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Currency Positioning and Technical Outlook: Heavy Dollar Looks Likely

Marc To Market's picture




 

 

There are several incremental additions to our information set from developments over the past week.  The US manufacturing sector is stalling, with the ISM at new four month lows, and the sector failed to add jobs in April, for the first time since last September.  The euro area economy remains weak and the German engine also appears to be flat lining.  

Industrial output in Japan is stabilizing, albeit at weak levels, while domestic consumption remains restrained and wage growth is poor.  This suggests that only the weak yen component of Abenomics seems to be working.  Ironically, it is the UK's economy that provided the upside surprises in recent days and sterling was rewarded by being bid to new 11 week highs and finally reaching our $1.56 objective first cited here in late March.

In terms of policy, there were no surprises by the FOMC, but by including into the statement what Bernanke and others have already said about its flexibility, to quicken or slow the pace of its purchases in response to economic developments, drives home the point about the symmetry of its stance.  Although the recent FOMC minutes showed there was a discussion about tapering off purchases, it is still possible that the Fed may have to accelerate its purchases, especially if growth slows sharper than anticipated and if disinflation continues.    

The ECB delivered a 25 bp cut, but effectively kept the door open to more action, which could include another 25 bp rate cut in the refi rate and possibly measures to support the ABS market for non-financials.  Although Draghi seemed to suggest greater willingness to consider a negative deposit rate, our sense was that this was not a signal of intent or even desire.  We suspect that a negative deposit rate would be disruptive and another headwind for the financial sector and savers.  Draghi's rhetoric may have been aimed at demonstrating that the ECB had not exhausted its options. 

The US dollar fell against the major currencies, except the yen, last week and appears poised, from a technical perspective, to continue to trade heavily in the days ahead, though the week will begin slowly with both Tokyo and London markets closed on Monday.  

The Dollar-Index did rally in the second half of last week, but ran into a wall of offers near 82.50 a key retracement objective of the previous week's drop.  Provided this area holds, we are more inclined to see it fall toward 81.20 and maybe 80.70. 

The decline in the euro in the second half of last week largely held a trend line drawn off the April 4 and April 24 lows.  The trend line comes in near $1.3070 on Monday and  $1.3125 by the end of next week.  Initial resistance is see near $1.3160 and then $1.3240.  The euro has not managed to finish the North American session above $1.32 since Feb 20.  Good demand for euros around $1.30 has spurred talk of central bank interest.

After the conclusion of the Golden Week holidays, Japanese institutional investors are thought likely to begin implementing the investment plans for the new fiscal year.  We remain skeptical of the magnitude of the outflows.  Many core European bonds, like France, Belgium and Austria offer record low yields.  Yield in the large peripherals, like Spain and Italy are at multi-year lows.  Meanwhile, anecdotal reports suggest the foreign appetite for Japanese shares,  which in the year through mid-April, has been nearly $65 bln (more than twice the pace of the year ago period) may be slowing. 

Short-term speculative sentiment remains wholly yen negative and technically the market looks poised to try again at the JPY100 level.  A break of it could see a quick move toward JPY101.40.  Now only a break of JPY97 would dampen the constructive technical tone.  

It has taken a bit longer than we anticipated, but sterling has reached our $1.56 objective, but it does not look as if the move is over.   The next target is near $1.58, while a break of $1.54 would suggest a top is in place. 

The dollar-bloc finished last week on firm footing.  Although poor data have increased the risk that the Reserve Bank of Australia cuts interest rate as early as next week, the Australian dollar finished the week at three day highs.  A move now above $1.0325 would target $1.04.   Some Aussie bulls may also take heart from the recover in copper prices, which finished the week at its best level since mid-April.   Gold prices traded broadly sideways last week, but also managed to record a marginal new high since the dramatic sell-off in mid-April. 

The Canadian dollar recovered from the knee-jerk sell-off on news that the new central bank governor sounded a bearish note when talking about the need to boost exports to reinvigorate the economy.    The US dollar slipped as we anticipated last week into the CAD1.0070-CAD1.0100 area.   Our next target is near CAD1.0020. 

