Currency Positioning and Technical Outlook: Diverging Performances

There was a clear divergence in the performance of the major currencies over the past week. Simply put, the dollar-bloc was strong, and the continental European currencies were weak.

Sterling, with the help of Carney's warning that a rate hike could be delivered sooner than the market thinks, remained sympatico with the dollar-bloc. The New Zealand dollar led the majors, and was rewarded for the hawkishness of its central bank as well.

The yen moved with the dollar-bloc, gaining almost 0.5% against the US dollar. The impulses did not come from US yields, where the benchmark 10-year Treasury note was flat. It is true that US shares traded heavily, in the first of the week, the Nikkei itself closed slightly higher on the week.

The demand for peripheral European assets failed to lift the euro. It appears to have been mitigated the wider differentials. The premium the US offers over Germany on 2-year paper is at its highest level in seven years. The ECB's measures have driven EONIA below the effective Fed funds rate for the first time in six months.

The euro's bounce off $1.35 failed to be very convincing. We look for a push below there in the coming days. The year's low was set in early February just below $1.3480. A dovish Fed could spur a bounce, but the market seems to be inclined to sell into bounces still. This psychology may be neutralized on a move into the $1.3580-$1.3620 band. The 200-day moving average is slowing rising from the $1.3660 area.

Sterling is the market's darling. In the futures market, the speculative gross long sterling position is the larger that the gross long euro, yen and Swiss franc positions put together. Carney's unexpectedly hawkish comment saw sterling approach the $1.70 level again (similar high in early May) before stalling). We look for penetration in the days ahead, perhaps fueled by sterling purchases against the euro (and yen). Sterling peak since the end of 2008 was in early 2009 near $1.7045, but a convincing break would likely target the $1.7250-$1.7350 area, from a technical perspective.

The immediate technical tone is strong. The 5-day has crossed back above the 20-day average. The MACDs are turning up. The note of caution comes from sterling finishing last week above its upper Bollinger Band. In a pullback, support may initially be seen above $1.6900.

The divergent monetary policy trajectories are pushing the euro lower against sterling. In the medium term, the goal is the 2012 low near GBP0.7750. The more immediate target is GBP0.7880. Here too, the Bollinger Band has been broken on a weekly closing basis, and this signal favors a little patience.

Technically, the dollar appears set to edge higher against the yen. More likely, it can churn higher in narrow trading ranges. On the upside there seems to be resistance levels every 20 pips from JPY102.00. It is important that the JPY101.60 area held. There appears to be an increased influence coming from the crosses. A key level to monitor in the euro against the yen is the 200-day moving average (~JPY138.80). The ECB's initiatives appear to have trumped Abenomics as the euro has not sustained a break of its 200-day moving average against the yen since before Abe was elected.

The Canadian and Australian dollars look vulnerable, though the former's strength over the past week surprised us. The US dollar's streak of lower lows came to a halt with the upticks before the weekend. The greenback fell to almost CAD1.0840 and provided this holds it would help solidify the lower end of the greenback's range over last six weeks. Initial resistance is seen just below CAD1.09.

The Australian dollar exceeded our favorable outlook. It approached the year's high set in April near $0.9460. There was not follow through after the outside up-day was posted on June 12. A break now of $0.9370 would likely signal a corrective phase rather than consolidation, in which case the next target would be around a cent lower.

The Mexican peso was considerably weaker than we expected. In the recent past, surprise rate cuts by the central bank spurred a quick drop in the peso and then a strong recovery. It was the same thing this time, except for the recovery. The US dollar took out the significant downtrend line drawn off the January, February, March and April highs. Technically, the dollar is poised to record another leg up in the coming days. The next target is the MXN13.12-15 area and then MXN13.20.

The yield of the US 10-year Treasury note flirted with the downtrend line going back to January, but unlike the dollar against the peso, it was unable to sustain the break. That trend line comes in near 2.62% though an intra-day high was recorded near 2.66%. On the downside, a move below 2.60% could see slippage toward 2.55%. Most of the technical readings suggest that the price of oil may still advance. However, it did finish the week above the upper Bollinger Band, which warns of a pullback, or at least some sideways trading at the start of the new week.

Observations based on speculative positioning in the futures market:  

1.  The largest position adjustment in the reporting week ending June 10, was the euro.  Gross longs and gross shorts both changed by more than 10k contracts.  There were only 3 other gross positions that were adjusted by more than 5k contracts.  As has been the recent pattern, the gross euro longs continue to be culled. They fell by about 30% to 43.7k contracts.  As recently as early May, there were 111k gross long euro contracts in speculators' hands.  The gross short position rose by a little more than 10% to 100.9k contracts, which is about a quarter more than in early May.  Since flipping to the short side in early May, the net short position has grown in each of the past four weeks.  

2.   We note that this reporting period ended prior to BOE's Carney rate warning that saw sterling futures experience record volume.  The high volume in a rising market suggest new longs were established that are not picked up in this report.  The gross short sterling positions rose for the second week in a row and we suspect that some of the late shorts capitulated.  

3.  The net short yen position rose to a new 2-month high of 82.2k contracts.  Longs were pared slightly and just below 12k contracts, it is the third lowest gross long positions since 2003.  Gross shorts increased by 7.3k contracts to 94.1k.  

4.  The dollar rose nearly 20 big figures against the Mexican peso during this reporting period, but the peso bulls were not shaken.  The gross longs grew by less than 1k contracts and about 3.3k short gross short contracts were covered.  This resulted in an increase in the net long position to 90.2k contracts.

5. In the US 10-year note futures, the bears continued to dominate.  The net short position rose to 71.9k contracts from 43.3k.  This was the result of gross longs shaving 11.2k contracts (to 372k) and the gross shorts adding 17.4k contracts (to 443.9k).  

week ending June 10               Commitment of Traders
(spec position in 000's of contracts)
Net  Prior  Gross Long Change Gross Short  Change
Euro -57.2 -33.0 43.7 -13.4 100.9 10.8
Yen -82.2 -74.2 11.9 -0.7 94.1 7.3
Sterling 35.8 35.0 85.2 5.7 49.4 4.9
Swiss Franc -3.0 -2.0 9.6 -2.3 12.6 -1.3
C$ -24.1 -22.1 30.3 -2.2 54.4 -0.8
A$ 28.2 21.5 62.1 5.3 33.9 -1.4
Mexican Peso 90.2 86.0 106.6 0.9 16.4 -3.3

Currency Positioning and Technical Outlook: Diverging Performances Currency Positioning and Technical Outlook:  Diverging Performances Reviewed by Marc Chandler on June 14, 2014 Rating: 5
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