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Dollar Firm, but Fundamentals may Challenge the Bulls

Marc To Market's picture




 

The dollar finished last week and last month on a firm note against most of the major and emerging market currencies, with the exception of the Japanese yen.  The key central bank meetings (RBA, ECB, BOE) and important data (PMIs and US employment) pose substantial event risk.

The dollar's strength is being driven by ideas that the US is closer to   exiting its extraordinary monetary policy before many other countries.  The backing up of US interest rates, anticipating that the Fed will soon be easing up on the accelerator by slowing the pace of QE purchases, has seen the US premium over Japan and Germany increase.

Bond markets in emerging markets, where depth and liquidity, is less, have sold off sharply. The rising yields there are a sign of capital leaving through a small door, and this is also reflecting in emerging market currencies.  The magnitude of the moves and the accompanying volatility has forced even some passive investors to adjust positions as well.

Technically, the dollar looks to be in a strong position.  The Dollar Index is firm, holding above $0.8300, a retracement objective, and remains near the 2 1/2 year high set on May 23rd near $0.8450.   The big trend line connecting DXY's peak in 2009 and 2010 comes in between $0.8620-$0.8640 and is important for the longer-term technical view.  

It is noteworthy that the euro was turned back, just when the dollar bears thought they were gaining the edge, in front of the downtrend line drawn off the early-Feb's and May's highs, which came in near $1.3080.  The euro's low thus far this year is about $1.2745, it has only closed once below $1.2800.

We suspect the euro bears may be frustrated by the fundamental developments in the form of upticks in the final reading of the May PMIs and an ECB that refrains from pushing the deposit rate below zero.   Nor do we expect US non-farm payrolls to re-accelerate significantly from the 152k of the previous two months, which is marked slower than then the 240k pace seen in the prior two-month period.  

The dollar did make new lows against the yen for the move, slipping to almost JPY100.20.  Although we think that bulk of the yen's decline is well behind it, tactically, it may be worth selling.  Good dollar bids have been seen on intra-day pullbacks.  The JPY99.50-JPY100.00 area was difficult to break on the way up and resistance is turning into support.  We suspect that under political and economic pressure, the BOJ will continue trying to stabilize the JGB bond market. 

For the second consecutive week, sterling successfully tested the $1.50 level and recovered, the second time even more than the first.  Still, sterling stalled at the 20-day moving average and the minimum retracement objective (~$1.5230).  Sterling is likely to be sensitive to three PMI reports due next week.  The last BOE meeting for Governor King is highly unlikely to see a change in stance.  

The dollar held support near CHF0.9500,  The bulls cannot feel secure until the greenback resurfaces above the CHF0.9680-CHF0.9700 area.  We note that the short-term (30-day) correlation between the Swiss franc and yen  is at 0.82, a nearly five year high.   We tend to think of the Swiss franc moving in the euro's orbit, but the correlation with the yen is nearly as high (euro-franc correlation is about 0.86).

The pendulum has turned against the dollar bloc.   The US dollar held support near CAD1.03 and quickly returned toward its recent high set near CAD1.0420.  We  continue to suggest potential into the CAD1.05-CAD1.06 range.  

Meanwhile the pace of the Australian dollar's descent has slowed, but upticks are minimal and brief.  Technical support is difficult to find much above $0.9400.  Australia report slew of economic data next week, but we suspect that after the RBA meeting (no rate cut, scope for lower rates if necessary), the data will be less significant than the market environment.  A move above $0.9700-$0.9730 is needed to lift the technical tone.  

The US dollar's gains against the peso accelerated in recent sessions and blew past the MXN12.60-MXN12.80 technical target we suggested last week.  The peso's weakness appears to be more a function of  the global developments and market positioning.  The dollar approached the MXN13.00 level before the weekend after finishing the previous week near MXN12.44.  It began the month below MXN12.15.  We still think the Mexican story has legs and look at the position adjustment under way to provide a new opportunity to participate in what is still a good fundamental story. 

