Dollar Tone Heavy; Can FOMC Lift It?

After the strong US jobs data, there was no follow through buying of the dollar. The greenback fell against all the major currencies last week, save the New Zealand dollar, where the central bank cut rates and signaled the likelihood of another one.

Many, including ourselves, expected the dollar to perform better as the recent string of economic data plays into the Fed's hands. Even though a rate hike by the FOMC next week is highly unlikely, it can be expected to recognize the reinvigorated economic momentum. Yellen will most likely try to keep the market focused on the data, not a particular time frame. Based on current information and the expected trajectory of economic data, a September lift-off remains the most likely scenario.

There is a recent pattern. Whatever direction the euro moves on Friday, it has been moving in the opposite direction on Monday. After unable to push through $1.14 in the middle week, the euro was sold on Thursday and was drifting lower on Friday. Then Merkel's comments (which many observers took out of context and used it for what we think is a hyperbolic currency war narrative) sent it quickly lower to $1.1150. From there, a bout of short covering took it back toward $1.1300.

The euro remains broadly range bound. After bottoming in mid-March near $1.0460, it spent the next six weeks between $1.05-$1.10. With the notable exception in late-May and early-June, it has been in a $1.10-$1.15 range. The technical indicators are neutral and are not generating a strong signal at the present.

If Merkel's comments are part of a currency war, the BOJ's Kuroda comments pointed in the opposite direction. He suggested that the real effective yen was near a bottom. His comments spurred a quick sharp yen advance, After the sharp move on Wednesday, the yen has spent the next two sessions consolidating within that range set at midweek. The triangle pattern being formed is often seen as a continuation pattern, which in the current context, means a lower dollar. The technical indicators are consistent with the dollar retesting the Kuroda- inspired lows near JPY122.45. The dollar recorded lower highs each session last week. Rising above the previous day's high then would be the first indication of a potential dollar low.

Sterling snapped a three-week decline against the dollar. The five-day moving average crossed back above the 20-day average. With a 2% gain against the dollar, it completed a 618% retracement of its decline from mid-May (~$1.5575) and finished the week above its 200-day moving average ( ~$1.5490). Near-term potential extends toward $1.5670-$1.5700. Support is pegged in the $1.5420-40 area.

The Australian dollar gained about 1.5% against the US dollar over the past week, but it remains in a $0.7600-$0.7815 range. Of note, it has generally finished the North American session near the day's highs. We suspect the RBA minutes, to be released next week, will be dovish, offering a contrast to what we expect to be signals that the Fed is still planning on moving in the opposite direction. The Aussie has not closed above its 20-day moving average since May 18. It is found now near $0.7760, which may serve as a pivot.

After reversing lower after the employment data on June 5, the US dollar saw follow through selling against the Canadian dollar early last week. The US dollar turned better bid after easing to CAD1.2200. Offers in the CAD1.2350 area has checked the greenback's recovery. If this area is not taken out, the risks increase for a test back to the lows. A break of CAD1.22 warns of losses toward CAD1.20. The Bank of Canada's neutrality contrasts with the easing trajectory of the RBNZ and the dovish RBA.

August light sweet crude is the front month contract now. Technical indicators are not particularly illuminating. US rigs continue to shut while US production remains resilient. Some shale well have re-opened, and there are reports about how the fracking technology continues to improve. Now there is more discussion of re-fracking--returning to old wells with new technology. For the past month, the August contract has been confined to a $58-$62 range, with a few short-living exceptions. It is near the middle of that range now, making it a poor entry level for new exposure.

US 10-year yields approached 2.50%, the highest since last September, but the market is hesitant about pushing through there. The September note futures staged a key reversal on June 11. First it pushed through the previous day's low to make a new low for the year, and the rallied to close above the previous day's high. The yield can fall back toward 2.25%.

The ten-year German bund yield also rose to its highest level since last September (~1.05%). Its downside reversal seemed more powerful, even if not as technically elegant as US Treasuries. On the week, the bund yield eased a single basis point. The 80 bp area has been a recent shelf, and a break could see yields fall back toward 70 bp. We want to be attentive to a shift in the relationship whereby bund yields and the euro have been moving in the same direction.

The S&P 500 was virtually unchanged on the week. However, the technical tone seems to have deteriorated, and the pre-weekend close was poor. The RSI has turned down, and the MACDs are still moving lower. A break of 2088 would signal a retest on 2072.

Observations based on speculative positioning in the futures market.

1. There were two significant (10k contracts) position adjustments. The gross short euro position was cut by 24.4k contracts to 190.6. It is the biggest short-covering since March 2014. Recall that the gross short euro position peaked in March at 271k contracts. This reduction in the gross short position accounts fro the bulk of the adjustment of the new position. The speculative net short euro position has fallen from by about 90k contracts since peaking in early April. The other significant position adjustment was speculators continued to amass a large short yen position. In the reporting period ending June 9, speculators grew their gross short yen position by 26.4k contracts to 158.7k. Since the end of April, when the gross short yen position had fallen to 54k contracts, it has grown nearly three-fold. The net short position stands at 116k contracts. In late-April speculators were short 5.5k yen contracts.

2. Speculators generally added to short currency futures positions. The euro was an exception. So was the Swiss franc. The gross short position was trimmed by 800 contracts. Speculators have been net long francs since early April.

3. The speculative net short 10-year Treasury note futures was halved to 36.6k contracts. Gross longs rose by 71.6k contracts to 412.4k. While they may have been trying to pick a bottom, the bears grew went with the momentum, and expanded gross short positions by 34.6k contracts to 449k.

4. The speculative net long oil futures position was pared by 13.7k contracts to 325.8k. This was a function of gross longs being trimmed by 10.7k contracts (to 483.8k) and a small increase (3k) of gross short positions (to 157.9k contracts).

week ending June 9		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-138.0	-166.0	52.6	3.2	190.6	-24.4
Yen	-116.0	-85.7	42.4	-4.2	158.7	26.4
Sterling	-28.3	-25.7	31.0	-1.8	59.3	0.9
Swiss Franc	10.1	8.4	13.5	1.0	3.4	-0.8
C$	-13.7	-1.0	21.0	-9.1	34.7	3.6
A$	-14.0	-13.3	65.2	1.8	79.2	2.6
Mexican Peso	-51.1	-45.1	28.6	-5.4	79.7	0.6
(CFTC, Bloomberg)