Currency Positioning and Technical Outlook: Dollar and Yen Shine

The biggest move, over the past week, among the major currencies, was the short squeeze that lifted the Japanese yen. Before last week, the yen was already the strongest of the majors against the dollar, rising about 1.0% through January 17. The combination of the drop in US and Japanese equities, and the sharp decline in US bond yields, helped accelerate the short squeeze, which was already helping the yen recover.  

The dollar fell to JPY102, its lowest level since early December. Near-term potential extends to JPY101.50 area, which corresponds to a 50% retracement objective of the dollar's rally from the early November low near JPY97.60. A break of there opens the door to JPY101.00, the 100-day moving average and JPY100.60 another retracement objective.    The JPY103.50-75 area marks resistance.   Renewed yen weakness would seem to require a move back up in US yields and/or recovery in the equity markets (and both may take place simultaneously). 

The Swiss franc was the second worst performer among the majors until last week.  It had fallen almost 2% against the US dollar.  Last week it was the second strongest of the major currencies, appreciating about 1.75% against the greenback.    This seems appears to be largely a function of short-covering and partly in response to greater capital requirement for mortgage lending, which sparked some concern that Swiss banks would repatriate funds from abroad.    

The SNB is most assuredly not going to change its currency cap any time soon.  This means that a new opportunity may present itself shortly to buy euros against the Swiss franc on a move below CHF1.2200.  The dollar held CHF0.8900 before the weekend.  A convincing break warns of retest on the two-year low seen in late December near CHF0.8800.  Technically, the dollar posted an outside down week against the Swiss franc, trading above the previous week's high, and then finishing below the previous week's low.   A move back above CHF0.9000-30 would stabilize the technical tone.  

For its part, the euro recovered smartly, after spending four sessions below the 100-day moving average, the longest amount of time below it in six months.    The euro's recovery, counter-intuitively, took place at the same time as the largest decline in the US stock market since last August.  Often during the crisis, the euro was often positively correlated with the S&P 500.  Now it is flirting with going inverted (on 60-day rolling basis, using percentage change).    The euro traded on both sides of the previous week's range, but failed to finish above the previous week's high. 

The euro recorded a two-year high just after Xmas near $1.3900.  It posted a low at the start of the past week near $1.3500.  The euro's recovery ran out of steam near $1.3740, just shy of a Fibonacci retracement (61.8%) of that down move.    Initial support is seen near $1.3640.  The 100-day average is found just above $1.3580.  

More than the euro, sterling's technical tone deteriorated markedly.  It posted a key reversal before the weekend by making new multi-year highs in Asia near $1.6670 and then selling off sharply, as Carney indicated no rate hike any time soon.  It finished the North American session well below the previous day's low.  Sterling had traced out a similar pattern on January 2 and proceeded to fall another cent before finding stronger bids.   The RSI is shows a bearish divergence and is pointing down, while the MACD has been showing divergence since mid-December.  

A break of the $1.6465 area, which corresponds with the 20-day moving average,  the uptrend line drawn off last July and November lows, and a Fibonacci retracment (~$1.6450) would be an ominous technical development.  It could spur a move toward $1.6200-50 in the coming weeks, ahead of the February 12 Bank of England inflation report.  BOE Governor Carney has indicated that forward guidance will be updated then. 

The dollar-bloc currencies were the weakest of the majors over the past week.  The Canadian dollar eclipsed the Australian dollar to hold on to its place as poorest performing of the majors.  The central banks from both countries seemed to push the market in the direction it was already moving.  The Bank of Canada regarded the Loonie as strong (still),  even though it was near a four year low after depreciating around 6.5% over the past six months.    Governor Poloz heightened concern about the persistently low inflation was also seen as encouragement to sell the Canadian dollar. 

Momentum stalled in front of CAD1.12.  Technical indicators allow for additional US dollar gains, but are concerned that the extended speculative short positions may want to book some profits on the very sharp decline now that momentum appears to have stalled.  Initial support for the US dollar is seen near CAD1.1000-30.  A break there could see a move toward CAD1.0850. 

The somewhat firmer than expected Australian Q4 CPI figures dampened speculation of another rate cut by the RBA.  The Aussie bounced a cent, but ran out of steam as it approached $.0.8900.  The drop in global markets gave the Aussie bears immediate gratification as new multi-year lows were recorded.  

However, any effort to stabilize, like the Canadian dollar managed, was dashed by an RBA official's call for an $0.80 Australian dollar.  The market took the bait and pushed the Aussie to $0.8660, not far from the $0.85 target suggested the RBA governor late last year.   There is no technical sign that a low of any significance is in place, but some near-term consolidation should not be surprising.  During this time, we envision the Australian dollar to meet fresh selling closer to the $.08770 area.  

The dollar rose to its highest level against the Mexican peso since July 2012.  The peso lost 1.5% on the week.  It is, though, the second week of sharp losses.  Over this period, the peso lost 3.6%.  We suspect the Mexico was tarred with the same brush that undermined the emerging market asset class.  

There was not a significant deterioration of Mexico's macro economic fundamentals.  It is true that the bi-weekly inflation figures were slightly elevated, but fear of an economic slowdown were eased by the considerably stronger than expected November retail sales (1.9% instead of the 0.8% expected by the consensus).    

The technical indicators do not show the dollar has topped out, but we suspect the move has been excessive.  We expect the peso to bounce back among the quickest when markets  stabilize.  Initial dollar support is seen MXN13.36 and then MXN13.28. 

Observations from the speculative positioning in the CME currency futures:

1.  The net speculative position swung to the short side for the euro for the first time since last July (with an exception for a week in Nov, the net position was short less than 500 contracts).  The net speculative position swung to the short side for the Mexican peso for the first time since last September.  That leaves only sterling among the currency futures we track with a net long speculative position.   Given dramatic price action before the weekend, it would not be surprising if the net sterling position swings to the short side in the next report.

2.  Most position adjustment in the latest CFTC reporting period were minor.  Eight of the gross positions we track changed by less than 5k contracts.  The adding of nearly 18k short Australian dollar contracts and 11.6k new short peso contracts were largest adjustment and the only ones where there was a change of 10k or more contracts.

3.  The gross long euro position has been cut almost in half from the peak seen Q4 13.  Yet that gross long position, at almost 80k contracts is the largest among the currency futures we track here.  The gross short position has steadily, though slowly increased and at 83k contracts is the largest since early last August.

4.  The gross short yen position (115k contracts) has been cut by a little more than 30k contracts since peaking last year.  This has almost solely been accounted for a reduction of gross shorts.  The strong yen gains seen in the second half of last week likely reflected more of this short covering.

week ending Jan 21		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-3.8	9.2	79.3	-7.7	83.1	5.3
Yen	-115.0	-118.0	13.1	2.4	128.1	-0.7
Sterling	8.7	11.2	56.6	2.2	47.9	4.7
Swiss Franc	-1.9	-2.9	11.6	-1.0	13.6	-2.0
C$	-70.3	-67.3	29.4	-4.8	99.8	-1.8
A$	-64.6	-52.0	15.6	5.3	80.3	17.9
Mexican Peso	-3.6	13.7	26.7	-5.8	30.4	11.6