Dollar Bulls to Yellen: A Little Help Here, Please

Anxiety over Greece seemed to offset the dovish read of the FOMC minutes.    The US dollar was a little higher on the week against both the euro and yen in choppy trading conditions.  The much-followed Dollar Index closed marginally higher on the week.    

Over the course of the week, market expectations of an Australian rate cut in early March were downgraded.   The recovery of milk prices and official comments indicating the RBNZ is in no hurry to reverse its recent rate hikes, helped support the New Zealand dollar.  On the other hand, weak data and dovish comments weighed on the Canadian dollar.  The Bank of Canada is widely expected its second rate cut of the year in early March. 

Sentiment toward the dollar was weakened by soft economic data and new doubts about a mid-year rate hike.  The implied yield of the December 2015 Fed funds futures contract fell five bp over the course of the week to 49 bp.   We expect Yellen's Congressional testimony will push back against the dovish interpretation.  However, the risk of a negative year-over-year headline CPI print may blunt the Chair's guidance.  

The euro, which had traded as high as $1.1450 in partial response to the FOMC minutes, broke below $1.13 ahead the weekend for the first time since February 11.  Still, the euro continues to chop around a $1.1250 and a $1.1450 range.  We are more inclined to see modest upticks at the start of the new week as an opportunity to add to the short euro position, or increase hedge ratios, especially ahead of Yellen's testimony.  

The dollar was confined to narrow ranges against the yen.  The prevailing range is around JPY118.50 on the downside and JPY120.50 on the upside.  Technical indicators are not generating strong signals though we expect a somewhat firmer dollar.    Soft Japanese inflation figures at the end of next week may renew speculation that the BOJ will have to take more action to reach its inflation target.  That said, the risk of this seems minimal in the next few months. Over the intermediate term, we anticipate that the BOJ will either extend its time frame for reaching the inflation target, or more formally look past the decline in energy prices.  

Sterling met the minimum objective of the head and shoulders bottom we have been tracking over the last couple of weeks.   However, it ran out of steam in front of $1.5500.  Support is seen in the $1.5310-40 area.  A break of this could see another cent decline.  The general dollar direction and events in the eurozone will be the key to sterling rather than domestic economic developments.   

The Swiss franc lost about 0.6% against the dollar last week, but it finished firmly and appears technically poised to continue to recover.  This was particularly notable. One might have expected that the franc would have weakened on the positive developments from Europe.  The greenback had briefly poked above CHF0.9500 for the first time since the cap was abandoned.  The technical tone of the dollar appears to have deteriorated ahead of the weekend.

Both the dollar and euro recorded a potential key reversal against the Swiss franc.   New highs for the move were seen; the euro and dollar traded on both sides of the previous day's range and closed below the previous day's low.  Technically, the dollar can see corrective losses toward CHF0.9300, especially if coupled with the franc making cross rate gains against the euro.  The euro, which briefly pushed through CHF1.08, now appears poised to slip back toward CHF1.05. 

The Canadian dollar also lost about 0.6% against the greenback.  Disappointing economic data and dovish comments from the central bank keep expectations running high for another rate cut in early March.   Technical indicators favor buying US dollars on near-term weakness against the Canadian dollar.  Initial resistance is seen near CAD1.2600.

The technical outlook for the Australian dollar is mildly constructive.  The RSI and MACDs are trending higher and five-day average crossed above the 20-day average for the first time in nearly a month.  A move above $0.7860 could signal a move toward $0.7930-50.    We expect the bears to make a stronger stand near $0.8000. 

The April crude oil futures contract has been stuck in a choppy range after breaking the seven-month down trend at the end of January.  Our reading of the technical condition suggests this consolidation phase is nearing completion.  We expect it to be resolved to the downside.  It seems many want to believe that the first serious bounce after a long downtrend is a sign of a bottom.  Perhaps it is scar tissue talking, but we suspect this is simply a bear market correction, which in the big picture is a fairly limited bounce off the lows. 

In six of the past seven sessions, the US 10-year yield closed above the 2% threshold.  The upside momentum stalled.  The range set on the day the FOMC minutes continues to confine activity.  That range was 2.04% to 2.16%.   This push up in yields that began at the start of the month does not appear complete though it has come quite far (50 bp), and technical indicators appear consistent with 2.20%-2.25%.   The peal may be seen in the first half of next week, ahead of the CPI figures that will be released on February 26.  

The S&P 500 rose to record highs in recent days, momentum has not accelerated until just before the weekend, and on Friday, it posted an outside up day and closed on its highs.  While there may some follow through at the start of the week ahead, we suspect the market will likely consolidate around Yellen's testimony.  .  The S&P 500 has gained about 2% this year and is the worst performing G7 bourse.  We suspect there is scope for some catch-up.   

Observations from the speculative positioning in the futures market: 

1.  Activity increased in the past week, but there was still no gross position adjustment of more than 10k contracts.  The gross short euro position came the closest with a decline of 9.1k contracts (to 232.8k).  Four of the remaining 11 gross positions changed by less than a thousand contracts.  

2.  There was a clear pattern in the position adjustments.  Shorts were reduced in all the currencies we track except for the Australian dollar.  Longs were mostly added to, with the exception of the gross long euro position that was unchanged and the small (1.0-1.2k) reduction in the gross long Swiss franc and Canadian dollar positions respectively.

3.  The net short Treasury position increased to 67.2k from 44.8k.  This was mostly the result of an 18.7k increase in the gross short position (to 4703.k contracts).  The gross long position slipped 3.6k contracts (to 403.1k).    

4.  Many people will see the 27.8k increase in the speculative net long NYMEX oil futures and conclude that the market is bullish.  However, the net increase did not reflect an increase in the gross long position, which was shaved by a couple hundred contracts. Instead, it was shorts, taking profits or being squeezed out, that were reduced. The gross short position fell 28.1k contracts; leaving 179.4k.  

week ending Feb 17		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-186.0	-195.0	47.2	0.0	232.0	-9.1
Yen	-49.1	-55.1	31.3	5.4	80.4	-0.6
Sterling	-28.8	-38.6	43.0	6.2	71.8	-3.6
Swiss Franc	-6.0	-5.5	4.7	-1.0	10.8	-0.5
C$	-32.8	-33.3	20.0	-1.2	52.8	-1.7
A$	-53.8	-53.2	17.2	4.7	71.1	5.4
Mexican Peso	-45.4	-49.2	28.9	3.2	74.3	-0.6