USD: Range or Trend?

The US dollar finished the week on seemingly fragile footing. The question investors are asking is if the steady drum beat of disappointing US economic data turns the dollar's bull case on its head.  The Europe and Japanese side of the divergence have not changed, but the US side has.  

On the other hand, the minus 20 bp deposit rate is not the floor for short-term rates in the euro area.  A resolution of the Greek issues continues to prove elusive.  The outcome of the UK election on May 7 also poses substantial risk.  We suspect there can be a dramatic response if the US Congress fails to grant the President trade promotion authority (fast-track).   The US April employment report on May 8 will be more important than usual, especially after the disappointing March report.

The euro, sterling, and the yen haven largely range-bound for at least the past month.  Our reading of the technicals suggests there is more room before the dollar's lower bound is met.  For the euro, that is found in the $1.1000-50 area.  Against the yen, the lower end of the dollar's range is near JPY118.00, but there is technical support in the JPY118.30-50 area.  

Sterling is the most interesting of the three from a technical perspective.  Leveraged accounts reportedly have begun positioning for a post-election sterling recovery, and this appears to have help push cable to its 100-day average ($1.5185) for the first time since late February, when it was turned back from that average.  It has not been above its 100-day average since last August.  A break above it would target the $1.5250 area immediately and bring the top of this year's range (~$1.5500-50) into view.  

The upside momentum carried sterling past the top of its Bollinger Band (~$1.5120), as stops were triggered.  The market is stretched, and some near-term consolidation is likely.  The risk is that it is short-lived and that the market uses a constructive Q1 GDP report on Tuesday (expected 0.5% quarter over quarter) to extend sterling's gains.  However, we will be attentive for a reversal pattern the on daily charts, and more inclined to see this rally as a better selling opportunity.  

The Canadian and Australian dollars have benefited from shifting expectations on the trajectory of their respective monetary policies.  The market appears to have given up on another BOC rare cut. The market still expects the RBA to cut rates again, even if May does not seem as likely has it did a couple weeks ago.  However, it expects just one cut now, whereas previously investors leaned toward two cuts this year.  

The Canadian dollar's advance is looking more stretched than Aussie's.  Next week's expected news that the Canadian economy contracted in February, the third monthly contraction in a four-month period.  For the second time in six session, the US dollar found support near CAD1.2100. Resistance is seen in the CAD1.2300-25 area.  Technical indicators warn that the US dollar could have another leg down before a more solid bottom is in place.  

The Australian dollar appears to be in a stronger technical position.  It finished the  week above a down trend line drawn off the January 15 spike high to almost $0.8300, the late-March high near $0.7940, and the mid-April highs.  It came in before the weekend near $0.7780.  Once the $0.7840 area is overcome, the Aussie can advance another cent for meeting much chart-based resistance.  Beyond there is $0.8000.  

Oil prices rose for the sixth consecutive week.  The technicals for the June light sweet crude contract are looking stretched.  Despite the gain on a weekly basis, the June contract traded inside the previous week's range.  The RSI has turned down, and the MACDs will do shortly.  Initial support is seen in the $55.70 area, but a move toward $54.30-50 would test the resolve of the bottom-pickers.   

The US 10-year yield rose three bp over the course of last week.  This was after the 3 bp decline before the weekend, ostensibly on the back of weak details in the March durable goods orders report and the rise in the stock market to new record highs.  Yields have been mostly in a 1.85%-2.00% range.  The upper end of that range was tested in the middle of last week.  Given that it held the rule of alternation says it may test the lower end of the range.  

The S&P 500 rose to record highs, and the NASDAQ set new fifteen year highs to close in on the record set in March 2000.  Since the S&P 500 first tested in a couple of months ago, the 2120 has proved rather formidable.  It is hard to talk about resistance when the S&P 500 is at record highs. Technical indicators are not over-extended or showing bearish divergence, even if they are not generating strong buy signals.  

Observations based on speculative positioning in the futures market:

1.  There were three significant position adjustments (more than 10k contracts) in the CFTC reporting week ending April 21.  The gross short yen position was cut by almost 12k contracts, leaving 66k, the least since last July.  The reduction of gross short yen positions has been one of the main features of speculative positioning thus far this year. Last December the gross short yen position peaked near 153k contacts.  Following a less dovish line by the Bank of Canada the gross long Canadian dollar position almost doubled to 33.3k contracts (an increase of 10.3k contracts).  The gross long Mexican peso position was cut by 13.2k contracts to 50.3k.  In the prior week, the longs jumped by 21.3k contracts.

2.  This liquidation of long peso contracts swung the net position back to the short side by 13.7k contracts.  The leaves the Swiss franc, among the currency futures we track, where speculators are net long.  The net short yen position of 14.4k contracts is the smallest in 2.5 years.

3.  Speculators hold 55.6k gross long Australian dollar futures contracts, this is the largest gross long position among the currencies we track.  The yen is in a close second with speculators long 51.5k contracts.  The gross short euro position at 261.5k is far and away the largest.  The Australian dollar is a distant second with speculators hold a net short 90.2k contracts.  In the other four currency futures we track, speculators hold a little more than 60k short contracts.

4.  The speculative net short 10-year Treasury futures position grew by 41k contracts.  However, this reflected 54.3k long contracts being cut and nearly 13k short contracts being covered.

5.  The net long speculative oil position rose by almost 41k contracts.  This was not a function of new longs being established.  Rather the gross short position was cut by nearly 50k contracts, while the gross longs were pared by 8.6k contracts.

week ending Apr 21		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-215.0	-212.0	46.8	1.6	261.5	3.9
Yen	-14.4	-23.1	51.5	-3.3	66.0	-11.9
Sterling	-29.3	-36.0	34.8	0.8	61.1	-5.9
Swiss Franc	0.3	0.2	11.1	-1.1	10.8	-1.3
C$	-27.1	-30.6	33.3	10.3	60.4	6.8
A$	-34.7	-42.4	55.6	0.5	90.2	-7.3
Mexican Peso	-13.7	8.4	50.3	-13.2	64.0	8.9