Dollar's Demise Exaggerated: Technicals Anticipate Turn in Fundamentals

Yogi Berra, one of the keenest observers of the human condition, is said to have once remarked "It is tough to make predictions, especially about the future."  And so it is.

Between the middle of last December and the middle of March, the Dollar Index rallied 14.7%. It then fell 6.2%.  A 50% retracement would bring it to 94.00, which had generally provided support in the second half of February.  It was from that the Dollar Index staged a new leg up that carried it to 100.40 over the next few weeks.

The decline in the Dollar Index, as well as its pace, however, has spooked the market.  This speaks to two things.  First, the stretched positioning in the speculative market.  Specifically, the short euro position had barely been adjusted though several of the other currencies had.  The Dollar Index, as we have noted before, is not a good trade-weighted measure and is heavily weighted toward the euro and currencies that move in its orbit.

Second, traders are fickle about the dollar's rally.  Part of this seems to be a function of pushing out a Fed rate hike.  It is partly that US economy ground to a virtual halt in Q1.   But there is also a deeper sense that many believe the dollar is living on borrowed time: That it has been more of a question of euro weakness than dollar strength.

In thin markets before the weekend, the dollar staged an impressive recovery.  The thinness of market conditions makes us hesitant to read too much into it, but we suspect that if the dollar has not bottomed, it has come awfully close.   While the Reserve Bank of Australia possible rate cut may be the highlight of the first half of next week, the UK election May 7 and the US monthly jobs report the next day will drive the market.   Our constructive outlook for the dollar requires a jobs report that is not disappointing.  

The euro's rally stalled before the weekend just shy of its 100-day average  (~$1.1297) though it still held on to a weekly gain of 3%.  Even the pullback on Friday, it still closed at the top of its Bollinger band.  It appears that some of the gains were driven by unwinding of hedges or short positions, and linked to the sell-off of German stocks and bonds.  Key support for the euro may be the top of the previous range, roughly $1.1050.

Technical indicators favor the dollar over the yen.  The greenback is trying to establish a foothold above the downtrend line drawn off the March multi-year high (~JPY122.03), and the April high (~JPY120.85)/  It is just below JPY120.20 now.  The dollar's 5-day moving average will cross above the 20-day moving average.  The RSI is curling up while the MACD's are flat on the lows.   Rising US Treasury yields also favor the dollar.  The JPY120.75-85 offers initial resistance.  Japanese participation will be light due to the Golden Week holidays.  A strong US jobs data could see a challenge on the JPY122.00 area.

With its steep pre-weekend loss, sterling has retraced more than 38,2% of its rally that took it from $1.4565 on April 13 to almost $1.56 in the middle of last week.  It had traded for the first time since last August above its 100-day moving average (~$!.5165).    The impressive ten cent rally took place in the face of a slowing economy and polls that still make it difficult to see a majority government being forged from the May 7 election.

The RSI has turned down, and the MACDs may cross lower next week.  The 50% retracement is near $1.5030 with the 61.8% retracement slightly above $1.4920.  They offer road markers if not price objectives.  The 20-day moving average is $1.4985.

The US dollar had fallen sharply against the Canadian dollar over the past few week, but staged an impressive recovery after retracing 38.2% of the its rally since last July's lows, that came in just below CAD1.20.   In fact, the rally in the second half of the week completely recouped the losses from the first part of the week.

The test for US dollar bulls now is likely the CAD1.23 area.  The 100-day moving average comes in near there, as does the 20-day average.  It is also the lower end of an old congestion area; it also corresponds to a retracement objective.  The RSI has turned up, and the MACDs are poised to cross at the start of the week.

Like the Canadian dollar, what the Australian dollar gained in the first half of last week it gave back in the second half.  The Aussie rallied from a low near $0.7530 in early April to a high near $0.8075 in the middle of last week.  It rose above its 100-day moving average for the first time since last September.  With the drop before the weekend, the Aussie had recouped 50% of what it had lost in recent weeks.

The 61.8% retracement is near $0.7740, and the 20-day moving average starts the new week at $0.7760.  The technical indicators are consistent with additional losses.  An RBA rate cut in an offered market may have more impact than in a bid market.  A rate cut would also be understood in part as a protest against the Aussie's strength.

The June light crude futures contract encountered strong offers in front of $60 a barrel. This is the upper end of the range seen since mid-December last year.  The RSI is trying to turn lower.  The MACD flat-lined near the highs for most of April.   Initial support is seen in the $55-$56 area.  The 100-day moving average, which it traded above last week for the first time since last August, comes in at $53.70.

The US 10-year Treasury yield rose 20 bp over the course of last week, despite some disappointing data.  Two factors that contributed to the increase was the active new corporate bond sales, which often uses Treasuries as a hedge, and the sell-off in European bonds that may have dragged the US down as well.  There is a band of congestion just above last week's 2.12% high and extends to the 2.25% area.  A strong employment report could see this area approached while a weak report would likely see a rejection of the 2%+ yields and a return to the lower end of the range around 1.85%.

The S&P 500 gained almost 1% before the weekend, which was not quite enough to retrace the week's decline seen after a new record high was posted at the start of the week.  It did break the streak at three of lower highs.  The technical indicators are not generating a strong signal.  The market fared well in the face of the sharp rise in yields.    US shares may have also been positively impacted by the big position unwind that also had been expressed as short US and long Germany or European equities.

Observations based on the speculative positioning in the futures market:  

1.  There were three significant (more than 10k contracts) position adjustments in the Commitment of Traders reporting week ending April 28.  The gross short euro position was trimmed by 13k contracts, leaving 248.5k.  It remains near the record set in March near 271k gross short contracts.
The gross short yen position was cut by 11.8k contracts to 54.2k.  It peaked last December near 153k contracts.  The gross long Mexican peso position was cut by 12.3k contracts to 38k.  

 2. The overall pattern was to cover short currency positions.  Of the seven currency futures we track all but sterling saw a reduction of gross short positions.  The gross longs, outside of the peso, were little changed.  The largest was the euro where the gross long position increased by 3.9k contracts. The 50.7k gross long euro contracts are the second largest gross long position, trailing the Australian dollar where speculators hold 53.8k contracts. 

3.  The speculative net short 10-year Treasury futures was reduced from 153k to 98.6k contracts. This was a function of 40.4k new long positions (now 363.6k contracts) and a cut of 14.4k short contracts (leaving 462.1k).  

4.  The net speculative long crude oil futures position was trimmed by 8.2k contracts to 314.8k.  Both the longs and shorts grew.  The gross long position edged up by 2.4k contracts to 521.7k.  The gross short position rose by 10.6k contracts to 206.9k.  

week ending Apr 28 Commitment of Traders
               (speculative position in 000's of contracts)
Net  Prior  Gross Long Change Gross Short  Change
Euro -197.8 -214.7 50.7 3.9 248.5 -13.0
Yen -5.5 -14.5 48.7 -2.8 54.2 -11.8
Sterling -34.2 -26.3 33.2 -1.6 67.4 3.3
Swiss Franc 1.3 0.3 11.1 0.0 9.8 -1.0
C$ -20.9 -27.1 33.9 0.5 54.8 -5.6
A$ -27.4 -34.6 53.8 -1.8 81.2 -9.1
Mexican Peso -23.4 -13.7 38.0 -12.3 61.4 -2.6

Dollar's Demise Exaggerated: Technicals Anticipate Turn in Fundamentals Dollar's Demise Exaggerated:  Technicals Anticipate Turn in Fundamentals Reviewed by Marc Chandler on May 02, 2015 Rating: 5
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