Dollar Outlook and Currency Rotation

The US dollar posted gains against all the major currencies over the past week save the Australian and New Zealand dollars. The Reserve Bank of Australia appears to have moved to a more neutral stance on rates, relying on the currency to provide the necessary adjustment.

The dollar's gains were helped by a strong July auto sales, a jump in the service sector ISM, and a jobs report that was consistent with recent trends. Over the course of the week, a greater risk of a September hike was priced into the September Fed funds futures contract.

On the other hand, the Bank of England seemed to dash speculation of a rate hike this year. This sapped whatever strength the sterling bulls had been mustering. It was the best performing major currency against the dollar in July, but has fallen out of favor again.

There seems to be a bit of a rotation taking place among the major currencies. The dollar-bloc is beginning to show preliminary signs of stabilizing while the Swiss franc and Scandis have taken over the leadership on the downside. Some suspect the Swiss National Bank has covertly driven the franc down. Since the middle of July, the euro has rallied nearly 3.5% against the franc. The Swiss franc lost 2% against the US dollar last week. The franc's weakness will help recoup some of the paper losses the central bank experienced in H1.

Both Norway and Sweden publish July CPI figures in the week ahead. Despite the strong growth in Sweden in Q2 (1% quarter-over-quarter), the deflation pressures likely to remain evident are the key to monetary policy (negative rates and asset purchases). Falling inflation and the tick up in unemployment keeps the door open to for lower rates in Norway. The Norges Bank meets next on September 24.

The technical condition for the euro is weak, but it is not clear that the $1.08 area that provided support in May and July is about to break. There are some suspicion that a large bid near there may be from Swiss officials. Risk-reward considerations favor selling into bounces. The euro posted a big outside up day before the weekend. To do so, it had to shrug off the US jobs data that boosted the risk of a September lift-off by the Fed. This suggests scope for follow through euro gains. The $1.1030-50 may be the first serious hurdle, but risk extends toward $1.1100-20.

The dollar made a new marginal high of almost JPY125.10. However, there was momentum, and despite the constructive US employment data, the yield on the 10-year Treasury slipped. Despite a number of attempts since early June, has only managed to close above JPY125 once. That proved to be a near-term top. The dollar's technical condition deteriorated with the reversal after the US employment report. Initial support is seen near JPY124.00, which also corresponds to the 20-day moving average. Look for better dollar buyers on a move toward JPY123.20.

Sterling has fallen out of favor amid disappointment that the Bank of England did not signal any urgency to lift rates. The strong close negated the intraday break of the trendline off the June and July lows (~$1.5470). A convincing close below there is technically important as it represents the neckline of a potential topping pattern. If confirmed, it would signal risk toward the July low near $1.5330 on its way toward $1.5250. On the upside, initial resistance is seen in the $1.5550-70 area.

The Australian dollar bottomed near $0.7235 at the end of July. There were modest bullish divergences in the RSI and MACDs. The five-day moving average is crossing above the 20-day average for the first time since late-June. The close above $0.7400 before the weekend is a constructive development. Initial short-covering gains can carry it toward $0.7500.

The US dollar peaked just above CAD1.3200 in the middle of last week. Like the other currencies, the Canadian dollar recovered before the weekend. However, it appears poised to be the laggard within the dollar-bloc. The market may retest the US dollar high if oil continues its slide. Initial US dollar support is seen near CAD1.30 where the 20-day moving average is found. The greenback has not traded below its 20-day moving average since last June.

The September light sweet crude oil futures contract extended its losing streak to eight consecutive weeks. During this streak, it has lost about 27%. The technicals are stretched nut do not show the kind of divergence that is associated with a bottom. The September contract settled on its lows following news that the US rig count rose for the third consecutive week. Nearby resistance is seen near $45 and then $47. On a continuation contract, the target is the mid-March low just above $42.00.

In the face of stronger US economic data, US 10-year Treasuries remained firm. The mid-week sell-off that took yields to almost 2.30% was reversed, with the help of falling commodity prices and a weak equity market. While the S&P 500 briefly pushed through its 200-day moving average near 2073, the US 10-year yield is approaching its 200-day moving average, which is found near 2.14%. Below there, the May lows beckon just below 2.09%.

The S&P 500 lost 1.25% last week. It flirted with the 200-day moving average but closed above it. Technical indicators warn against picking a bottom quite yet. Both the RSI and MACDs are moving lower. A move above the 2085-2095 area would likely neutralize the technical tone. The VIX had fallen to new lows since July 2014 in the middle of last week near 10.85% and spiked above 14.5% when the 200-day moving average broke before the weekend. It finished the session on its lows near 13.4%. Broadly speaking, continued range trading is the most likely scenario.

Observations from the speculative positioning in the futures market:

1. Speculators made two significant shifts (10k contracts) in gross currency positioning in the CFTC reporting week ending August 4. The gross short euro position rose 12.2k contracts to 184k. The gross short yen position rose 19.8k contracts to 129.6k.

2. After trending lower in recent weeks, the net long Swiss franc position flipped to the short side. It is the first net short franc position since May.

3. The recent general pattern has continued. Gross long and short positions mostly increased among the currency futures we track. Of gross long positions, only the Canadian dollar was cut, and that was by a minor 1.2k contracts, leaving 34.0k. Of the gross short positions, sterling was slimmed by 1.3k contracts (to 52.3k), and the peso was trimmed by 6.1k contracts (to 104.6k).

4. Speculators sold into the rally in US Treasuries. Speculators liquidated 11.1k contracts (leaving 480.4k) and went short 22k contracts (boosting the gross short position to 447.9k contracts). This halved the net long position from 65.6k contracts to 32.5k.

5. Speculators were largely content with their positioning in the oil futures. The net long position rose 3.7k contracts to 247.1k. The gross longs rose by 2.7k contracts to 478.7k, while 1k contracts shaved the gross shorts to 231.6k.

4-Aug		Commitment of Traders
	(speculative position in 000's of contracts)
	Net	Prior	Gross Long	Change	Gross Short	Change
Euro	-113.0	-104.0	70.6	2.8	184.0	12.2
Yen	-79.7	-63.5	49.9	3.6	129.6	19.8
Sterling	-6.6	-9.8	45.7	2.0	52.3	-1.3
Swiss Franc	-1.5	0.1	11.4	1.6	12.8	3.2
C$	-64.2	-56.1	34.0	-1.2	98.2	6.9
A$	-49.4	-50.7	49.4	2.8	98.8	1.6
Mexican Peso	-88.8	-88.8	22.6	0.7	104.6	-6.1
(CFTC, Bloomberg)