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Currency Positioning and Technical Outlook: Underlying Trend Intact

Marc To Market's picture



One of the most important decisions participants in the foreign exchange must make is whether to view the dramatic pullback in most of the major foreign currencies seen in the early days of the new year as a reversal of the trend or as simply an overdue correction.   Our technical analysis sides with the latter and we anticipate renewed dollar weakness in the period ahead. 

We would be forced to reconsider if the euro fell through the $1.2980 area or if sterling fell below $1.60.  Although the dollar's sharp gains against the yen have left it over-extended, we see no compelling technical sign that a reversal is at hand.  Just like ECB's Draghi wielding Outright Market Transaction scheme drove down Spanish and Italian yields, Japan's Abe's rhetoric has been sufficient to drive the yen down without lifting a finger or spending cent.

Reports indicate the new Japanese government wants to see the dollar firm to JPY90.   The market seems quite happy to deliver it.  However, perhaps, like a dog chasing a car that doesn't know what to do when it catches it, so to0 will Abe find that success is not all that it is cracked up to be.  Japan will likely still be experiencing deflation, a weak economy and corporate governance challenges with the dollar at JPY90 as it did with the dollar at JPY80.  Moreover, the export stimulus of a weaker yen may be more apparent than real.  Ministry of Finance data shows that Japanese companies, like US multinationals, service foreign demand more through local production than from exports.  

Euro:  We think the fact that the euro held the $1.2980-$1.3000 area is important.  It corresponds to retracement objectives and the 50-day moving average.  It is also where the trend line drawn off the late July, Draghi-inspired, low and the early Nov low comes in.  The recover on before the weekend was also constructive.  It is true that the 5-day moving average has moved below the 20-day average for the first time since the third week in Nov.  However, we suspect that it is giving a false sell signal, generated by the sharp losses in a few days.  A move back above $1.3115 would strengthen our confidence and a move above $1.3150 would set up for another test on the $1.33 area.  

Yen: The JPY88.80 area is the next immediate dollar target.  As the JPY90 area is approached, it may be increasingly important to watch how the yen performs in Asia and whether Japanese corporates try to lock in profits or hedges.  Buying dollars on modest dips is likely to be the preferred strategy of the trend following and momentum traders.  We anticipate pullbacks to be limited to the JPY86.80-JPY87.30 range.  

Sterling:  The recovery before the weekend was not as impressive as the euro, but sterling did manage to hold above the $1.60 level.  This is where the trend line drawn off the July and Nov lows comes in.  A convincing break of it warns of potential for another 1% or so decline.  On the other hand, a move above $1.6150 help confirm that a low is in place and push through $1.62 would encourage another run at $1.6400.  

Swiss franc:  The technical outlook is similar to the euro.  The dollar did fray is downtrend line against the Swiss franc, but it did close poorly--near the session lows, setting up what appears to be a potential hammer in candlestick terms.  Initial dollar support is seen near CHF0.9190.  A break there could signal a retest on the recent lows just below CHF0.9100.

Canadian dollar:  The technical considerations are not generating strong signals.  Our bias is for a higher Canadian dollar.  However, there are more effective ways to express a negative view of the US dollar, and we note that often in a weak US dollar environment, the Canadian dollar lags on the crosses.  

Australian dollar:  The huge rally on Wednesday was nearly completely retraced by Friday morning, confusing the near-term technical outlook.  However, the strong close before the weekend and the fact that the $1.04 area largely held on the pullback, inclines us to look for follow through gains in the days ahead.  The $1.0530 area may offer resistance on the way back to test $1.06. 

Mexican peso:  The technical outlook is constructive for the peso.  However, the dollar is approaching the lower end of  its 15-month trading range against the peso, which is found in the MXN12.55-65 area.     This still gives the peso bulls some room to play.  The MXN12.85 area looks to provide the near-term cap. 

Turning to the Commitment of Traders, we recognize that the participation has slackened over the holiday period and most positions were only marginally changed.  Still, we share the following four observations:

1.  In the latest CFTC reporting period, speculative participants in the futures market generally added to long futures positions (except for sterling and Mexican peso), while reducing short positions (except in the Swiss franc).  

2.  For the first time since August 2011 the net speculative euro position is long.  That said, the gross euro short position is still substantial and is the second largest behind the gross short yen position.  

