Currency Futures Positioning and Technical Outlook

The new Commitment of Traders report covers the week through May 1 and it shows that the dollar was sold by speculators across the board.  The net short euro, yen and Swiss franc positions were pared, while the net long sterling, Canadian and Australian dollars and Mexican peso positions were extended.  However, the dramatic price action in the days after the reporting period ended warns that some of the late positioning was in weak hands and may have been squeezed out.  

Over the last couple of weeks, we have argued that the technical tone for the major foreign currencies was more constructive than our assessment of the fundamental backdrop.  The price action following the larger than expected Australian rate cut, the disappointing euro zone purchasing managers surveys, and soft US employment data have weakened the technical condition.  The Japanese yen is the main exception and it has strengthened as anxiety levels increased, reflected in the worst week for oil and the S&P 500 for the year (thus far).

Euro:  The net speculative short euro position was trimmed by 6.5k contracts to 107k in the week ending May 1.  This was a function of a cut in both longs and shorts.  The longs were shaved by 1.3k. Some 7.7k short positions were covered and the euro reached 4-week highs on May 1.  However, that was the peak, and the euro proceeded to sell-off and finished the week at its lowest level since April 10.  

The downtrend drawn off the late Feb high, the April 2 high and the May 1 high comes in now just below $1.3300.  This should cap corrective upticks.  The bottom end of the range comes in in the $1.2970-$1.3000 area.  Given how formidable that support has been over the past few months, some shorts may seek to take their profits as the support is approached, not playing for the break out.  The lower end of the Bollinger band comes in near $1.3050 and may prompt some profit-taking. I continue to look for break lower and head toward $1.24 by the end of the summer. 

Yen:  The net speculative short yen position was cut by 5.7k contracts to 50.2k.  It is the smallest net short position in about a month.  It reflected the establishment of 1.4k new longs and the capitulation by 4.3k shorts.  The yen has been trending higher since late March and reached its best level since late February and yet at 64.3k, the gross shorts are still substantial.  

Initial support for the dollar is seen near JPY79.65 and then about a half a yen lower, but if the demand for the greenback near JPY79.15 does not prove sufficient, the dollar could fall toward JPY78.20.  Material intervention is unlikely, but jawboning by officials should be expected.

British pound:  After switching to longs for the first time since last August, the net long position more than doubled to 16.5k contracts.  The net figure, though understates how the extent of the long sterling position. In gross terms, the longs increased by 5.7k to 53.1k contracts, which is the largest in a year.  Shorts continued to capitulate and were trimmed by 3.3k contracts.

Sterling broke out of its trading range in the second half of April.  Its resiliency seems to be more a function of the shift in these speculative flows, which may have been encouraged by M&A activity, and more evidence of reserve management demand.   It peaked on April 30, just above $1.63 and trended lower for the remainder of the week.  The roughly 1% pullback was unlikely to cause the bulls much pain.  However, they are vulnerable.  A break now of $1.6120 could spark a test on $1.60 and force some of the last longs out.

Swiss franc:  The Swiss franc is boring as it trades in relatively tight ranges just below its cap against the euro.   What the SNB has effectively done is to return the Swiss franc to its high correlation with the euro that existed since the start of the monetary union.  The European debt crisis had seen that correlation break down.  Last August, for example, on the 60-day rolling correlation fell below 0.02.  Now it stands at 0.98.

The net short franc position was shaved as the speculative players bought 1.4k contacts and the shorts were reduced by almost 1k.  The SNB succeeded in deflecting speculative attention elsewhere.  It trades like the euro, without its problems, but is less liquid and pays less interest.  That said, look for activity to pick up if the dollar either rises above CHF0.9200 or falls below CHF0.9060.

Canadian dollar:  It is the Loonie that is the speculators' favorite.  The net long position jumped to 70.2k contracts on May 1 from 44.2k the previous week.   It is the largest net long position since March 2011.  The shorts tossed in the towel as the Canadian dollar made a new high for the year and were reduced by about a fifth to 14.2k contracts.  The longs piled in another 21.4k contracts and now are long 84.5k.

The late longs are in weak hands and some appeared squeezed out at the end of the week by a combination of much weaker than expected IVEY survey and disappointing US jobs data.  The risk is that a high of some significance is in place for the Canadian dollar and that the extended speculative positioning will continue to unwind.  There is scope for the US dollar to rise toward CAD1.0050-CAD1.01 in over the next couple of weeks.

Often the Canadian dollar is seen as a "commodity currency".  We have argued that the price of commodities, especially oil, is not a good guide for the Canadian dollar.  The relationships are not stable. Nevertheless, with the price of oil tumbling, the issue is worth re-examining.  We find the 60-day correlation (on the percent change) between the Canadian dollar and oil is now about 0.57.   While this cannot be dismissed out of hand, note that the correlation between the Canadian dollar and the S&P 500 is almost at 0.80.

Australian dollar:  The Australian dollar was resilient ahead of the RBA's decision on May 2.  The net speculative long position rose to 52.3k contracts from 46.0k.  The net figure understates the extended nature of the long positions.  The gross longs rose by about 10% to 88.6k.  This is a larger gross long position than in the Canadian dollar.

The resilience of the Australian dollar did not hurt the shorts, who added 1.8k contracts in the week through May 1.  The larger than expected rate cut by the RBA, poor domestic and foreign data, and risk-off sentiment saw the Australian dollar post its lowest close of the year on May 4th, below $1.02. The near-term risk extended toward $1.0120-50, but these forces and expectations for additional rate cuts in the coming months could see the Aussie test parity in the coming weeks.

Mexican peso:  The peso was largely sidelined, both longs and shorts were reduced, leading though to a little less than a 2k rise in the net long position to 42k contracts.   The peso had looked to be strengthening as the CFTC reporting period came to a close, but in subsequent trading, especially it seemed in reaction to disappointing US data, the peso sold off.  The technical outlook has deteriorated and the mid-April dollar high near MXN13.30 beckons.

Separately and to round out the discussion, we looked at the peso's correlation with oil and discovered that over the past 60 days it is a little below the Canadian dollar at 0.51.  The peso's correlation to the S&P 500 is roughly the same as the Canadian dollar just below 0.80.  For the record, the euro's correlation to the S&P 500 is below 0.42.  It might be more helpful currently to conceptualize the Canadian dollar and Mexican peso in the risk-on/risk-off matrix than as commodity currencies.

Currency Futures Positioning and Technical Outlook Currency Futures Positioning and Technical Outlook Reviewed by Marc Chandler on May 05, 2012 Rating: 5
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