Firm Grasp of the Obvious: Dollar Bull Run Remains Intact

It is beyond dispute.  The US dollar is in a powerful bull run.  There are two main drivers, and their ability to dominate the price action varies according to the news stream.  The first is constructive economic news from the US that reinforces ideas that the Fed will likely raise rates next year.

The second driver is what is happening in the other key centers.  This is the aggressive monetary easing by the Bank of Japan and the diversification by Japanese pension funds.  It is also the trajectory of the ECB's monetary policy, with the range of assets it is buying likely to increases over the next few months.  This driver also includes the loss of momentum in the UK economy and later and slower tightening cycle than previously anticipated.  

The year-to-date performance of major foreign currencies may surprise many casual observers.  The weakest currencies are not the euro and yen, which are both down around 9.7%.  The Swedish krona has seen the largest depreciation, falling 13.4% so far this year, followed by the Norwegian krone, which has fallen about 10.4%.

In the past week, it was the yen and sterling that led the declines, both with about a 1.3% loss. The yen is being pushed lower by the diversification of Japanese savings overseas.  Stepped up foreign purchases of Japanese assets, especially stocks, appears be largely transacted on a currency-hedged basis.

The US dollar finished the week above JPY116.00.  Like many we were surprised by the aggressiveness of the BOJ and GPIF.  We now see potential for the dollar to move toward JPY120 over the month or two.  Support is pegged in the JPY115.00-50 area.  Last week, we had noted that the greenback was flirting the upper Bollinger Band.  However, the higher volatility means that the two-standard deviation band is considerably wider.  The upper band now is near JPY118.85.

For its part, sterling stabilized in first half of last week, but the dovish Quarterly Inflation Report pushed it over.  It fell around 2% in the last three sessions.  The report warned of the risk that inflation falls below 1% over the next six months.  Investors knew this meant a later start to the rate hiking cycle.

Sterling briefly dipped below $1.56.  Although the $1.55 level is the next target, there is scope to test the (potential) trend line connecting the 2010 and 2013 lows, which comes in below $1.5100. That said, sterling has pushed through its lower Bollinger Band near $1.5675.  The Bollinger Band may move toward prices , especially if, as we suspect, this area, which extends to $1.5720 acts as resistance.  

The euro was confined to a little more than a 1.25-cent range over the past week.  The sideways consolidation helps ease the technically over-extended market, but the absence of the proper upside correction is a testament to the extent of bearish sentiment.   We do not read much into the outside up day recorded before the weekend.  The $1.256-70 area like denotes the near-term ceiling. It corresponds to a retracement objective of the down move since October 15 and the 20-day moving average, which the euro has not closed above for more than two weeks.   The downside opens up on a break of $1.2360, the recent low.  The immediate target would be $1.22, but many have their sights set on $1.20 before the end of the year.

The Australian dollar fell to three-day lows before the weekend, but recovered to finish near its session high and above the 20-day moving average near $0.8735.  We are watching the price action around the downtrend line drawn off the September 5 high (~$0.9400), the October 29 high (~$0.8910).  It caught the November 13 high (~$0.8765).  The flows out of the yen may be giving the Aussie some legs, but they are still weak.  Technically, it looks difficult for the Aussie to sustain gains above $0.8800 now.

If one is inclined to look for an alternative to the US dollar, the Canadian dollar looks interesting from a technical perspective. The RSI and MACDs are turning lower.  The price action before the weekend was constructive.  The US dollar's advance faltered in front of CAD1.1400.   The weekly close below CAD1.13 now could spur a move toward CAD1.12.     In a strong US dollar environment, the Canadian dollar tends to do well on the crosses.

The price action of the Mexican peso was also constructive ahead of the weekend.  The US dollar's momentum has faded around MXN13.60.  It has straddled this area in the last two weeks, but is has not been able to get much of a foothold.  It is relatively expensive to be short the peso without momentum in one's favor.  Initial support is seen near MXN13.50, but a break could spur a move toward MXN13.40.

US 10-year Treasury yields are consolidating in a mostly 2.30% to 2.40% range.  Global liquidity issues, the drop in oil prices, and the strengthening dollar makes US bonds attractive, even though the yield is below when many regard as fair value based on growth and inflation trajectories. The University of Michigan's consumer confidence survey provided more evidence before the weekend of an erosion in inflation expectations.  This helped spur the rally in US Treasuries that pushed the yield to the lower end of the range, and weighed on the dollar.  

Although the S&P 500 made new record highs on November 13, it has really moved sideways last week.    Market sentiment is still constructive based on global liquidity and low interest rates.  However, the technical condition appears to be deteriorating a bit.   Support is pegged in the 2020-2028 band. A break could signal a test on the 1997-2000 area.

Observations based on the speculative positioning in the futures market:

1.   There were two significant adjustments (10k+ contracts) in gross positions.   The first is somewhat surprising.  The gross short euro position was cut by 14.2k contracts to 224.3k. It is still more than the combined gross short position of the yen, sterling and Swiss franc.  And this is after taking the second significant adjustment into account:  The gross short yen position rose by 20.3k contracts to 129.8k.  

2.  Of the remaining 12 gross positions we track, there were only two that changed by more than 5k contracts.  The gross long yen futures position increased by 9.3k contracts to 47.3.  The gross short Canadian dollar position rose by 5.5k to 54.5k contracts.  Half of the 10 gross positions were adjusted by less than 2k contracts.  

3.  Speculators generally added to gross short currency futures positions.  The notable exceptions were the euro and Australian dollar.  

4.  There was a 15k contract reduction of the net short euro position, which now stands at 164k contracts.  It was the first decline in six weeks.  The nearly 13k net short sterling contracts is the most since September 2013.  The net short Swiss franc position of 22.7k contracts is the largest since mid-2013.  

5.  Treasury bears tried to make a stand.  The gross short position jumped nearly 10% or 41.4k contracts to 503k.  The gross longs were culled by a little more than 5% or 23.8k contracts to 390.1k. This saw the net short position swell to 112k contracts from 47.3k in the previous reporting period.  

week ending Nov 11               Commitment of Traders
(speculative position in 000's of contracts)
Net  Prior  Gross Long Change Gross Short  Change
Euro -164.0 -179.0 60.5 0.9 224.3 -14.2
Yen -82.6 -71.7 47.3 9.3 129.8 20.3
Sterling -12.9 -7.5 40.7 -2.6 53.6 2.8
Swiss Franc -22.7 -20.2 8.8 0.9 31.4 3.4
C$ -21.8 -19.4 32.7 3.0 54.5 5.5
A$ -38.0 -38.3 12.9 -1.7 50.9 -1.9
Mexican Peso -29.7 -26.6 29.4 -0.8 59.1 2.3

Firm Grasp of the Obvious: Dollar Bull Run Remains Intact Firm Grasp of the Obvious:  Dollar Bull Run Remains Intact Reviewed by Marc Chandler on November 15, 2014 Rating: 5
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