Currency Positioning and Technical Outlook: Dollar Breakout or Range-bound?

The US dollar had a difficult week. It lost ground against all the major currencies. Falling interest rates, sparked by the FOMC minutes that reassured investors that an early US rate hike is highly unlikely and a drop in the equity markets that wiped out the first quarter gains, appears to have been the main culprit.  

Recall that the dollar-bloc had led the move against the dollar last month, but since the new quarter began the euro and yen have participated. Last week, the yen and Swiss franc were the strongest of the majors, while the dollar-bloc seemed to tire.

Given the technical damage inflicted on the dollar and the decline in US interest rates, it is tempting to look for the greenback's losses to accelerate. Yet ,we are more inclined to think that rather than breaking out, the dollar simply moved to the lower end of its ranges.  

This means that the greenback may do a bit better in the days ahead as participants will likely be denied fresh incentives. The pullback in US interest rates has likely run its course, US data, including retail sales and industrial production, will point to a recovery from the sluggish start of the year, and important chart levels have been approached. 

Dollar Index: From the high on April 4 through the low set on April 10, the Dollar Index fell about 1.6%. Last week, it posted its largest decline since late Q3 13. However, it the bears stalled in front of last month's lows, just below 79.30, which also corresponds to the bottom of the Bollinger Band. A move now above 78.80 would help stabilize the tone.

Euro: After the ECB meeting and the US employment report in the first week in April, the euro had probed the bottom of its Bollinger Band and finished last week near the upper band ($1.3935). Given the psychological importance of the $1.40 area, and what will be a long holiday weekend for many, we suspect the short-term participants will shy away from pushing the euro much higher in the days ahead. Support is likely to be found in the $1.3780-$1.3800 initially.

Yen: The dollar also fell to the lower end of its range against the yen near JPY101.30. We suspect a break would require US 10-year rates to fall through the 1.60%. The stronger economic data we expect should prevent this. An upside correction for the dollar would likely encounter initial resistance near JPY102, which corresponds to the 5-day moving average. The dollar has not closed above it since April 3.

Sterling: The push above $1.68 on April 10 appears to have exhausted the short-term sterling bulls. Sterling stalled just in front of the multi-year high set in mid-February near $1.6825. The gains had lifted sterling above the upper Bollinger Band. On April 9, sterling closed above the upper band for the third time this year and after each of the other times sterling came off at least two cents. Downside potential extends toward $1.6600-40. Sterling also looks heavy against the euro. The euro's move toward GBP0.8230 appears to have completed the drop from GBP0.8400 in late March.

Canadian dollar: From the FOMC meeting on March 19 through the middle of last week, the US dollar lost about 3.8% against the Canadian dollar. The move to CAD1.0860 appears to have completed the greenback's decline. The RSI has already turned up, and the MACDs are about to cross. The initial retracement target is CAD1.1020 and then CAD1.1070, which roughly corresponds to the 20-day moving average.

Australian dollar: The head and shoulders bottom we have discussed, projects to about $0.9500.  The Australian dollar reached $0.9460 on April 10, before giving up a cent on profit-taking ahead of the weekend.  That pullback met a minimum retracement objective of the bounce from the test on $0.9200 on April 3.  Provided this area holds,  the bulls may be emboldened.  

Mexican peso:   The dollar is likely to recover against the peso.  The RSI is neutral but the MACDs are about to cross.  The dollar traded below the MXN13.00 level in five of the past six sessions and managed to finish only once below there, which seems to have been a clue of the waning downside momentum.  The initial retracement target near MXN13.1330 was approached before the weekend.  The MXN13.1750-MXN13.20 area represents a more important resistance area. 

Observations from the speculative positioning in the CME currency futures:

1.  The net speculative Australian dollar futures position swung to the long side (3k contracts from -5k) for the first time since last May.  As recently as early February, speculators had a gross short position of 80k contracts.  It has been more than halved to a little more than 34k contracts.  The gross long position bottomed a month ago around 9k contracts.  It is now almost 38k contracts.

2.  There were four gross position changes that are significant (more than 10k contracts).  The gross short yen positions was shaved by 10k contracts to 101k.  The net position did not change much as 9k longs also moved to the sidelines.  The gross long sterling position jumped almost 16k to 92k contracts.  This is a new 7-year high.  The Mexican peso accounted for the other two significant gross position adjusted.  Gross longs surged 21k contracts to 70.k.  Shorts were halved to about 14k contracts.

3.   It is interesting to think about the positioning a year ago.  Then the net speculative position was short the European currency futures.  Now it is long.  It has been about a 74k contract swing to create the net long 23k contracts has now.  For sterling it was more than 116k contract swing to produce the net long 47k it has now.  The net speculative yen position at -88k contracts is about 10k more shorts than it was a year ago. Speculators are net short half as many Canadian dollar futures as the 71k contracts that they had a year ago. At 3.3k contracts, the net long Australian dollar position is a sliver of last year's 78k contracts. Even though the net long peso position of 57k contracts is the largest among the currency futures, is a little more than third of the size of it year ago position (143k contracts).

4.  The gross long euro position fell by 10% to 92.6k contracts, which is the largest gross long position among the currency futures.  It just edged out sterling with its 91.6k contracts.  The yen's gross short position of 101k contracts is easily the largest.  Next is the gross short euro position of 69k contracts.

week ending Apr 8               Commitment of Traders
(spec position in 000's of contracts)
Net  Prior  Gross Long Change Gross Short  Change
Euro 23.3 33.2 92.6 -9.2 69.3 0.7
Yen -87.5 -88.6 13.3 -8.8 100.8 -10.0
Sterling 46.4 33.6 91.6 15.7 45.2 2.8
Swiss Franc 11.3 14.2 19.3 -5.5 7.9 -2.6
C$ -34.3 -37.0 28.7 1.1 63.0 -1.5
A$ 3.3 -4.9 37.6 2.2 34.3 -6.0
Mexican Peso 56.5 21.8 70.4 20.5 13.9 -14.3

Currency Positioning and Technical Outlook: Dollar Breakout or Range-bound? Currency Positioning and Technical Outlook:  Dollar Breakout or Range-bound? Reviewed by Marc Chandler on April 12, 2014 Rating: 5
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