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The Trend Wants to be Your Friend Again

Marc To Market's picture




 

 

The US dollar moved lower over the past week against the major currencies, with the notable exception of the Japanese yen.  The greenback's technical tone has deteriorated.  The euro and sterling appear to have convincingly broken above significant down trend lines.  With the holiday season upon us, there seems to be no compelling technical reason not to look for a continuation of dollar weakness into the end of the year.  Few are incentivized to fight the trend.

 

The extent of the Fed's easing, and the implication of its guidance, suggests an even more dovish posture than the expansion of QE3+ (remember it was purposely open-ended, unlike QE1 and QE2). While the euro zone economy appears to be contracting this quarter at a slightly faster pace than in Q3, the slowdown in the US is more dramatic.  Growth may be more than cut in half from the 2.7% annual pace seen in Q3.   The fiscal cliff is the main cause of consternation at the moment.  Although there is private negotiations taking place, the public posturing is what investors have to guide them, and it is not particularly flattering.

 

The immediate wild card comes from Japan, when the election is widely anticipated to produce an LDP-led government that seems intent on debasing the currency through aggressive monetary policy, with the purchase of foreign bonds mentioned and an expansionary fiscal policy.  This is nothing secret about its intent.  This contrasts to the US, where despite the official rhetoric that a strong dollar is in the US interest, many observers divine a hidden intent to drive the dollar lower.  Speculators have amassed one of  the largest short yen positions in the futures market in history.

 

Foreign asset managers recognize the significance of the LDP's intent. They have been pouring money into Japanese shares.  Consider that from the start of the year through early November, foreign investors bought a net $2.73 bln of Japanese equities.  Since then, they have bought roughly $8.63 bln worth.  The weekly MOF flows suggest that the equity purchases were not a switch out of Japanese government bonds.  Despite the threat of currency devaluation and a fiscal policy that will add to the country's 200%+ debt/GDP, Japanese 10-year government bonds have outperformed Treasuries and bunds over the past month.

 

We are wary that the speculative community sold the yen on "rumors" that the LDP will win and may buy the yen on the "fact".  The Nikkei would then also be vulnerable to a setback.  It is not just the election either.  The BOJ meets Wed and Thurs and given the poor stream of economic news and signs that deflation has not loosened its grip, an additional JPY5-10 trillion expansion of the asset purchase plan is widely anticipated.  As good bureaucrats, the BOJ should be expected to defend its nominal independence from encroachment by the new government, but that might be an early 2013 story.


Euro: The combination of favorable developments in Europe and a very dovish Federal Reserve clarified the euro's technical picture.  The euro broke through two key trend lines.   The first is the longer-term trend that goes back to May '11 high near $1.4940 and the Aug '11 high near $1.4550 and catches the Oct high of this year.  I pointed it outhereon Dec 6, but then the euro sold off on the Italian political story and it had cloudedthe technical outlook.   The second trend line that appeared convincingly violated was drawn off the Sept 14, Oct 17, and Dec 5 highs .  It is so a flat trend line that technically looked like a triple top.  That trend line comes in around $1.3120 and should offer support.  On the upside a reasonable target for the bulls is near $1.35, which corresponds to a retracement objective and a measuring objective.  Bullish technical outlook.  

 

Yen:  The anticipation of an LDP victory has seen the yen sell-off sharply in recent weeks.  The dollar also closed the week above 18-month old downtrend against the yen.  It can be drawn off the April '11 highs and the March '12 highs.  It has appeared to check recent gains.   The dollar appears stretched, looking at Bollinger bands and RSI signals.  As we show below, the trend followers and momentum players have amassed a significant short yen position.  The market seems vulnerable to a "buy the rumor, sell the fact" type of activity.  One way this can play out a rally to new highs into the JPY84-JPY85 area.  The JPY85 area corresponds to last year's high, the 200-day moving average and, of course, is a nice round psychological level.  A failure there could be significant.  Initial support may be seen near JPY83.20, but it may take a convincing break of JPY82.40-60 to cause the yen bears much grief.  Cautious about the establishment of new yen shorts without a bounce.  

 

Sterling:  The trend line drawn off the year's high of almost $1.6310 on Sept 21, the Sept 28 high just below $1.6275 and the Nov 1 high near $1.6175 was violated at the start of the month, but then sterling retreated at the end of last week back below it.  It has now convincingly broken it and a retest on the $1.6300 area looks likely, and possibly $1.65 before the move exhausts itself.  Support may be seen in $1.6080-$1.6100 area.  Technical indicators appear supportive.  That said, in the advance envisioned here, sterling is likely to continue to lag behind the euro.Favorable outlook against the dollar, but not against the euro.  

