This page has been archived and commenting is disabled.

Currency Positioning and Technical Outlook: Dollar Frustrates QE Bears

Marc To Market's picture




 

 

The US dollar rose to new multi-month highs against several of the major currencies, including the euro, Swiss franc, British pound and the Japanese yen.  The BOJ, BOE and ECB meet last week and none changed policy.  The Swiss National Bank meets on March 14 and is also unlikely to change policy.  The Federal Reserve meets the following week and is widely expected to stay its course.  It is not monetary policy then providing the new trading incentives. 

Nor can the dollar's gains be attributed to political uncertainty in Europe stemming from the inconclusive Italian elections, as was the case previously.   The immediate shock has worn off and Italian stocks and bonds have recovered the lion's share of those initial losses.  Fitch's downgrade of Italy's credit rating just before the weekend is unlikely to have lasting impact.  It is a catch-up move to where S&P has been.  Moody's is the outlier at Baa2.  A downgrade by Moody's should not be surprising nor providing new information to investors. 

The best explanation for this latest leg up in the dollar is growth differentials mediated by interest rate differentials.  The US-German 2-yea note continues to do a good job tracking the euro-dollar exchange rate, while the 10-year spread  between the US and Japan is highly correlated to the dollar-yen exchange rate.

The US-German 2-year differential averaged 18.5 bp over the past week, the highest weekly average since early January.  In the past week, the US 10-year yield rose nearly 20 bp, which the Japanese 10-year yield rose 3 bp.  The 10-year spread of 142 bp is the largest US premium since August 2011.  

Our fundamental and technical analysis suggest additional US dollar gains are likely.  Our next target for the euro is is near $1.2880 and over the slightly longer-term a return to the mid-November low near $1.2680.  The caveat is more often than not in recent weeks, the euro moves in the opposite direction (NY close to NY close basis) on Monday than it did on the preceding Friday.  We suspect the $1.3050-70 area should offer initial resistance.   The Swiss franc is tracking the euro with a modest lag.  The greenback is posited to move above CHF0.9600 in the day ahead  Support is seen near CHF0.9400.  

Sterling continues to be a dog, but it has yielded to Japan, the dubious honor of having the weakest currency this year.   Our next target for sterling is in the $1.4780 to $1.4820 band.    Bounces should be capped in the $1.5050 area.  

Many participants have their sights set on JPY100 for the dollar and 13,000 for the Nikkei. As we outlined, we are skeptical that Abenomics will be able to push the yen much further. To be sure, this is not to say the top is in place for the dollar, but that the bulk of the move is behind us and the market appears to have discounted more aggressive easing by the BOJ next month (large scale purchases of longer dated JGBs).  We see no compelling technical evidence that a reversal is imminent.  Previous resistance should now act as support and this is found in the JPY94.80-JPY95.20 area for the dollar. 

We remain bearish the Canadian and Australian dollars.  Stronger than expected jobs data failed to offer much support to the Loonie.  The greenback held support, we pegged in the CAD1.0200-20 area, and returned toward the session highs.  A convincing move above CAD1.0350 would signal a resumption of the move that we expect can carry the US buck to CAD1.05.  

The Australian dollar recovered after falling to to five month lows at the start of last week.   It stalled near $1.03, which now represents the upper end of the range.   Support now is seen in the $1.0180-$1.0210 range.  Although the RBA signaled not urgency to cuts further, we do expect another cut later in Q2.  

The central bank of Mexico surprised the market with an aggressive 50 bp rate cut before the weekend.  The peso quickly dropped, with the dollar rising toward MXN12.785. However, as officials signaled this to be a one-off measure and not the beginning of an easing cycle, the peso rebounded smartly and the dollar fell to new low for the week just below MXN12.65.  The resilience of the peso blunts the impact of the modest decline in Mexican bonds (bearish curve steepening) and although long peso positions are crowded, we still like it. 

We share the following observations about the latest CFTC report on positioning in the currency futures market.

1.  For the second consecutive week, the gross long positions in all the currency futures we trade was reduced.  It is not simply a matter of poor news elsewhere ant more, but the dollar has responded to positive US economic data.

2.  In the previous reporting period, the gross short positions add to except the euro and yen.  In the latest period there was an increase in the gross short position in all the currency futures.

