Currency Positioning and Technical Outlook: Dollar Poised for Additional Gains

The US dollar had a good week, appreciating against all the major currencies, except sterling, which was fractionally stronger (0.13%) and the Canadian dollar, which was flat. Underpinned by firm CPI and a robust retail sales report, sterling resisted the dollar's draw. Canada reported the highest headline CPI before the weekend, and the Canadian dollar was able to recoup what had been the week's decline.

There were two important price developments. First, the dollar traded below its 200-day moving average against the yen in the first half of last week before bouncing back. It finished the week at six day highs and put in a hammer in the weekly Japanese candlestick patterns, Technically, this is constructive price action. It reinforces the lower end of the trading range that has been carved out over the past three months. However, a band of resistance that extends from JPY102.00-35 may prove formidable on initial attempts.

The second noteworthy price development was the euro's weekly close below its 200-day moving average for the first time since last September.  It has not sustained a break of that average since last July. New three month lows were recorded before the weekend ahead of $1.3600. Momentum indicators warn of the risk of further losses and, assuming a break of $1.3600, the next target is in the $1.3520-45 area.

The dollar's performance against the other major currencies is less clear. Sterling tested the $1.68 support area. Although it has held, the momentum indicators and price action warns a break is still possible. A trendline, drawn off the year's lows in January near $1.6250 and the March and May lows, comes in near $1.6770. A break of the trend line would initially target $1.6720.

The Australian dollar tested the $0.9200 support. This is the third test on it since early April. The subsequent bounce has not been very enthusiastic. On a break, the triggering of stop loss sales could carry the Aussie down another half cent in short order and through the 200-day moving average (~$0.9170). It would  lend credence to the idea that an important high is in place. A deeper retracement would target $0.9050 in the coming weeks.

From another perspective, a feature of the recent price action has been the outperformance of the North America. Both the Mexican peso and Canadian dollar did relatively well. Only the Colombian peso among the Latam currencies did better than the Mexican peso in the past week. The US dollar fell to new 2014 lows against the peso before the weekend. It is approaching the MXN12.80 level that was solid support in Q4 13. A break of the MXN12.75 area could signal a move toward MXN12.60, but the technical indicators suggest this may not be particularly likely.

It had looked like the US dollar was going to break out above the downtrend line drawn off the March 20 high for the year near CAD1.1280 and the late-April and early May highs. However, the greenback reversed lower and settled on its lows just above support seen at CAD1.0850. The strong inflation report underscores the central bank's neutrality. Perceptions of its dovishness are being tempered. This can push the greenback to CAD1.08. Below there, the 200-day moving average is found near CAD1.0740.

Observations from the speculative positioning at the CME currency futures:

1. The were two gross position adjustments near 10k contracts. The gross long euro position continued to be trimmed in the last reporting week ending May 20. It fell 9.4k contracts to 75.0k. The gross longs have been cut by 45k contracts over the past two month. The gross short yen position was cut 9.7k contracts to 72.5k. This is the smallest short position since late 2012. Speculators in the futures market have been steadily covering their short yen exposure this year. The gross short yen position peaked in late December 2013 near 160k contracts.

2. The 8.8k increase in gross long sterling positions to 80k contracts is sufficient to surpass the gross long euro position. However, the largest gross long position is held by the peso with 92.7k contracts, including the 6.6k increase over the past week.

3. Of the 14 gross positions we track, 9 were adjusted by less than 3k contracts. To the extent there was an overall pattern it was that ironically was as increase in gross long positions. There were two exceptions, the liquidation of the euro position we noted above and a small (500 contracts) reduction in the gross long Canadian dollar position.

4. The gross short euro position of 84.2k contracts (reduced by 2.3k contracts in the latest week) is the largest gross short position. The 7.5k contract increase brings the gross short sterling position to almost 47k contracts, which is the largest in three months.

week ending May 20               Commitment of Traders
(spec position in 000's of contracts)
Net  Prior  Gross Long Change Gross Short  Change
Euro -9.2 -2.2 75.0 -9.4 84.2 -2.3
Yen -53.8 -64.7 18.7 1.2 72.5 -9.7
Sterling 33.1 31.8 80.0 8.8 46.9 7.5
Swiss Franc 5.0 6.8 17.4 0.4 12.4 2.2
C$ -26.5 -26.0 26.5 -0.5 53.0 0.0
A$ 19.5 17.1 50.1 0.0 30.7 -2.4
Mexican Peso 77.3 68.6 92.7 6.6 15.5 -2.1

Currency Positioning and Technical Outlook: Dollar Poised for Additional Gains Currency Positioning and Technical Outlook:  Dollar Poised for Additional Gains Reviewed by Marc Chandler on May 24, 2014 Rating: 5
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