Currency Positioning and Technical Outlook: King Dollar Returns?

Marc To Market's picture

The US dollar rose against all the major currencies in the past week.  It seems clear that the greenback's gains were not a reflection of domestic developments, though it is true that US data stands in stark contrast with nearly ever other major country.


Consider what has been reported in recent days.  The minor contraction in Q4 GDP was revised away and replaced with a minor expansion.  For sure, the US economy stagnated, but a positive stagnation is preferable to a negative one, in the same way that a little  inflation is preferable to a little deflation.  The larger than expected rise in the manufacturing ISM lifted this much followed indicator to its highest level since mid-2012, suggesting an encouraging resilience.


However, the sequester, which is expected to shave at least 0.5% off growth this year, according to the Congressional Budget Office, was not avoided by the politicians.  It makes the assessment of the underlying economy more difficult.


Early indications suggest that the economy is weathering the end of the payroll tax holiday with little fanfare.  The personal consumption expenditures rose 0.2% in January.  The 6- and 12-month average is 0.3%.  February auto sales were stronger than anticipated and remain near the multi-year high set late last year.  They stand in stark contrast to the collapsing car sales in Europe.


Nevertheless,  the main event has been the uncertainty injected by the Italian election.  While even in the best of conditions, such as Berlusconi's last landslide victory, it took several weeks to cobble together a government.  The emergence of Grillo's 5-Star Movement as the largest single political party has created an extra layer of complication.  It is not clear how much control or influence he has over those that run under his banner and it unclear what it will ascent to.


Some kind of coalition or government with a fixed agenda to make way for another election still seems to be the most likely outcome.  The agenda may include as few as three items--election of the next president in mid-April, electoral reform, and some sort of growth measure. This last item need not antagonize Brussels as 1) in the last days of the campaign Monti seemed to recognize the necessity; 2) Italy's budget deficit is among the smallest in the euro area, 3) it is the only country that ran a primary budget surplus in 2012, 4) the economic contraction appears to be deeper and more protracted than expected previously.


The Italian elections had farther reaching implications because for the first time, a euro area country went to the polls and did not vote in favor of austerity.  Japanese voters at the end of last year did not vote for austerity. Some might think that the Americans did not either, but the federal deficit has fallen by 3.1% in the 2009-2012 period, the largest decline over a 3-year period in a generation.  And the sequester calls for another $1.2 trillion in spending cuts over the next decade.


In any event, there is a concern that the vote in Italy marks the end of the complacency latency phase induced by the ECB's commitment to do what is necessary to preserve the monetary union.  During this period, Spanish and Italian bond yields fell sharply.  Deposits rose.  Equity markets gained.  Speculators in the futures market went net long euros for the first time in more than a year.  Growth in the euro area slowed and even Germany did not escape and contracted a sharp 0.6% in Q4.


The EU seemed more open to granting at least some countries an extra year to reach the fiscal targets.  Many officials seemed to be in self-congratulatory mood.  Many pronounced the end of the crisis.  Many thought that with euro zone taken care of, investors could turn their attention back to the QE3+ by the Federal Reserve, which they perceived to be debasing the currency by $85 bln a month (in long-term asset purchases).


The Italian election results, and the trouncing of Monti, shattered the illusion.  Yields have risen.  Equity markets have been hit.  Speculators in the futures market have switched, and for the first time since late July 2012, they are net short euros, as you can see below.


We sketch out the short-term technical outlook, which compliments and updates the long-term technical outlook we provided last week.



Euro:  The month-long slide is carrying into March.  The euro broke below $1.30 for the first time since mid-December.    While momentum indicators are getting stretched, there is not divergence.   Our next target is near $1.2880, the 50% retracement of the gains scored after ECB's Draghi promised to do whatever it took (within his mandate, broadly interpreted).  The 200-day moving average is a bit lower, near $1.2840.  A break there signals a move toward $1.2700.  On the upside, the $1.3070-$1.3100 should now offer resistance. 


We continue to point out that the US-Germany 2-year interest rate differential continues to track the euro-dollar exchange rate closely.  The spread itself is driven by the German 2-year.  Recognition of the passive tightening of monetary conditions and interest in the higher yielding periphery, saw the German 2-year yield rise from around minus-10 bp in early December to 32 bp in late January.  It finished last week near 3 bp.   Ahead of the ECB meeting, amid increased talk a rate cut following the poor PMI figures, and what is likely to be protracted political uncertainty in Italy, may see the German 2-year yield slip a bit more.  We suspect, however, that it is too early for the ECB to cut rates and that some position adjustment is likely prior to its meeting on March 7. 


Yen:  The heightened political tensions in Europe and the decline in US yields has not been sufficient to lift the yen.  The dollar's lows against the yen were set at the start of last week just below JPY91.  It recorded higher lows each day thereafter.   We remain skeptical of the renewed yen weakness, but respect the price action.  After taking profits in February, leveraged accounts are believed to be re-establishing positions and interest in JPY100 strike calls for 2-3 months tenor has been reported. 


