Currency Positioning and Technical Outlook: Dollar Bloc Strength Against Euro Weakness

The dollar's technical tone has improved against the complex of European currencies, but it remains soft against the dollar-bloc.  There are a few macro-fundamental developments, like Draghi's hint that the ECB may be getting closer to taking non-conventional measures and somewhat stronger US data that weighed on the euro.

Against the yen, the outlook is less clear. After making new 10-week highs before the weekend, the dollar slipped lower and closed below the previous day's range. This potential key reversal warns of additional backing and filling after the dollar rallied about 2.5% over the past seven sessions.

Dollar Index: With the gains in the second half of last week, the Dollar Index completed a retracement objective near 80.55, which seems to correspond to a neckline of a potential head and shoulders bottom. The measuring objective is near 81.75. Some short-term technical indicators are a bit stretched and a pullback toward 80.20 could be a better buying opportunity than chasing the market, if one shares the constructive outlook.

Euro: The losses before the weekend put the single currency at its lowest level in a little over a month. Although the Dollar Index is heavily weighted toward the euro (and currencies that move in its orbit), the head and shoulders pattern we see there is not as clear in the euro chart. There is a band of support ($1.3640-80) that may limit the losses in the near-term, though a break of it would be significant. On the upside, the $1.3740-60 should cap upticks.

Yen: The market rebuffed the dollar's foray above JPY104. Pressured by the decline in US yields and then by the sharp sell-off in equities the dollar retreated to JPY103.20,a retracement objective of the run-up since the March 27 low near JPY101.70. A break of it could spur a move toward JPY102.60. Technically, it does look as if the move above JPY104 completed some technical phase.

Sterling: It was largely sidelined after the US jobs data and the euro and yen stole the spotlight. Still, sterling recorded lower highs for the fourth consecutive session before the weekend. Support near $1.6540 was approached. The next important level of support is seen near $1.6440. The technical indicators we look at are not generating strong signals presently.

Canadian dollar: After seven sessions of flirting with support near CAD1.10, the US dollar fell through there before the weekend. The strength of the North American employment data gave the Canadian dollar (and the dollar-bloc, more generally) a lift. The US dollar fell to the bottom of its Bollinger Band (CAD1.0955). In consolidative activity at the beginning of the new week, the US dollar is likely to find resistance in the CAD1.1000-CAD1.1020, but a move above CAD1.1050 would likely signal the end of the Canadian dollar's recovery.

Australian dollar: The Canadian dollar was the strongest of the major currencies last week, gaining 0.7% against its US counterpart. The Aussie was second with about a 0.4% gain. That was sufficient, thought, to lift it to its best level since late last November. It has been knocking on the $0.9300 ceiling for several sessions. It has moved above it twice, but unable to close above it. At the same time, pushback has been modest, with $0.9200 holding. It is possible, as we have noted, that the Australian dollar has carved out a head and shoulders bottom. It projects toward $0.9500.

We have recently identified a head and shoulders top in the euro against the Aussie. The neckline was at A$1.50 and projected to around A$1.42. After approaching the neckline from underneath (~A$1.4965), the euro posted another leg down to finish the week near A$1.4760 and below its 200-day moving average for the first time since last April. Some of the technical indicators are warning that additional near-term losses may be difficult to sustain without some consolidation.

Mexican peso: The peso gained about 0.5% against the US dollar last week. The greenback was pushed below MXN13.00, albeit briefly for the first time since mid-January. The peso and Mexico's Bolsa were amazingly resilient in the face of the large slide in US equities before the weekend. Additional dollar declines are possibly, but a move to MXN12.95 would likely produce over-stretched technical readings and increase the risks of a dollar bounce.

Observations from the speculative positioning in the CME currency futures:

1.  There were four speculative positions that were adjusted by more than 10k contracts.

  • The gross short yen position rose by more than a quarter to 110.8k contracts. Speculators had been covering short yen positions through the first quarter. These new shorts though were in weak hands and many may have been forced to cover before the weekend.  
  • Gross long Canadian dollar positions were cut by a third to 27.5k contracts. 
  • Gross long Australian dollar positions increased by 11.0 contracts to 35.4k.  Speculators have not be net long Aussie futures since last May.   
  • Gross long peso positions more than doubled to almost 50k contracts and this was enough to swing the net position long by 21.8k contracts  
2.  It was the second consecutive weekly reporting report during which net long euro positions were trimmed.  It was the third consecutive week that net long position was increased.

3.  Gross short currency positions were generally increased.  The exceptions were the Australian and Canadian dollars.  The gross long positions also were mostly added too.  The exceptions were the euro, Swiss franc and Canadian dollar.

week ending Apr 1               Commitment of Traders
(spec position in 000's of contracts)
Net  Prior  Gross Long Change Gross Short  Change
Euro 33.2 39.6 101.8 -5.1 68.6 1.3
Yen -88.6 -68.9 22.2 4.6 110.8 24.3
Sterling 33.5 29.7 75.9 9.2 42.4 5.4
Swiss Franc 14.2 14.8 24.8 -0.2 10.6 0.4
C$ -37.0 -33.2 27.5 -12.9 64.5 -9.1
A$ -4.9 -20.5 35.4 11.0 40.3 -4.6
Mexican Peso 21.8 -1.7 49.9 27.1 28.1 3.7
Currency Positioning and Technical Outlook: Dollar Bloc Strength Against Euro Weakness Currency Positioning and Technical Outlook:  Dollar Bloc Strength Against Euro Weakness Reviewed by Marc Chandler on April 05, 2014 Rating: 5
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