Currency Positioning and Technical Outlook: Is the Status Quo Dollar Negative?

It is not true that there has been a secret protocol, reintroducing fixed exchange rates, though the lackluster price action in the foreign exchange market and the continued erosion of volatility make it feel almost like it. 

Activity in the week ahead should pick up and trading ranges are likely to expand. There are a number of important events and economic reports. The FOMC meeting, US employment data, the euro area flash CPI reading and the first look at Q1 GDP in several countries, including the US, UK and Spain should provide new incentives.

That said, the general considerations about investment climate are unlikely to change. Fed tapering continues, but a rate hike is still more than a year away. The ECB is likely to take fresh action, with the April 30 flash CPI report, shaping expectations for either a May or June move. China's PMIs are likely to confirm that the economy is stabilizing at weaker levels. The BOJ meets, but is watching the impact of the sales tax, and it is too early to have any hard conclusions.

Our sense is that, without changes in the investment climate, the status quo is somewhat dollar negative. As the major countries have not reached peak monetary expansion (the Fed's balance sheet is going to be expanding for at least the next five months). No interest rate hikes (leaving aside Denmark and New Zealand as exceptions). Fiscal austerity is easing,and growth is picking up.  This backdrop is dollar negative.

Euro: A reasonable base has been establishing in the $1.3780 area. On the upside, the top of the narrow range is seen near $1.3865. Our short-term technical indicators are somewhat constructive for the euro. The month's high was set just above $1.3900 and a test on this area seems more likely than a break down. That said, a down trend line, drawn off the 2.5 year high set in mid-March just below $1.3970 and the mid-April high just above $1.3900 comes in near $1.3865 at the end of next week.

Yen: The dollar finished last week with a streak of lower highs and lower lows for the last three sessions. The JPY101.95 area tested before the weekend corresponds to a retracement objective of the recovery off the JPY101.33 low set on April 10. During the Golden Week holiday look for Japanese participants to leave orders to buy dollars around JPY101.50 and sales near JPY102.75.

Sterling: Favorable real sector data continues to underpin sterling. It remains within spitting distance of the multi-year high set recently near $1.6840. Initial resistance may be encountered near $1.69, but we anticipate a move toward $1.70 and, possibly even $1.72 over the slightly longer term. Support is pegged in the $1.6730-50 band.

Canadian dollar: The Canadian dollar's range over the past week appears to have been the smallest in at least several years. The US dollar low was near CAD1.1010 and the was near CAD1.1050. The technical indicators we monitor are not generating strong signals It may take a break of a slightly wider range, say CAD1.0980 and CAD1.1070 to signify anything important. Our bias is for a weaker Canadian dollar as central bank officials seem to be relying on hope (rather than policy) that the economy transitions away from the household sector and toward exports and business investment.

Australian dollar: The softer than expected Q1 CPI cut short dealt the bulls a significant setback. The head and shoulders bottom we had identified, projected a minimum objective of $0.9500. We had been looking for follow through Aussie gains against the euro. The single currency had carved out a head and shoulders top against the Australian dollar, but the CPI data triggered a reversal and the euro recovered to approach the neckline.

The Aussie's five day average against the dollar fell below the 20-day for the first time since early March. In fairness the Aussie's high for the year was recorded on April 10, near $0.9460. By the time the CPI was reported, it was a cent lower. Recall, the next speculative position in the futures market swung to the long size after being short for a year. We peg initial resistance in the $0.9310-25 area. Support is seen near $0.9200.

Mexican peso: The US dollar moved to 3 week highs against the peso before the weekend. We had warned of risk toward MXN13.1750-MXN13.20. Although it did not reach these levels, the peso's technical tone deteriorated, with the dollar recording higher highs and higher lows in through the second half of last week, and the five day moving average crossed above the 20 day average. Mexican data was also somewhat weaker than expected (unemployment in March 4.8% vs.4.46% consensus and 4.65% in February, and retail sales collapsed 1.7% year-over-year in February. The market had expected a 0.4% increase.

Observations from the speculative positioning in the CME currency futures:

1.  Position adjustments in the latest reporting period, the week ending April 22, were minor.  Of the 14 gross positions we track, there was only one that increased more than 5k contracts.  Gross long Australian dollar position rose by 9.1k contracts to 49.5k.  Ten gross positions were adjusted by less than 3k contracts.  This may reflect that the decline in historic (actual) volatility means that neither bulls nor bears were forced out (stops) of positions.

2.  The lack of interest is especially evident in the Canadian dollar futures.  The gross long and short positions were adjusted by less than one thousand contracts for the second consecutive reporting period.

3. Gross longs and gross short euros (and Swiss franc) futures positions fell after both rose in the previous week.  Gross long and short sterling positions rose after falling in the previous week.

4.  That lack of gross position adjustment means that net position were little changed.  The exception is the Australian dollar futures.  They doubled to 16.4k from 8.1k contracts.  It is a five-fold increase over the last three reporting periods.  We too thought the Australian dollar's uptrend was intact.  However, the softer CPI data liked forced some of the late longs and we expect to see this in the next report.

week ending Apr 22		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	25.8	27.7	101.2	-5.0	75.4	-3.1
Yen	-67.2	-68.7	16.6	2.2	83.8	0.7
Sterling	47.8	50.6	89.7	2.2	41.9	5.0
Swiss Franc	14.0	14.0	21.7	-2.2	7.7	-2.1
C$	-35.5	-35.4	27.5	-0.8	63.0	-0.7
A$	16.4	8.1	49.5	9.1	33.2	0.8
Mexican Peso	53.5	54.2	68.3	-2.7	14.8	-2.0