3.  For the third week in a row, the net short yen position was reduced.  It is interesting to now why.  It is more a reflection of trying to pick a bottom in the yen (gross longs have increased from 16.3k to 30.4k in the past three weeks) than taking profits on short yen positions (gross shorts have slipped from 117k to 111k).

4. The speculative community remains substantially long Canadian and Australian dollar and especially, Mexican peso positions.   We think these large currency futures positions should be noted, but not acted upon, without other considerations.  The foreign exchange market is more a cash than a futures market.    As we have discussed, there are no compelling technical indications that a reversal is at hand.

week ending Jan 1               Commitment of Traders  
    (speculative position in
000's of contracts)
  Net  Prior Week Gross Long Change Gross Short  Change  
Euro 5.1 -2.5 81.9 6.9 76.8 -0.8  
Yen -80.5 -85.6 30.4 3.7 110.9 -1.4  
Sterling 36.3 37.3 69.1 -5.3 32.8 -4.3  
Swiss Franc 11.6 11.4 23.8 1.9 12.2 1.7  
C$ 65.9 63.4 73.7 0.9 7.8 -1.7  
A$ 79.5 75.4 117.4 1.2 37.8 -2.9  
Mexican Peso 142.0 149.0 150.0 -7.7 7.9 -0.1  
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Sat, 01/05/2013 - 18:14 | 3125873 Kataphraktos
Kataphraktos's picture

Corporates have been mercilessly hitting the bid in USDMXN every time some mini-crisis out of D.C. drives the USD up 20-30 points. Meanwhile, the Mexican economy is showing little sign of slowing, and is probably benefiting from all the cheap labor re-patriating as job opportunities dwindle in the US. To note, remittances to Mexico from the US are decelerating rapidly. The Mexican CB is toying with the idea of raising rates a bit earlier than previously expected.

I suspect the days of a 12.55-12.65 floor on the USDMXN are numbered, and we could see it get pulverised as soon as this coming week.

Sat, 01/05/2013 - 13:51 | 3125338 GoldbugVariation
GoldbugVariation's picture

Thank you Marc to Market, this kind of commentary is extremely useful. 

Forex is an area where technical analysis can still be helpful.  Whether it's because a lot of people still believe it, or because the market trades based on broad patterns of sentiment which can last for days at a time, or because trend-following algos are in play, really doesn't matter - and truth is it's probably a combination of all the above.  Whatever the reason, it's helpful to know the turning points as there can be sharp reversals there.

Sat, 01/05/2013 - 12:49 | 3125236 Jack Sheet
Jack Sheet's picture

Moving averages only have significance because "many market participants use/believe them" - a circular argument devoid of any scientific underpinning.

Sat, 01/05/2013 - 11:21 | 3125112 francis_sawyer
francis_sawyer's picture

Every fucking algo on the planet is set to engineer a blow out of stops... It's called 'market manipulation'...

Therefore ~ 'technical analysis' [anymore] is only handy in determining the likely place that will happen... Technical analysis is about as useful [these days] as 'cleverly' informing people [for a fee] that the NFL games will kickoff at 1PM EST on Sunday (without handicapping which side will cover the spread)...

Casually ~ I believe that the dollar will weaken in 2013, but banking it all on 'technical breakdowns' of the Euro at the 1.30 level is just a bunch of headfake nonsense that some 'insider' will end up picking up pennies in front of a steamroller on...

It's a rigged game & SMART folks would be better off stacking [at almost any price]...

Sat, 01/05/2013 - 12:52 | 3125241 Jack Sheet
Jack Sheet's picture

Exactly - the uptrend is likely to continue unless it doesn't. Buy at 1.300001 with a target of 1.310567 with a stop at 1.2988.

Sat, 01/05/2013 - 10:56 | 3125084 CaptainAmerica
CaptainAmerica's picture

Let me speculate on the value of the U.S. Dollar...It will not be worth anything.

Sat, 01/05/2013 - 11:34 | 3125128 boogerbently
boogerbently's picture

Massive printing, huge deficit, non-stop borrowing to fund debt, a boat-load of new spending programs in the wings, over half the people getting govt. support......and gold declines because of "strengthening dollar"!?!?! 

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