Observations on speculative positioning in the CME currency futures:

1.  Position adjusting was minimal in the reporting week ending May 28.  On the gross long peso position was adjusted, liquidated in this case, by more than 10k contracts.  In fact, including it, there were only three gross positions adjusted by more than 7k contracts. 

2.  Generally, speculative positions in the currency futures were adjusted by trimming gross longs, except for sterling and the Swiss franc, and edging up gross shorts, except for the euro and Canadian dollar.  

3. The increase in the net short Australian dollar position was more a function of gross long liquidating than new shorts being established.  This cannot be appreciated by only looking at the net figures.  

4.  The late short yen positions seem vulnerable given the strength seen at the end of last week.  Though it is noteworthy that the gross euro position at 121.6k contracts is larger than the gross short yen position of 118.2k.  Sterling is not far behind at 110k gross short contracts.  

 

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Sat, 06/01/2013 - 14:48 | 3616788 Everyman
Everyman's picture

"Fundamentals" do not matter anymore in a rigged system. It is whatever the Central Bankers say it is until they are executed for the crimes they have perpetrated upon the Citizens of the United States.

Sat, 06/01/2013 - 13:41 | 3616638 akak
akak's picture

Sigh.

For the last fucking time, you head-in-your-ass twits, the "US Dollar Index" is NOT, I repeat, NOT, I repeat once again, NOT the same thing as the US dollar, nor is it in ANY way a measure of the true (purchasing) power of the US dollar, which only and always moves in one direction: DOWNWARD.

I instantly dismiss anyone who blathers about the "rising dollar", as there is no such thing, today or ever.  ALL fiat currencies constantly lose value ---- that is their inherent nature.  Speciously or disingenuously pretending to 'measure' the value of one depreciating fiat currency by comparing it to other simultaneously depreciating fiat currencies is nothing but a fool's errand and/or just more pro-fiat, pro-Establishment propaganda.

Please change your handle to Marc to Fantasy.

Sat, 06/01/2013 - 18:11 | 3617101 Marc To Market
Marc To Market's picture

akak must you be a jerk ?  Do I not talk about the dollar against a number of currencies on a bilataeral basis?  Does the discussion of the dollar index take up more than two sentences in this post ?  Who in the hell are you---"you dismiss"--.  The foreign exchange market is the largest of the capital markets with an estimated turnover of $4 trillion.  It is key for international trade and finance.    "All fiat currencies constantly lose value"--againdt what--don't say gold, as we know it is the price of gold that has fallen.    You won't know "Establishment Propaganda if it hit you in the head.  Doesn't Tylers at here at ZH offer analysis of the capital markets, including forex exchange?  May you are on the wrong site, mate.

Sat, 06/01/2013 - 19:44 | 3617233 akak
akak's picture

Marc, must you be an idiot?

I will stop slamming bullshit like your "article" above when the authors of said articles cease making egregiously fallacious arguments such as pointing to the meaningless and US Dollar Index (which is only a relative measure of the current exchange rates of the US dollar against other, simultaneously depreciating fiat currencies) as an actual meaningful measure of the absolute value of the US dollar, given that the value of the US Dollar Index has NO RELATIONSHIP WHATSOEVER to the true value --- i.e., the purchasing power --- of the US dollar. 

The fact that you even implicitly deny that all fiat currencies are invariably and always losing value only points out what a conventional, establishment-captured hack you truly are.

Maybe you are on the wrong site, 'mate'.

Sat, 06/01/2013 - 19:44 | 3617239 otto skorzeny
otto skorzeny's picture

The fact is the dollar is still the world's reserve currency and it has to be dealt with on that basis until it is not.

Sat, 06/01/2013 - 19:47 | 3617244 akak
akak's picture

Otto, that is quite beside the point that attempting to measure the true, absolute value of the US dollar using the relative scale of the US Dollar Index is not only misleading, but impossible.

