The Dollar's Momentum Eases, Bulls Hesitate

The US dollar's upside momentum, sparked by the strong January jobs report, and anxiety over the brinkmanship politics in Europe over Greece (and Ukraine), faded last week.  The weaker than expected US retail sales and some optimism over another cease fire in Ukraine and suggestive signs from negotiations with the new Greek government gave the dollar bulls cause for pause.

When it was initially reported that a deal with Greece, the euro rallied and came back off as it became clear that no agreement was reached.  Most people appear to expect that a compromise will indeed be found.  Greek stocks and bonds rallied strongly in the second half of last week.  Ahead of the weekend top officials were still warning that the gap between the two sides remains wide.   Still, the prospects of that a deal will be cut encourages dollar bulls to be patient and wait to buy the US dollar on more weakness.

The euro finished last week above its 20-day moving average for the first time in two months.  It broke out of the $1.1265-$1.1365 range to the upside.  The 5-day moving average is poised to cross above the 20-day average.  Provided that the $1.1360-80 area holds, the euro can move into a band of resistance seen in the $1.1485-$1.1535 band.   If the offers here are successfully absorbed, potential extends toward $1.1650, but that might require new doubts about the Fed's lift-off.

The dollar's push to its best levels against the yen since the first week in January fizzled out. The dollar fell two yen to JPY118.40, just ahead of chart-based support. Follow through selling at the start of the new week, perhaps spurred Japan's Q4 GDP, which is expected to return to growth after two quarters were spent contracting,  could spur a move to JPY116.60-JPY117.00.  The downtrend line drawn off the early December high (~JPY121.85) now is found near JPY119.20.   It was violated during the week, even on a close basis, but it failed to retain a foothold.

Last week we noted a possible head and shoulder bottom in sterling.  The objective was $1.5450.  It briefly poked through $1.5420.  The two cent rally was encouraged by the less dovish BOE's quarterly inflation report.  Four of the last seven sessions saw sterling trade above its top Bollinger Band (two standard deviations around the 20-day moving average).  The economic calendar does not look very supportive.  Next week the UK is likely to report a steep fall in consumer prices (consensus -0.8% January CPI) and soft retail sales.  Support is seen $1.5300, but it requires a break of $1.5200 to flag a potentially more significant development.

The dollar's performance against the Swiss franc is not particularly interesting.  However, the euro-Swiss cross does appear to be carving out a new range.  The CHF1.04 support looks firm.  The market appears to be fishing for the top.  Right now, it looks to be around CHF1.0650, but it does not seem particularly strong.

From a macro point of view, both Australia and Canada are likely to cut rates again.  Some think as soon as next month.  However, from a technical perspective, the both the Australian and Canadian dollars look poised to correct higher in the coming days. The US dollar slipped through the 20-day moving average against the Canadian dollar for the first time since last September (~CAD1.2455), and managed to finish just below it on a weekly basis.  Initial resistance is seen around CAD1.2525.  On the downside; a shelf has been carved out in the CAD1.2350 area.  A break of this could signal a move toward CAD1.22.

The Aussie may be more interesting.  It appears to have traced out a double bottom in the $0.7625-40 area.  It will not be confirmed unless the neckline near $0.7870 is broken, which is also where the 20-day moving average intersects.    Other technical indicators we use, including RSI, MACDs, and Stochastics appear to be generating stronger signals than the Canadian dollar.   A break of the neckline would suggest a measuring objective near $0.8000.

Last week we recognized crude oil's better technical tone.  It advanced about $1.5 a barrel last week, but the technical move has not been completed.  We had suggested a $56-$57 a barrel target (basis the March contract but it works for the April contract, which is now the front month contract). However, now we see potential toward $60.  The speculators in the futures market have been trying to pick a bottom by accumulating a large long position since the beginning of December. The average price since then has been about $55 a barrel.

The US 10-year Treasury yield straddled the 2.0% level most of the week.  After the jobs data, we had anticipated a move to the 2.00%-2.05% area.  top of that range. The market appears to be searching for a new range, post-employment data, and amid an upside correction in commodity prices.  The focus now is on the upside of the range.  A trend line drawn off last September's high (~2.65%) and December highs (~2.30%) comes in near 2.10% in the week ahead.  

The S&P 500 gained almost 2% this past week to bring the month-to-date advance to 5.1%.  It was more of a grind higher than strong momentum, though it still closed at new record highs.  We remain impressed that three of the past four decline in the S&P 500 going back to Q4 14 had gaps off of V-shaped bottoms.  The gap created earlier this month between 2021.66 and 2022.71 remains unfilled.  Support ahead of the gap is seen around 2035-2041. The S&P 500 is under-performing most of the major bourses this year, but for dollar-based investors to capture this, they need to hedge out the currency.   

Observations based on speculative positioning in the futures market: 

1.  Speculative positioning in the currency futures barely changed in the Commitment of Traders reporting week ending February 10.  There was only one gross position adjustment larger than 5k contracts:  6.4k gross short Australian dollar futures were covered.  The gross long euro, yen and sterling positions were adjusted by less than 1k contracts.  

2.  To the extent, it makes sense to highlight a pattern with such small changes, there was a general withdrawal from the market.  Of the fourteen gross positions we track, nine were in reducing longs or covering shorts.  Of the remaining five, two were less than 1k contracts.  

3.  The net short 10-year Treasury position was more than halved from 119k contracts to 44.8k.  The main story was the new longs that entered.  The gross long position swelled by 65.3k contracts to 406.8k.  The gross short position was pared by 8.6k contracts to 451.6k.  

4.  The net long speculative crude oil position was barely changed at 271.5k contracts. The gross longs were trimmed 9.3k, leaving 479k contracts.The gross shorts were shaved by 8.6k contracts to 207.5k.

  

week ending Feb 10		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-195.0	-196.0	47.2	-0.5	241.9	-2.2
Yen	-55.1	-59.6	25.9	0.3	81.0	-4.1
Sterling	-38.6	-42.4	36.8	0.6	75.4	-3.2
Swiss Franc	-5.5	-5.4	5.8	-2.6	11.3	-2.5
C$	-33.3	-27.3	21.2	-3.4	54.5	2.6
A$	-53.2	-56.2	12.5	-3.5	65.7	-6.4
Mexican Peso	-49.2	-48.2	25.7	2.1	74.9	3.1