Sterling:  The attempt to stabilize after the recent loss of the UK's AAA rating was dashed after the dismal PMI reading.  Sterling was pushed briefly below $1.50 for the first time since July 2010.  The next technical objective is near $1.4855, which corresponds to a retracement objective of the rally from $1.35 in early 2009.   Previous support in the $1.5250 area should now act as resistance.   


Canadian dollar:  The US dollar rose to CAD1.0340 early Friday, its highest level in nearly 9 months, but reversed lower and finished the day on its lows.  There is also a bearish divergence with the momentum indicators.  This suggests that the move since February is complete and a correction is likely at hand.  A dollar pullback toward CAD1.0170-CAD1.02 maybe seen in the coming days and test the breakout from the downtrend going back to Oct 2010. 


Australian dollar:  The Australian dollar fell to new multi-month lows before the weekend and finished near the lows.  Bounces are seem to have become shorter and shallower over the past several weeks.  The $1.2040-60 area should cap up[ticks if the downward momentum is going to be maintained.  We look for a test on the $1.01 area in the days ahead. 


We share the following observations of the speculative positioning in the futures market.


1.  The gross long position of the all the currency futures were reduced.  The gross short positions were increased in all the currency futures by the Japanese yen.  The largest position adjustment were in build of short euro (22.3k contracts) and Canadian dollar positions (37k contracts).


2.  The position adjustment in the Canadian dollar futures has been particularly violent.  As of mid-January, the net long position stood at 68.5k contract.  At the end of the last reporting period, it was net short 21.4k.  That this was more a function of shorts being established rather than longs being cut, it warns that some longs might be trapped and may sell into the first few corrective bounces.  


3.  With the switch in the most recent reporting period of the euro and Canadian dollar, now the net position is short for all the currency futures we track here except the Australian dollar and Mexican peso.


4.  The net long Australian dollar position is the smallest since July.  The net long Mexican peso position has fallen by 47k contracts in a little more than a month, which is larger than the net position in all the other currency futures except the Japanese yen.

week ending Feb 26               Commitment of Traders
    (spec position in 000's
of contracts)
  Net  Prior  Gross Long Change Gross Short  Change
Euro -9.5 19.1 74.8 -6.2 84.1 22.3
Yen -65.3 -65.9 52.0 -2.7 117.3 -3.2
Sterling -36.1 -23.4 31.1 -9.5 67.3 3.2
Swiss Franc -8.2 -0.7 8.2 -2.9 16.4 4.6
C$ -21.4 19.4 42.2 -3.9 63.6 37.0
A$ 25.7 44.0 79.1 -8.8 53.4 9.5
Mexican Peso 105.0 116.0 120.4 -4.2 15.6 7.1

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
suteibu's picture

"However, the sequester, which is expected to shave at least 0.5% off growth this year, according to the Congressional Budget Office, was not avoided by the politicians."

I'm trying to remember when the CBO was right about anything.

disabledvet's picture

"surprising strength in the dollar" is still my "financial media story of the year play." i'm playing around with the treasury thing cuz it makes for good copy...but you can lose everything waiting for equity markets to correct. (not the least being the opportunity cost of being out of the market) i still don't see the EXTRA inflation (we've had a huge run up in cost push inflation ever since QE started...but the real meaning behind QE's lessening impact is that the higher prices have forced all of us to cut back on things thus reducing growth and spending as a whole. combined with "every equity bounce meaning another massive income loss" and i think we might hit an "economic air pocket" here. we'll see if there's blowback on the downside as i'm betting. "politically speaking" now would be the time to have it if there is.

Edward Fiatski's picture

BTW, Marc -- German & E-Z Services PMIs for Feb are out on Tues @ 9:00 GMT.

More ammo for the ECB if they come in lower than Exp.

Edward Fiatski's picture

Good article as always, Marc.

I agree, yet again, on EUR levels. To get to 1.28 it will take some interesting catalysts - perhaps, dovish ECB comments next week with a hint of IR reduction, since PMIs all came in lower?

We'll see. :)

P.S. Cute - so many downvotes, must be a lot of stops below 1.2970. LOL

Mr. Hudson's picture

G. Edward Griffin discusses the history of fiat money in his book "The Creature from Jekyll Island”, and he makes a very interesting observation. Throughout history, in every case where fiat money collapsed, there was always a severe deflation and shortage of the money before hyper-inflation set in. This was due to government intervention with regulations such as price and wage controls, contraction of credit and the raising of interest rates. It would make sense that we will see a surge in the dollar, which will push gold down even further. But, this could provide an excellent opportunity for buying physical gold.

Fuh Querada's picture

Gee, you must make a shitload of money on the FOREX with all this high-powered analysis.

Lordflin's picture

'Italy is the only European country to have voted against austerity...' Hmmm... Guess I have been following a different Europe...

Marc To Market's picture

I bite, in what other country did a majority vote against austerity ? What Europe have you been following ?  Did you bring enough to share?   

Lordflin's picture

Well... France comes to mind.... The UK is strongly considering backing out of the EU... Although I will admit they are more tied to US than Europe... Iceland declared war on the banks... Spain has been on the verge of splitting apart at the seems... Then you have the massive anti austerity riots that have taken place all over Europe... And I do realize that Hollande has backed over some of his promises to the French, but he came in on anti austerity platform.