3.  Of the 14 gross positions we tracked, there was a greater than 10k contract swing in five.  The gross long euro position was cut by 11.5k contracts, helping to lift the gross short position to its largest since the middle of Dec.  The bears added 12.6k contracts their short position in sterling, which at 79.9k is the largest since late 2011.  There was a 22.6k increase in the gross short Canadian dollar contracts.  Over the past four reporting periods, the gross short position has soared from 12.5k to 86.2k contracts.  The gross long Australian dollar and Mexican peso positions were cut  by around 17.5k contracts.  These are the only two currency futures were the net position remains long.

4.  The net short Canadian dollar position is the largest since March 2007.

5.  Although the net speculative position is still long the Australian dollar, it has been reduced sharply here in 2013.  In mid-Dec, the net long position stood at 103k.  As of the latest reporting period, it has been cut to a mere 7.1k contracts, the smallest since last July.







week ending March 3               Commitment of Traders
    (spec position in 000's
of contracts)
 
  Net  Prior  Gross Long Change Gross Short  Change
Euro -26.1 -9.4 63.4 -11.5 89.5 5.2
Yen -73.4 -65.3 51.0 -1.0 124.3 7.0
Sterling -43.8 -36.1 36.0 5.0 79.9 12.6
Swiss Franc -11.5 -8.2 7.1 -1.1 18.5 2.2
C$ -46.7 -21.4 39.6 -2.6 86.2 22.6
A$ 7.1 25.7 61.3 -17.8 54.2 0.7
Mexican Peso 93.5 105.0 103.0 -17.4 9.5 6.1

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 03/09/2013 - 13:31 | 3315003 Quinvarius
Quinvarius's picture

They are all printing and all paper exchange rates are 100% rigged with printing press backed derivatives.  As long as that is true, all currencies are 100% fungible and meaningless.  The Euro is the Dollar and the Pound.  If you want out of the game you have to buy physical gold.  If you stay in the game you need government and central banker contacts like, Soros has, to know where they are moving rates to next. 

Sat, 03/09/2013 - 14:48 | 3315209 Bam_Man
Bam_Man's picture

A++++

Exactly. F/X rates are completely rigged by governments through their Central Bank and TBTF Banking agents. Profits trading in these "markets" accrue only to those who have inside information and can front-run everyone else. If you are not connected and don't have insider access, you will be road kill.

Sat, 03/09/2013 - 13:35 | 3315008 Jack Sheet
Jack Sheet's picture

I'm long the dong myself.

Sat, 03/09/2013 - 12:00 | 3314822 NoWayJose
NoWayJose's picture

That's a problem with QEternity- there is no 'tradeable' Fed event for the speculators to hop onto. Thus the dollar will rise because there are events that can weaken or short the other currencies. It is also interesting that the currency markets are NOT predicting any economic recovery.

Sat, 03/09/2013 - 11:42 | 3314793 Fuh Querada
Fuh Querada's picture

Place your bets! We'll take the commissions, thank you very much.

Sat, 03/09/2013 - 12:37 | 3314904 Orly
Orly's picture

We don't pay commission, we pay spread.

Sat, 03/09/2013 - 13:09 | 3314969 Fuh Querada
Fuh Querada's picture

Semantics.

Sat, 03/09/2013 - 14:10 | 3315078 Orly
Orly's picture

Sez ewe.

Sat, 03/09/2013 - 10:51 | 3314719 nate
nate's picture

Is the Mexican peso the new reserve currency?  Short the Euro, Yen, Sterling and Swiss Franc, and go long the Peso.

Sat, 03/09/2013 - 11:23 | 3314760 Stuck on Zero
Stuck on Zero's picture

Yep.  Buy lots of silver pesos.

 

Sat, 03/09/2013 - 12:22 | 3314873 Prisoners_dilemna
Prisoners_dilemna's picture

Care to share why you think the Peso will be the new reserve currency?
The silver part is self explanatory. What else do you see factoring in here?
Last I read about Mexico and the Peso, Hugo Salinas Price was attempting to get silver recognized as currency, was failing I believe, and paper was king in Mexico. Did Price succeed somehow, somewhere?

Do NOT follow this link or you will be banned from the site!