 

Swiss franc:   Like the euro, the price action suggest the Swiss franc has broken out of some kind of consolidation pattern and is headed higher.  The pre-weekend dollar high near CHF0.9250 is likely to prove significant.  The measuring objective of the break of the pattern suggests a return to the CHF0.9000 area and possibly a bit lower.  Bullish technical outlook.

 

Canadian dollar:  Although the US dollar sustained the break of CAD0.9900, the price action was disappointing.  The Loonie lost ground to most of the major currencies, but the Japanese yen and Swedish krona.  The pre-weekend price action was poor and is suggestive of a potential reversal.  The CAD0.9880-CAD0.9900 may offer initial resistance.  A small shelf for the dollar is in the CAD0.9825 area.  Neutral to slightly bearish the CAD.  


Australian dollar:  The Aussie bulls continue to shrug off poor domestic news, rate cuts and a government clearly desiring a weaker currency.  The Australian dollar's resilience is notable.  The slow grind higher suggests it is working through offers, but there is no technical reason why the Australian dollar cannot continue to move higher with the $1.0625-50 the next target.  This year's high, above $1.08 still seems far away.  Additional near-term Australian dollar gains are likely.

 

Mexican peso: The dollar lost another 1% against the peso over the past week and is poised to continue to gradually drift lower in coming period.  The next objective is near MXN12.66, the spike low in early Oct and then MXN12.55,  the low for the year, set in mid-March.  The MXN12.85 area may cap dollar upticks.  Retain a favorable outlook for the peso.

 

 

week ending Dec 11

              Commitment of Traders

   

(speculative position in 000's of contracts)

 
 

Net 

Prior Week

Gross Long

Change

Gross Short 

Change

Euro

-31.6

-32.8

51.5

3.2

83.1

2.1

Yen

-94.4

-90.3

16.4

-4.6

110.1

-0.5

Sterling

28.0

27.3

64.8

-1.3

36.8

-2.0

Swiss Franc

3.2

0.6

11.2

-0.5

8.0

-3.1

C$

62.5

57.1

74.2

7.9

11.7

2.4

A$

103.0

92.2

139.5

3.3

36.2

-7.8

Mexican Peso

149.0

119.0

155.3

28.3

6.0

-2.0

             

 

 

***The net short eur oposition is the smallest in 15 months.  The gross longs are approaching the high for year.   The gross shorts are the second largest in the futures market, with only the  gross short yen larger.  

***The net and gross short yen position is the largest in five years.  

*** The gross long sterling position is larger than the gross long euro and Swiss franc positions put together, yet sterling is lagging on the crosses.

***The net long Swiss franc position is the largest in 15 months.  

***The net long Canadian dollar position is the largest in one month.  

***The increase in net long Australian dollar positions to a new record high is more a function of shorts covering than new longs being established.  

***The new record net long peso position was almost solely a reflection of the continued accumulation of a record large gross long position.

 

 

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Sat, 12/15/2012 - 21:07 | 3067578 Guy Fawkes Mulder
Guy Fawkes Mulder's picture

"normal" people will choose survival over being good
Jesus is the man through the ages who chooses being good over survival Judas says: "Where salt goes, water follows." * * *  "like sands through an hourglass, so will be the days of our lives" Shakespeare: man through the ages who hates tyrants Islam is very good. So is Buddhism. So is.... But the highest Freemasonry initiates are evil "illuminati" I think they have most likely infested Mormonism. Jesus is older than Mormonism. Freemasons, who may have come from Jacob, are not older than Jesus. Therefore Jesus is better than Jacob, when you understand that this is Hell and we must purify ourselves. Beware the false leaders of the Nation of Islam. Why does Greg have "Chronophobia"? Maybe he is very close to the last of those fearing the Mayan alignment. The older the star alignments, the older the message. https://sites.google.com/site/themattprather

Sat, 12/15/2012 - 21:02 | 3067567 Guy Fawkes Mulder
Guy Fawkes Mulder's picture

I haven't been here in a while. What's up all?

Sat, 12/15/2012 - 21:03 | 3067568 Guy Fawkes Mulder
Guy Fawkes Mulder's picture

I come seeking peace, not war.

Sat, 12/15/2012 - 19:23 | 3067356 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Marc I am the greatest currency trader to not trade FX in the history of the known universe so I will make sure to keep you posted when i see any interesting trends.

Right now due to economic policy I am looking for a dollar failure.  The USD has found equilibrium with most pairs so I will need to see what happens, but soon I think it will fail.

I'll keep you posted.

Sat, 12/15/2012 - 21:07 | 3067579 Guy Fawkes Mulder
Guy Fawkes Mulder's picture

But how will I know?