Sat, 06/01/2013 - 15:02 | 3616817 Fuh Querada
Fuh Querada's picture

Yes, quite, but Mr. M. Market is an Investment Banker, and much richer than you!

Sat, 06/01/2013 - 18:16 | 3617105 Marc To Market
Marc To Market's picture

Not to confuse you with the facts Fuh Querada, but I am not an investment banker. I support my family wby analyzing the foreign exchange market.   What makes my analysis worht reading is not my wealth, as if you even know what you are talking about, but hopefully my arguments and evidence I marshall.  

Sat, 06/01/2013 - 15:07 | 3616826 akak
akak's picture

Whether he is richer than I is quite irrelevant to the factuality of the discussion.

And since when did relative wealth become the measure, and sine qua non, of existence anyway?

Sat, 06/01/2013 - 18:21 | 3617116 Miffed Microbio...
Miffed Microbiologist's picture

Richer? Perhaps. Wealthier? Who knows. Thank god ( oops.. I mean thank Big Bang or intelligent causation or Random vibrations in space time continuum... oh forget it I'm not sure what to thank!) for this site and all the people here who have explained the difference to me.

Miffed;-)

Sat, 06/01/2013 - 13:43 | 3616648 TheFourthStooge-ing
TheFourthStooge-ing's picture

Retarded faithful follower and flatterer of fiat is retarded.

Sat, 06/01/2013 - 13:44 | 3616650 akak
akak's picture

Your truthiness is very crustationary and quite something.

Sat, 06/01/2013 - 09:55 | 3616384 disabledvet
disabledvet's picture

There is a term in sailing called "luffing" where you're just trying to maintain full wind in your sail as you're tacking of (I think) going in a leeward direction. Basically it is "slow sailing"...but since everyone else is sailing slow too your just trying to maintain maximimum inflation. When dealing with this much Government and debt seems to me this is about the best you can do here. We're not powering ahead nor is anyone else. in many ways a strong dollar impedes recovery...but it is a needed thing to "pay for all that Government." I still believe the basic ZH view that the way this "boondoggle" will be paid for is by banks issuing their own private money not the Treasury...but we shall see.

Sat, 06/01/2013 - 09:37 | 3616363 Fuh Querada
Fuh Querada's picture

Looks like "Orly" went bankrupt

Sat, 06/01/2013 - 09:29 | 3616358 Quinvarius
Quinvarius's picture

All the central banks collude to maintain exchange rates within certain ranges.  There are no fundamentals.  There is no market.  The exchange rates are agreed upon and enforced.  The Dollar and everthing else in the FOREX market are the same currency as long as CBs collude.  All I see is a Euro at the bottom of its trading band and a dollar near the top of its trading band.  If you want to bet on what they decide to make the trading ranges after their next meeting, go for it.  But don;t tell me the paper is reacting to anything in the financial world when the dollar has been in the same place for 8 years. 

Sat, 06/01/2013 - 12:32 | 3616570 disabledvet
disabledvet's picture

Morgan dollars are coming. http://en.wikipedia.org/wiki/Morgan_dollar that's why those those rail road stocks do nothing buy go up. they exist as a proxy for a gold standard. since it is impossible for the Government to ever return to such a thing the banks...via equity prices and "cross shareholding arrangements" (railroads start buying mining companies) will. since outside of Goldman and Morgan Stanley the bulk of this funding can now be done in house you're gonna have a hard time downsizing these TBTF banks who probably caused the crisis in the first place. in other words "we'll give the Government and the taxpayer the debt and we'll take the war effort." with the EZ and Japan now heading South the only thing i find standing in the way of this thing is the fact that the bulk of the North American insurance industry resides in Connecticut. "they can finance a lot of things too" and with QE driving interest rates to at or near zero levels...a well managed and run insurance company provides a lot of liquidity for speculation as well. do more than get your popcorn here...need to get into the debate. "welcome to the only game in town for that."

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