Marc To Market's picture

Hollande promised higher taxes on the rich and corp to avoid spending cuts and still make the 3% deficit target.  The UK's EU plans---a referendum IF the Tories are re-elected and IF the treaty with the EU is changed is not the same thing as austerity. Was not the vote for the Tories in the UK a vote for austerity ?  Iceland's "war" on banks is also not the same thing as austerity.  


Perhaps we disagree on France, but none of your other examples show how my reading of the Italian election--as the first in which a majority have not supported austerity is wrong. 

Lordflin's picture

The Tories split their vote with the lib dems.... Farage, strongly anti bank, and anti EU, is gaining influence... Came close to pulling out the Eastleigh bi-election (only lost by 1700 seats)... Iceland repudiated it's debt and began jailing bankers... Call it what you want... As to Spain... Well, there is so much smoke flowing over the countryside it is impossible to see through...The only reason Greece did not go down that road is that it was one of the early ones to pop and the EU was able to throw it's might behind bringing the Greeks into line... A failing effort as it seems... One of Hollande's first acts of business in France was to restore the retirement age.

And, btw, I was not the one who gave you a down flag.... Suppose I could prove it to you by down flagging you, but that strikes me as disrespectful in the midst of a debate.

Marc To Market's picture

I would discount Iceland as it is not a member of the EU.  The split in the UK obviously was not very even and the LibDems have supported the government's austerity.  That is the issue we are discussing.  The recent byelection in the UK was indeed interesting as the Tories came in third, but it is just a byelection.   The restoration of the retirement age by Hollande was limited.  His version of socialism, it seems to me, is neo-liberalism slowly.  I think my generalization is still valid--the Italian election was unlike anything we have seen thus far in Europe--austerity has undermined the political center.   Many be be critical of QE, but austerity does not seem to be the answer either.  

flags?  are they really relevant ?  flag use/readers=~zero

Lordflin's picture

So far as Hollande is concerned... there is little question he fell out to the right of expectations, and as a consequence has managed to irk almost everyone... But the sentiment that swept him into power was not dissimilar to that which set the torch under the Italian election... That aside, I will give you that it was notable... And a harbinger of coming events if the news today out of Spain and Portugal are any indication...

Orly's picture

I would contend that this is not really a rejection of austerity per se but a rejection of perceived "outsiders" (i.,e., global banking shills...) telling the Italians that they have to suffer for the good of Brussels and UBS.

They probably wouldn't mind tightening their belts if it were a local person asking them to do that; someone whom they could respect.  It seems they have zero respect for Monti (obviously...) and Draghi and they don't want to suffer so that banks don't have to take the losses they rightly deserve to take.


disabledvet's picture

You could argue Germany has voted against austerity by "obliterating Greece." clearly that was a policy choice ("not coming to Greece's aid but to Deutche Bank's aid" instead) so events as they have transpired did not have to happen in the manner they did. It is/will be very interesting to see the consequences. Clearly it's good for the German voting booth but a horrific negative for the Eurozone project. In a sense the whole Masstricht Treaty has been scrapped in favor of a "strong central core" around which all other European nations will orbit (Britain include???!!!) Much as New York was to the USA during the USA's industrial revolution at the turn of the 19th to the 20th centuries so it would appear Germany is to Europe at the turn in this century. This does give at least a visage of stability and in that sense is euro positive...but the irony that their association with fossil fuels is about as bad if not worse than as ours should be lost on no one. "the Oil curse" has now impacted the West en toto. I hate to remain consistent but i still like Sweden over all others in the totality of the "European play." (and that does include Russia i might add which has come far from its Soviet days. Spain of course is another interesting case...but other than Franco and "Real Madrid" i am very ignorant of this place.)

Orly's picture


They said, "We're not austering anything.  Let it crash."  And it did.

And they lived happily ever after.


SAT 800's picture

experimenting; trying to figure out how to put a funny comic of floor traders, (a jpg.), on here; but alas, a computer programmer I am not.

Orly's picture

You have to have permissions to post.

Take a look at some trendlines and channels...

USDCHF bottoms from August 08, 2011 to January 27 2013.  Draw an equidistant channel with the tops at January 01, 2012 and July 15, 2012.

The stick is going to be a tremendous mesa formation with the left shoulder at .9593.  A break above that level confirms the up-channel and negates the head and shoulders.  A rebuff there sends the pair lower- maybe much lower.

But with the Euro having a rough time here, it seems the channel would be stronger.  Either way, watch .9593 for rejection.


Edit: Typo on the numbers levels.  .9593 is correct.  :D

DavidC's picture

" the same way that a little inflation is preferable to a little deflation."


Look back from 1800 to 1900 in the US, mild deflation across the Century as a whole, that didn't seem to do the US any harm. The only sector that gains, overall, from inflation is the Ponzi scheme known as central banking.



new game's picture

tptb are ever present and this setback is only temporary

they do in the end have the power to create money

and pick winners and loosers

they win, the people lose

don't be fooled by "people waking up".

just the way it is