We turn more cautious the Mexican peso as the dollar approaches the MXN12.00 area.  The dollar bounced smartly off this area in mid-April.  Technical indicators suggest that with a running start the greenback can be pushed through there now.  However, our cautious stance is based on two considerations.  The government seems to be turning less receptive to further peso gains and the trade is very crowded.  The Mexican peso has been the strongest currency we monitor here, up about 6.5% year-to-date and strongest in the emerging markets as well. 

Observations on the speculative positioning in CME currency futures:

1. The net short position of the euro, yen, sterling and Canadian dollars were reduced, while the net long Australian dollar and Mexican peso were pared.

2.  The net Swiss franc position swung from long back to short.  The net long position was a function of reduction of gross longs and shorts, while the shift back to a net short position was function of the establishment of new shorts and paring of longs.

3.  The net short yen position was reduced for the second consecutive week, but participation was reduced as gross longs and shorts fell.

4.  There was no gross position adjustment of more than 10k contracts.  In fact, all but three positions (gross long euros, gross short yen and Canadian dollar positions) changed by no more than 6k contracts.

5.  There was almost a doubling of gross short peso positions to 7.4k contracts.  The increase snapped a five week streak in which the gross shorts were reduced.  However, peso gains after the end of the reporting period may have forced out these late shorts.

 

 

 

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Sat, 05/04/2013 - 15:40 | 3530351 The Heart
The Heart's picture

And the opposite of insanity, conscious right-minded commentary from one of everyone's favorite, Gerald Celente.

http://www.youtube.com/watch?v=NdpdbhyAYQg

 

Sat, 05/04/2013 - 15:29 | 3530341 StarTedStackin'
StarTedStackin''s picture

Insanity= doing the same failed thing again and again and expecting different results

Sat, 05/04/2013 - 10:37 | 3529913 RockyRacoon
RockyRacoon's picture

Is it just me or has it not been shown that lowering interest rates is not working?

That's a rhetorical question folks.

How negative would rates have to be lowered to for that tactic to work?

Define "insanity" -- anyone?

Sat, 05/04/2013 - 18:50 | 3530624 Lord Koos
Lord Koos's picture

"Insanity is doing the same thing over and over while expecting there to be different results." Albert Einstein

You could certainly make a case for the actions of the Fed fitting that definition. 

Sat, 05/04/2013 - 20:12 | 3530741 RobertMugabe
RobertMugabe's picture

Thanks for reminding us of the most over-quoted phrase of all time. But I'm sure you understand the global financial system better than the boardmembers of the Federal Reserve right? Ben Bernanke is "stupid" or "insane" right? Jackass

Sat, 05/04/2013 - 22:42 | 3531014 StychoKiller
StychoKiller's picture

-1, "The purpose of a System is what it does."

Sat, 05/04/2013 - 12:57 | 3530093 Aeternus
Aeternus's picture

in-san-i-ty

 

Definiton of INSANITY

 

1 : a deranged state of the mind usually occuring as a specific disorder (schizoprintia to infinity)

 

2 : such unsoundness of mind, currency or lack of understanding as prevents one from having the mental capacity required by law to enter into a particular relationship, status, or transaction or as removes one from criminal or civil responsibility for centrally planning the destruction of said currency and corzining an entire populace into utter ruin.

 

3 a : extreme central planning folly or unreasonable ZIRP.

3 b : something utterly foolish or unreasonable (read; The General Theory of Employment, Interest and Money written by the English economist John Maynard Keynes)

 

http://www.youtube.com/watch?v=mfXC9T8hzlY

 

 

 

Sat, 05/04/2013 - 20:15 | 3530746 RobertMugabe
RobertMugabe's picture

Thanks for posting that video of the old people talking about a bunch of vague stupid shit, that REALLY helps to understand Zero Interest Rate Policy. Another shitbrained ZH keyboard jockey deluded into believing that they actually know how the economic system works better than Central Bankers

Sat, 05/04/2013 - 21:07 | 3530827 Sabibaby
Sabibaby's picture

So you're saying Central Bankers know more than just printing money?

Tue, 05/07/2013 - 00:57 | 3536690 RobertMugabe
RobertMugabe's picture

I'm saying they know a fuckload more than the shit heads on these message boards who a read Peter Schiff book then think they're fucking knowledgeable economists while they pontificate "The Fed is printing money! Hyperinflation! I'm a jackass stacking peices of metal and I know more than Ben Bernanke!" I'm guessing your one of those shit heads I was referring to

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