The
FOMC statement had upgraded its economic assessment, but did
recognize the important of international developments. Whereas
we regarded that as a prudent addition, many others viewed it as
an escape clause of sorts.
The implied yield of the December Fed funds futures contract
fell 3.5 bp on the week to 41 bp. It finished 2014 at 71 bp. The
same general pattern was evident in the December 2015 Eurodollar
futures. The implied yields fell 5 bp on the week to 66.5 bp. It
finished last year at 91.5 bp.
Our fundamental views have not changed. We continue to think
that a Fed hike in June is the most likely scenario. We would
not place much emphasis on the sub-3% Q4 14 preliminary print on
Fed policy for the middle of 2015. The preliminary estimate for
GDP is subject to statistically significant revisions,
especially as a third of the trade (December trade balance will
be released next week) and inventory data is not yet available.
Moreover, the 2.6% pace of expansion is probably closer to what
the Fed views as trend growth in the US than the 4.8% growth in
April-September period.
In addition, the FOMC statement drew attention to the divergence
between market-based measures of inflation expectations and
surveys. The survey have shown much greater stability than the
market-based measures, like the break-evens (comparing the TIPS
yield to conventional bond yields). This was underscored ahead
of the weekend as the University of Michigan's survey found the
long-term (5-10 year) inflation expectation unchanged at 2.8%.
Our dollar bullish outlook also remains intact, though the
consolidation phase against the euro, yen and sterling may
continue for a few more days. The euro has spent that last three
sessions within the roughly $1.1225-$1.1435 trading range
established on January 27. Last week we suggested potential
toward $1.1460.
The dollar has traded in a JPY117.20-JPY118.80 trading range for
nearly two weeks. It has not closed above its 20-day moving
average (~JPY118.20), which has capped upticks over this period.
The decline in US Treasury yields and the heavier tone in
equities (S&P 500 -2.0% on the week) can see the dollar move
lower against the yen. The key support of the broader range is
JPY115.50.
Sterling is interesting from a technical perspective. It has
slipped below $1.50 four times over the past seven sessions. The
RSI is neutral, but the MACDs are gentle trending higher since
bottoming in the early January. The top end of the range comes
is in the $1.5225-50 area. No inspiration is likely to come from
the BOE meeting, which is most unlikely to change policy at this
juncture. More incentives will come from the three PMI reports.
The service and manufacturing PMIs are expected show modest
improvement.
The dollar-bloc currencies remain under pressure. After the
Swiss franc, the New Zealand dollar (-2.4%), the Canadian dollar
(-2.1%) and the Australian dollar (-1.7%) were the weakest of
the major currencies. They have been crushed January. Encouraged
by soft data and the surprise Bank of Canada rate cut, the
Canadian dollar fell 8.4% against the US dollar in January.
The New Zealand dollar, weighed down by the end of the RBNZ
mini-tightening cycle, stepped up rhetoric about the over-valued
currency, and falling commodity (including milk prices), lost
6.8% against the greenback. The Australian dollar fell almost 5%
in January. Expectations have increased that the RBA will cut
rates as early as next week.
That said, the US dollar's advance to almost CAD1.28 before the
weekend may have exhausted the near-term move. A consolidative
phase would not be surprising. If such a phase does unfold, we
see initial support for the US dollar in the CAD1.2540-80 area.
The Australian dollar shed nearly three cents in the second half
of last week. If the RBA does cut interest rates and suggest
room for additional easing, the Australian dollar could spike
lower, toward around $0.7640. However, the failure to cut and
provide dovish guidance could see the Aussie back toward
$0.7900.
Before the weekend NYMEX's March crude oil futures contract
briefly traded above its 20-day moving average (~$47.60) for the
first time since the end of last September. It did not manage to
close above it, though the June contract did. The day before
prices set a new contract low. While the downside momentum has
stalled, we would not want exaggerate the pre-weekend price
action. Given the price action, it is surprising to see how much
the RSI and MACD has have corrected. There is not compelling
technical evidence that an important low is in place.
The US 10-year US Treasury yield finished at new lows for the
move near 1.66%. The next technical support is seen in the
1.57%-1.61% area from 2013. However, given the likely decline in
CPI and some disappointing data (durable goods, GDP), the
political storm in Europe, and the low international yields,
investors should be prepared for the 10-year Treasury yield to
fall to new record low. That means below the 2012 low near 1.38%
recorded the same month that the euro zone's existential crisis
had appeared to peak.
The S&P 500 lost about 2.7% in the last week of January, which
is nearly the year-to-date loss. Support in the 1988 area has
been tested. A break convincing break signal a move toward 1972
on the way to 1957. A break of that lower level would open the
door to a move to 1924 and the old gap from mid-October 2014
found roughly between 1905-1909. The technical tone is poor and
the pre-weekend close on its lows warns of the risk of a gap
lower opening on Monday.
Observations from the speculative positioning in the futures
market:
1. The increased volatility in the foreign exchange market has
not encouraged increased position taking in the currency
futures. In the Commitment of Traders report for the week ending
January 7, there was only one gross position adjustment more
than 10k contracts, and it was to reduce risk. The gross short
yen position was pared by 13.2k contracts to stand at 91.2k, the
smallest in since the summer. Since early December when the
dollar peaked against the yen in the spot market, the gross
short yen position has been cut by 62k contracts.
2. Of the remaining 13 gross currency positions we track, nine
were adjusted by less than 5k contracts. The four that were
adjusted by more than 5k contracts were accounted for by two
currencies the Australian dollar and Mexican peso. The
speculative gross long and short Australian dollar positions
increased by 6.3k (to 16.1k contracts) and 8.6k (to 65k
contracts) respectively. The speculative gross long peso
position increased by 7.7k contracts to 26.7k. The gross short
position rose by 6k contracts to 71.3k.
3. Overall, bottom picking in the currency futures was evident.
Only the euro saw a cut in the gross long position. It fell by
1.6k to 50.5k contracts. It remains the largest speculative
gross long position. The increase in gross long positions, given
the downtrend and net short position reflects anticipation of a
pullback in the US dollar.
4. US Treasury bears have been punished by the continued rally.
The net short position fell to 108k contracts from 146k. It is
the smallest net short position since early December. The gross
short position was chopped by 67.3k contracts to 454.6k. The
bulls took profits, trimming their longs by 29.6k contracts to
346.7k.
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