Can't Keep a Good Buck Down

The US dollar turned in an unexpectedly strong performance last week. It appreciated against all the major currencies, but the Australian dollar, and most of the emerging market currencies. Fundamental considerations after the disappointing March US employment report coupled with technical indicators favored a softer dollar. Instead, the dollar had one of its best weeks of the year.

The Dollar Index rose almost 2.8% on the week, retracing the bulk of the decline since the multi-year high was recorded on March 13.  Technically, it appears that the Dollar Index carved out a double bottom around 96.20-30.   The neck line was set 98.75, which was cut through like a hot knife and butter.  The measuring objective is found near 102.25.  Note that the 101.80 area is the 61.8% retracement of the bear market off the July 2001 high.    The five-day average crossed above the 20-day average at the end of the week.  The RSI has  turned up, and the MACDs are cross higher from five-month lows.  

The euro broke down to about $1.0570 after testing the $1.1035 area at the start of the week.  Widening interest rate differentials took a toll.  Constructive JOLTS data and the new cyclical low in weekly initial jobless claims encouraged the not putting too much weight on the softer than expected national jobs report.  A Wall Street showed 83% of the 60 analysts/economists surveyed still expect the Fed to raise rates in June or September.  Last month's survey had it at 86%.  Essentially there was a shift from June to September.   The euro's recent low was set just before last month's FOMC meeting near $1.0460, but it is difficult to talk about meaningful support until closer to $1.00.  The MACDs have crossed loser, and the five-day average is crossing below the 20-day. 

The yen lost 1% against the dollar last week, but the technical signals are not very compelling.  The dollar rose briefly above the JPY120.60 retracement area but drew no following through buying.   The five-day average crossed below the 20-day average, which was more the result of going sideways rather than sharp price action.  The dollar is just above the middle of the JPY116-JPY122 range that has been in place since early December. 

Sterling was sold to new multi-year lows at the end of last week, just below $1.4590.  It draws little succor from stronger data but sells off on disappointment.  The national election is less than a month away, and not only is one-party rule highly unlikely, but based on the polls and the rhetoric, it is difficult to envisage a majority government.   Moreover, with a large current account deficit, rates on hold, and CPI potentially slipping into negative territory (CPI on 14 April), sterling has few friends.   It is difficult to talk about support when sterling has not seen these levels for five years.  The low from 2010 comes in near $1.4300, and the $1.40 area may offer psychological support.  Sterling finished the week below the lower Bollinger Band (~$1.4680), which may warn against chasing the market.  

The US dollar has been range bound against the Canadian dollar since late-January.  In the middle of last week, the greenback tested the lower end of its range below CAD1.24.  However, weak survey data and a poor jobs report weighed on the Canadian dollar amid some speculation that the Bank of Canada cut rates again next week.  The top end of the range is a little above CAD1.2800.  A trend line drawn off last month's multi-year high (~CAD1.2835) and March 31 high(~CAD1.2785) comes in just above CAD1.2700 at the end of next week.    The MACDs are about to cross higher from the year's lows.  The RSI is rising but just above 50.  

The Australian dollar has also been largely confined to a range since late-January.  The lower end was frayed on April 2 when the Aussie slipped slightly below $0.7535.  Yet it has only closed twice below $.0.7600 and both of those times have been here in April.  The RSI is curling over without having resurfaced above the 50 level while the MACDs has been trending higher since cross up in early February.    It may be sensitive to the slew of Chinese data due in the coming days.  The market is confident of a rate cut in next month and is mostly looking for at least another cut after that.

Activity in the oil futures is moving into the June contract, which closed higher for the third consecutive week.  Even though the best level of the week (~$55.35) was not sustained, technical indicators are still positive.  A convincing move now above $54 could signal a test on the post-low highs near $57.20.  A break of $51.50 would warn of more range action.  

Since the March 18 FOMC meeting, US 10-year Treasury yields have been confined to about 1.80% and 2.0%.   Our read of the technical condition and expectation for next week's data, especially a recovery in retail sales and no further weakness in the CPI may see yields test the upper end of the range.  We suspect the yield will likely see 2.07% before 1.82% (the post-March jobs low yield).  

The stronger dollar and the start of the earnings season did not derail the stock market.  The S&P 500 traded above 2100 for the first time since March 24, rising about 1.6% on the week.   Its has gained for three consecutive sessions and in five of the past six sessions.  Both the MACDs and the RSI have turned up gently.   Resistance is seen a little above 2112.   Initial support is seen in the 2073 area. 

Observations from the speculative positioning in the futures market:

1.  There were two significant (more than 10k contract change in gross currency position) adjustments in the CFTC reporting week ending April 7.  The gross short euro position was trimmed by 13.6k contracts, leaving 254.7k.   The gross short Australian dollar position increased by 16k contracts to 96.2k.  The gross short Aussie position is the second largest after the euro among the currency futures we track.   Nine of the fourteen gross positions track were adjusted by less than 4k contracts.

2. Positioning adjustment fell into one of two groups.  The first is about reducing exposures.  Gross long and short positions fell in the euro, Swiss franc, and Mexican peso.  The second was about increasing exposures.  Gross long and short positions rose for the yen, sterling, Canadian and Australian dollars.

3.  The speculative net short 10-year Treasury futures position increased by 48k contracts to 162k.   This was a function of both long cutting (34.1k contracts to 329.4k) and shorts growing (14.5k contracts to 491.8k).

4.  Speculators hold 252k net long light sweet crude oil future contracts.  This is a 25.3k contract increase over the past week.  The actual increase in gross long positions accounts for 20% of the net adjustment, with short covering accounting for the lion's share.

week ending Apr 7		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-215.0	-227.0	39.4	-2.3	254.7	-13.6
Yen	-24.5	-23.9	53.3	8.9	77.8	9.4
Sterling	-34.3	-36.6	37.6	2.5	71.9	0.2
Swiss Franc	0.1	0.7	12.7	-0.9	12.6	-0.3
C$	-30.0	-29.6	22.1	3.3	52.1	3.7
A$	-40.3	-24.4	55.9	0.1	96.2	16.0
Mexican Peso	-22.9	-30.3	42.1	-1.1	65.1	-8.5