Currency Positioning and Technical Outlook: Positioning to Overshadow Data

The question we posed last week was whether important highs were in place for the euro and sterling, just shy of important psychological level of $1.40 and $1.70 respectively, or was the price action a short-term technical correction.  The key difference being the first assessment would imply buying US dollars on pullback, while the second looks to selling into dollar bounces.  

The price action has not resolved the question yet, and it remains pertinent.  The dollar did strengthen against the European currencies, but weaken against the yen and dollar bloc.  Swedish krona was an exception to this generalization.  The slightly stronger than expected inflation helped ease speculation about a rate cut next month and this allowed lifted the krona, which was the only major European currency to appreciate against the dollar. 

Position adjusting in general, and especially ahead of the EU parliamentary elections and Ukraine's presidential election next week, may be more important than the economic data.  The economic calendar features the flash euro area PMI, the flash HSBC China manufacturing PMI, and the FOMC minutes.  

Although some observers are still holding out the possibility that the ECB unveils an asset purchase program next month, we read the official comments as making rate cuts the more likely route.  Some institutional investors had been buying peripheral bonds on the ideas of  European QE and with increased risks then of disappointment began moving back into core bonds (gilt, bunds and Treasuries). However, the widely recognized link between the euro and the peripheral bonds appeared to have weakened.  In addition, some participants may be reducing euro balances to avoid the risk of knock-on effects from the possibility that the ECB adopts a negative deposit rate.  

Euro:  Last week's low was near $1.3650, below the neckline of a potential double top found near $1.3675, but just ahead of the 200-day moving average near $1.3630.  It recovered smartly on Thursday, despite the sell-off of the peripheral bonds.  Resistance is seen around $1.3730, but if it goes, the next immediate target closer to $1.3775.  

Yen:  We had not expected the US Treasury to rally last week.  That rally, more than any other factor, we think weighed on the dollar against the yen.  The dollar is approaching its 200-day moving average (~JPY101.20). The greenback has not violated this long-term moving average since last October-November period and quickly recovered.  Below the average is the year's low near JPY100.60.  Upticks by the dollar will run into offers, first near JPY102.00 and then between JPY102.20-35. 

Sterling:  The March 2015 short-sterling futures contract fell about 20 bp last week, with the help of soft labor earnings data and a quarterly inflation report that appears not to have much confidence in the sustainability of the economic momentum.  Sterling was sold to four-week lows near $1.6730.  The losses were sufficient to push the five-day moving average below the 20-day average for the first time since early April.  However, we would not put much weight on the cross over because sterling was already staging a recover.  Initially, we look for the $1.6840-50 area to check upticks.  If it does take this area out, offers near $1.6900 may prove stronger.   That said, most observers still would see the BOE raising rates before the Federal Reserve. 

Canadian dollar:  The US dollar was confined to fairly narrow ranges against the Canadian dollar over the past week:  CAD1.0850 to CAD1.0925. It is difficult to have much near-term conviction and the technical indicators we monitor are neutral.   We will monitor the downtrend line drawn off the March 20 high near CAD1.1280 and the late April and then early May highs.  It comes in near CAD1.0900 area the start of next week and finishes near CAD1.0880.  Unless this trend line breaks, the greenback may have to retest the CAD1.08 lows seen before the disappointing Canadian jobs data.  

Australian dollar:  Relatively narrow trading ranges were seen for the Australian dollar as a consolidative phase tightened its grip.  The $0.9400 are remains the key barrier to the upside, but the enthusiasm for the downside has waned.  The Australian dollar may be tracing out an A-B-C correction after the big advance that carried it from around $0.8700 at the end of January to almost $0.9500 in the first half of April.  If this is view is accurate, the Australian dollar should begin to trade more heavily in the day ahead.  A break of the 20-day moving average near $0.9320 would offer confirmation.  

Mexican peso:  For the better part of the past three weeks, the US dollar has been trending lower against the Mexican peso.  Participants were quick to sell into the dollar's bounce last Thursday, and this was sufficient to not only check its advance but push it back to the low for the year, set at midweek near MXN12.87.  The MXN12.80 offers the next technical objective.    The MXN13.00 area, which had been support, now should serve as resistance.  

Observations from the speculative positioning in the CME currency futures: 

1.  The large price swings have been matched by an increase in position adjustments.  In the reporting period that ended on May 13, the net speculative euro position swung short for the first time in three months.  It was largely a function of stale longs exiting.  Almost a quarter of the gross long euro positions were cut (26.3k contracts) to 84.4k, which has now slipped behind the Mexican peso.   The gross shorts rose by 8.4k contracts, which, relative to adjustments in recent weeks, is still substantial. The gross short position now stands at 86.6k contracts.  This is the largest gross short position.  

2.  Gross long sterling positions were culled by 12.6k contracts, or about 15%, to 71.2k.  The gross shorts were trimmed by 3.7k contracts to 39.4.  The net result was the smallest long position since March of 31.8k contracts.  

3.  The clear pattern during the recent reporting period the was reduction gross long currency positions. The exceptions were the Australian dollar and the Mexican peso.  The gross longs rose by 5.3k to 50.1k contracts.  This, coupled with a small decline in the gross short position (3.1k to 33.0k contracts), is sufficient to lift the double the net long position to 17.1k contracts, which the largest in a year.  The gross long peso position rose 27% to 86.1k contracts.  The gross shorts were shaved by 2.3k contracts to 17.5k.  This created a net long position of 68.6k contracts, which is the largest since last May.  

4. Canada appears to be being pulled away from the other majors and toward the Australian dollar and the Mexican peso.  Although the net speculative position is still short Canadian dollars, the gross shorts continue to be trimmed and this leave the net short position of 26k contracts.  This is the smallest since last November.  

5. The yen was largely sidelined.  Gross longs fell by almost 3k contracts and the gross shorts rose by 1.1k contracts to 82.2k.  Speculators moved to the sidelines in the Swiss franc, as the net long position was halved to 6.8k contracts, the smallest in two months as both gross long and shorts were pared.  

week ending May 13		Commitment of Traders
		(spec position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-2.2	32.6	84.4	-26.3	86.6	8.4
Yen	-64.7	-60.7	17.5	-2.9	82.2	1.1
Sterling	31.8	40.6	71.2	-12.6	39.4	-3.7
Swiss Franc	6.8	13.2	17.0	-8.2	10.1	-1.8
C$	-26.0	-31.6	27.0	-1.1	3.0	-6.6
A$	17.1	8.6	50.1	5.3	33.0	-3.1
Mexican Peso	68.6	47.9	86.1	18.5	17.5	-2.3