Currency Positioning and Technical Outlook: How Stretched?

Marc To Market's picture


There have been some large moves in the foreign exchange market in recent days.  The euro posted its largest rally in four months last week.  The yen has fallen to its lowest level against the dollar since June 2010 and extended the declining streak to nine consecutive weeks, something not seen since 1989.  The Canadian and Australian dollar rose to multi-moth highs, as did the Mexican peso.  


In last week's technical note, we suggested the key question whether the sharp drop in the major foreign currencies following the avoidance of the full fiscal cliff in the US was trend reversal or overdue correction.  We favored the latter and looked for the underlying trends to continue.   They did.  


Now market participants face a different question.  Given the out-sized moves, have the trends become stretched?  The answer, we propose, is more nuanced than last week.  There is not one answer for all the major currencies we review here.


For our purposes here, the currencies can broken into three buckets:  the European complex (euro, sterling and Swiss franc), the Japanese yen, and the dollar-bloc (Canadian dollar, Australian dollar and Mexican peso).  


In the European complex, there are mixed technical readings.  The euro has led the move and remains the strongest from a technical point of view.  It has pushed through the mid-December and early January highs near $1.3300.  It has posted two strong advancing sessions to finish the week.  Relative strength index, MACDs, and the crossing of the 5-day moving average above the 20-day moving average all suggest that there is room for follow through buying.  The one cautionary note is that the euro finished the week above the upper end of the Bollinger Bands (2 standard deviations above the 20-day moving average).  Even though the changes in the euro are not normally distributed, making standard deviations a somewhat less useful concept, it is still a rare occurrence.  The three times it happened in H2 12, the euro fell within a couple of sessions.  


Sterling has lagged and the technical condition is weaker than the euro.  Sterling faces an immediate hurdle in the $1.6160-90 area.   We are inclined to see this area hold. On the downside, a break of $1.6080 warns of re-test on the $1.60 area and the uptrend drawn off the early June 2012 lows.  


The Swiss franc's technical condition lies between the euro and sterling.  The euro closed above its 2012 high against the franc, while the franc gained about 0.75% against sterling last week.  The price action against the dollar is not generating strong signals.  


The yen's slide has been relentless.  The Japanese government has cited JPY90 as a desired level for the dollar.  While we had been thinking that there would be profit-taking as that level was approached, we are becoming more concerned about an overshoot, in which case the JPY93-JPY95 area is possible.  Relative strength and MACDs are not indicated an over-stretched market.  Nor are there any bearish divergences.  The one cautionary note is that the stochastics turned down.  Initial support is seen near JPY88.45.  


Within the dollar-bloc, the price action of the Australian dollar and Mexican peso appears the most stretched.  For the fourth time five months, the Australian dollar tested the $1.06 area and ran into a wall of offers.  We see risk that profit-taking pushes it back toward $1.0460-$1.0500.  


The proverbial elastic looks set to snap back in the Mexican peso.  The US dollar briefly fell below MXN12.60 to near the 2012 low set in March near MXN12.55.  The fading of the downside momentum warns of the likelihood of a dollar bounce.   Long pesos seem to be a crowded trade, but the relatively high yield gives the bulls some cushion.  The corrective move we anticipate could see the dollar move back into the MXN12.80-MXN13.00 band.  


The Canadian dollar is also vulnerable from a technical point of view.  Over the past three months and past week, the Canadian dollar has been the second weakest of the major currencies against the dollar  behind the Japanese yen.  However, it now looks better on the crosses than against the greenback.  In particular, appears set to recover against the Australian dollar and Mexican peso.  


Lastly, turning to the Commitment of Traders report from the currency futures market, we share the following observations:


First, as the table below illustrates, in the week ending Jan 8, speculators reduced the net positions in all currency futures we review except the Australian dollar. For most of the currency futures this mean a reduction of net long positions, but in the yen this meant a decline in the net short position.  In fact, it was the fourth consecutive week that the net short yen position was reduced.  