Sat, 12/15/2012 - 16:55 | 3067022 TraderTimm
TraderTimm's picture

Bitcoin: Beating every currency by a large margin. Keep on monetizing that debt, you sovereign idiots!

 

Sat, 12/15/2012 - 19:58 | 3067434 Papasmurf
Papasmurf's picture

Bitcoin, the ultimate ponzi scheme.

Sun, 12/16/2012 - 05:34 | 3068274 TraderTimm
TraderTimm's picture

Papasmurf, so quick to deride.

I'd put BTC against USD any day of the week. Care to do a mark-to-market comparison on a future date? I know who will be winning, I can tell you that.

 

Sat, 12/15/2012 - 19:19 | 3067350 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

lol bitcoin

Sat, 12/15/2012 - 16:43 | 3067004 NoTTD
NoTTD's picture

Deposited $50USD in AUS in 2010 at 0.98.   Earning 7% on a 60 month term dep plus the appreciaiton in currency exchange, so go AUD!!!

Sat, 12/15/2012 - 16:56 | 3067028 Orly
Orly's picture

Set an alarm for the next time it hits $1.06, then get out.  The RBA is already talking about intervention and a peg for the AUD but my bet is that all the talk will be rendered moot anyway.

Sat, 12/15/2012 - 16:28 | 3066972 1929agin
1929agin's picture

I don't have a book to sell, but would consider the narrow road . The narrow road is not easy to most, my alternate view, opinion is that the next few weeks, the USD will lead up to higher highs in 2013 and a corresponding lower equity market, commodity market and deflation will be most talked about along with Ponzi schemes .

Sat, 12/15/2012 - 16:53 | 3067020 Orly
Orly's picture

With all deference to Marc, I don't think he really needs to sell books to do okay.  I just mentioned the book because it goes anathema to all the gold-bug-crazy, Mad Max hoopla around here.  It is in line with what I have been saying about the dollar, as well; USD hegemony will be with us for a long, long time. His ideas are laid out and illustrated well and there can be no question that a serious reader should question the impending demise of the Dollar.  So, I'm talking his book.  :D

I am in agreement with what you said about the DXY getting ready to take off.  It has been coiling for a good while now.  Those moves higher would be in conjunction with a sharp move lower in equities.  I am not convinced that this is the Big One, though.  In fact, I would say it is probably a good foot-fake with the real declines in stocks to gradually sink from there.

:D

Sat, 12/15/2012 - 19:17 | 3067345 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Do not judge lest the be judged, oh fair orly.

Sat, 12/15/2012 - 19:39 | 3067394 Bay of Pigs
Bay of Pigs's picture

Orly is a perma bear on gold. Her beloved US doelarr is trading at 2005 levels when gold was $450. Now in 2012 gold trades at $1700 and is still in a 12 year GOLDEN BULL market. So who's been correct on this topic? The goldbugs that she bashes at every opportunity. Then she whines and complains when confronted by the facts, and says people are mean and nasty. LOL.

It's a shame she has such a closed mind and really narrow view on currencies and what real money represents.

Sat, 12/15/2012 - 16:22 | 3066965 Venerability
Venerability's picture

Marc has been excellent! the past few months and is now a must-read for anyone interested in Currency, even if you don't trade it.

Sat, 12/15/2012 - 15:52 | 3066905 Marc To Market
Marc To Market's picture

I will take another look at the sterling chart.  Thanks for the pointer.  I hope the book sustains your interest.  

Sat, 12/15/2012 - 15:07 | 3066766 Orly
Orly's picture

The 7:1 short/long yen ratio, the largest in five years, as you say, seems set up to cause the most pain to the most traders- just the way the market likes it...

_______________________

I would like to take an alternative view of the Price Action in the GBPUSD cross, however, and that is to say that the pair has been in a tightening triangle (wedge...) pattern since the pair stablilised after the onset of the financial crisis.  The top you mentioned should be drawn from the highs of August 2009 through the highs of 14 August 2011 @~1.662.  The bottom trendline is obvious on the Weekly chart.

The recent movement in the Cable is well within the confines of the triangle and do not represent a breakout necessarily, except to say that there may be a blow-off top to the triangle trendline to ~1.629.  After that, it should follow pattern and meet the lows of the triangle @~1.576.

It seems, though, that the last few weeks have given the GBPUSD its top because the normal pattern of trading the pair to the lower Bolli after a spike through the top Bolli (28, 2 STD...) has been disrupted and has seen the pair bounce off of the 28WsMA.  The last time this happened was in August of 2009 before the pair sold off for three weeks.

____________________

I got your book Making Sense of the Dollar yesterday in the mail.  I'm enjoying the insights so far.  Thanks for making sense!

:D

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