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#Post#: 32--------------------------------------------------
Technical Condition ahead of Next Week's Key Events
By: fxvictory Date: September 14, 2014, 10:42 am
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Next week may very well be one of the most important weeks of
the year. There are a number of events that individually and
collectively have the potential to spur significant moves across
the capital markets. These events include the Scottish
referendum, FOMC meeting, and the launch of the ECB's TLTRO
facility.
In addition, the Swiss National Bank meets, and it has indicated
that negative rates have not been ruled out to help defend the
currency cap. Catalonia's parliament will decide whether to push
forward with a non-binding survey/referendum that has been
rejected by the national government. Some observers have
attributed the under-performance of Spanish assets (after a
period of out performance) to the idea that the strong showing
of the Scottish nationalists has some bearing on Catalonia's
independence.
Given the potential for these events to drive the capital
markets, and that the volatility of volatility, if you will, has
risen, an overview of the technical condition of the capital
markets may be particularly helpful now. At the risk of
oversimplifying, the US dollar is in a strong uptrend against
the major currencies and most of the emerging market currencies.
Speculative positioning in the future market has been
concentrated in amassing significant short euro and yen
positions. The market was net long Australian and Canadian
dollars, but the recent price action suggests a substantial
position adjustment took place, and more than what is captured
in the position report for the week ending September 9.
There has also been a sharp reversal in US yields. The 10-year
Treasury yield was near the lows for the year in late August
below 2.35%. It briefly traded poked through 2.60% before the
weekend. It has now satisfied a Fibonocci retracement (38.2%) of
the yield decline from January through August. The next
retracement target is near 2.68%. Barring a shock, the yield can
climb into the 2.75%-2.80% in the coming weeks.
Yields around the world have risen with US Treasuries (which is
why political scientists rather than investment advisers
formalized the hypothesis of a G-zero world). European bond
yields have risen less, and several emerging markets and
Australia experienced larger increases in yields. Generally
speaking, in rising interest rate environment, one would expect
the credit spreads to widen, with lower credit yields rising
more.
The S&P 500 set record highs on September 4, but the technical
tone has deteriorated in recent session. The development is
somewhat reminiscent of the topping pattern carved out in the
second half of July, when the S&P 500 also registered record
highs. It is as if investors are happy to take profits on
rallies. Perhaps this reflects a mistrust for the equity gains
or belief that the environment that facilitated them will change
soon We note that the five and twenty day moving average are set
to cross, and this cross-over has done a good job in recent
months of signaling the trends. The poor close before the
weekend warns of follow through losses next week. Initial
targets are in 1970 and then 1958, It takes a break of the 1940
area to signal a test on the August low in front of 1900.
Most equity markets also fell last week, but lets looks at the
exceptions first. The weakening of yen may have helped encourage
the 1.8% rally in the Nikkei. Soft Chinese CPI underscores the
scope for potential easing of policy, and this may have helped
the national markets rise 1-2%. The MSCI emerging market equity
index recorded its 3-year high on September 4, while the S&P was
making its record high. It fell each session last week, and the
five and twenty day moving averages have crossed. All of the
Fibonocci retracement objectives have been surpassed,
highlighting the risk that the index 1045-50 area (~1.5%-2.0%
decline).
Commodity prices have fallen sharply. The CRB Index is off more
than 10% since late June, and 4% this month alone. The momentum
is too much and some signs of consolidation were seen toward the
end of the week in which twice the index gapped lower. Of note,
for American drivers gasoline prices at the pump are at
six-month lows (average price in US, according to AAA). Oil
prices themselves staged a potentially important technical
reversal last week. The move through $96 would indicate a low of
some significance was likely in place. The price of gold is at
an eight-month low. Raising interest rates increase the
opportunity cost of holding gold, and the rally in the dollar
may deter other buyers.
Taking a closer look at the foreign exchange market, we share
four points. First, the euro's record long losing streak of
eight weeks ended with a firm close before the weekend. The
$1.3000 level has psychological significance, while the
retracement of the ECB-induced slide is $1.3010. It may take a
move through the $1.3045 area to encourage short covering.
Second, the dollar has made new highs against the yen for eleven
consecutive sessions. The rise in US yields, and the official
jawboning, took place after the move was well under way. The
advance in the dollar has met no resistance. The diversification
of Japan's public funds, the increased portfolio outflow, and
speculators are among the featured yen sellers. With ECB
officials talking the euro lower, Japanese officials may sense a
greater sense of flux, and have welcomed the yen's decline, and
recognizing the fundamental economic considerations behind it.
The dollar finished last week near its highs, and further
near-term gains are likely. The JPY108 level beckons but real
target seems to be closer to JPY110.
Third, the gap that was created a the start of last week's
trading, in response to the YouGov poll that showed the Scottish
independents with a lead, has not been fully filled. A small gap
still exists between $1.6277-$1.6283. We think that nearly every
one really expects the "no" vote to carry the day and the
speculative positioning in the futures market bears this out.
There is a sense that sterling has been oversold, but the risks
are great, and the cost of hedging (implied volatility) is high.
It takes a break of $1.60 to signal something important. It is
likely to remain intact until the referendum. A "yes" victory
would wreak havoc. Sterling would sell-off sharply, and likely
drag down short-term rates. The market would price in a
political and economic crisis. At the same time, a "no" victory
would allow the market to focus on favorable UK fundamentals and
a pound that has lost 12 cents over he past two months. On a
as-expected "no" vote, our target for sterling is $1.65-$1.66.
Fourth, a negative attitude to the European currencies and yen
are not new. The new thing that has taken place is that the
dollar-bloc currencies have also now fallen out of favor. The
Australian and New Zealand dollars were the weakest of the
majors last week. The yen barely eclipsed the Canadian dollar to
take third place. The technical indicators warn of further
losses ahead. In addition, the take-away from the recent price
action in the other major currencies, is that this is does not
the kind of dollar market that one has been rewarded for fading
breakouts. Both the Australian and Canadian dollar have broken
out of their previous ranges. Technically, there may be scope
for another 2% decline in the coming weeks.
Observations based on speculative positioning in the futures
market:
1. There were two significant (10k+ contract change in gross
positions) position adjustment in the CFTC reporting period
ending September 9. First, short-covering reduced the gross
short yen position by 14.8k contracts to 118.0k. The yen has
continued to sell-off and new shorts were likely established
since the reporting period ended. Second, the bulls went
shopping in sterling. They extended the gross long position by
13.8k contracts to 81.3k. It was the most buying in five months.
It is also larger than the euro, yen and Swiss franc gross
positions combined.
2. The other twelve gross currency positions we track were
adjusted by less than 5k contracts. Generally speaking, this
reflected the position squaring in the sense that most of the
currency futures (but the Swiss franc and the Australian dollar)
saw a small reduction in gross short positions. Outside of
sterling that we discussed above, there was virtually now buying
of the currency futures during the reporting period. Combined
the euro, yen, and Swiss franc saw an increase of 2.5k gross
long contracts. Gross longs were reduced in Canadian and
Australian dollars and the Mexican peso. The out-sized losses in
these currencies in recent says suggests were longs have been
liquidated.
3. Speculators in the US 10-year Treasury futures bought into
the decline through September 9. During the week they added
almost 58k long contracts for a gross position of 440.2k
contracts. The gross shorts edged a little higher. The 8.4k
contract increase brings the gross short position to 473.5k
contracts. The net short position fell to 33.3k contracts from
82.7k. An important question is when will the longs capitulate?
We think that the yields are a little more than half way to what
may be a new equilibrium (~2.75%).
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