Second, this may have helped explain the sharpness of the moves in the second half last week, after the reporting period had ended.  Speculators may have had to scramble to re-establish position in the wake of the ECB's press conference.  


Third, the net position in the euro switched back to short.  Recall that in the reporting period ending Jan 1, the net euro position had swung to the long side for the first time since August 2011.  This was a reflection of longs taking profits rather than new shorts being established.  Indeed, the gross short positions were trimmed.  



week ending Jan 8               Commitment of Traders  
    (speculative position in
000's of contracts)
  Net  Prior Week Gross Long Change Gross Short  Change  
Euro -8.0 5.1 66.3 -15.6 74.4 -2.4  
Yen -74.1 -80.5 32.1 1.7 106.2 -4.7  
Sterling 25.9 36.3 60.5 -8.6 34.6 1.7  
Swiss Franc 10.3 11.6 19.6 -4.2 9.3 -2.8  
C$ 64.0 65.9 70.4 -3.2 6.4 -1.3  
A$ 80.3 79.5 122.3 5.0 42.0 4.2  
Mexican Peso 140.0 142.0 148.3 -1.3 8.8 0.9  

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i8emallup's picture

CEOs are working their will now, as we speak, in the oil market.

Reps tell clients all the time "Oil and corn are an asset class that you need to invest in for the long term."

They buy from the bank's inventory, AND PAY THE BANK A COMMISSION, how awesome is that.

If oil goes down a little, they get their bud Benjamin Satanyahoo in Isntreal to threaten to drop nuclear bombs on Iran.

Heres another example, you can get Boeing's stock to go down if you have a gremlin unscrew the gas cap and send the plane on a trip.  THen, after you complete a stock buyback, you announce that it was  a quick an minor fix, and, poof, your new earnings per share went up, and you didnt even have to sell any more planes.

Let me know if you knead any more brite ideas.

disabledvet's picture

awful quiet in here. "the way i like it" actually. not going to try and change your style but my first thought is "what's the plan, Stan." reading from the script is one thing but when the Director yells "ACTION" that's because that's what he wants. My first thought is context..namely a raging bull market in the USA that simply doesn't exist anywhere else but Australia right now and maybe Sweden (as you know my favorite currency.) the technical damage to markets in Europe, China and Japan are so total and complete its really hard not wanting to "pile on" by imaging the New Management on Wall Street taking a Walk on the Wild Side in the currency space. I have no inside knowledge of what a "Structured Products Division" of one of these mega Banks looks like but I imagine they are HUGE right now. Know you have experience working with such institutions I would think this could glean some valuable insight into "what they're up to" by simply asking the question "what would you be advocating if you were working with the new CEO of Citigroup?" And answering it...preferably here of course. If i were that CEO my target would be the Canadian dollar (and for the record i don't agree with any of this stuff...but i've done well for myself by understanding the people who run this country are not me and then trying to gauge how "not me" will do. So far "not me" has done quite well actually and i'm glad listened to "him.") and i would be "ordering my troops to destroy it." they have valuable things in that country and if i were that banking CEO i would want them "a lot cheaper." So my first step would be to call up my buddies in Sweden who I like and "see what we can cook up." Then I would be wanting to talk to the other "financially driven folks" (Singapore, China, Great Britain) to see how many i can get on board for "Project Mallard." Is this illegal btw? Is this something the banks would even do? Just curious. Anywho I would expect the Canadian defenses to be STRONG. They have massive amounts of oil and natural gas they are exporting to the good 'ol USA, they are big in the precious metals of the biggest outside Russia i imagine...and they would have friends in these same countries who would defend them from such a "machination." Having said that the inventory builds in the USA for energy are truly massive...and North America is working yet again on a super mild winter. the USA being the most dynamic transportation market in human history provides a powerful incentive to "drive down price" thus in many ways helping both economies (Canada and the USA) by increasing disposable incomes, providing more diffuse investment opportunities...ideally something that will help grow the US economy thus creating more demand for Canadian products etc.) So my question is this: "what would such a trade look like if you and your team were to structure one and what impact would this have both on the markets and economies of the USA and Canada should it be done?"