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FX Outlook in Week Ahead

Marc To Market's picture




 

The foreign exchange market has become more treacherous than usual.  The main culprit is a growing realization that the low interest rate environment that has characterized the investment climate over the last several years is going to end.  Whether it is in 3 months, 6 months or 9, investors realize it is better to be early than late in adjusting positions accordingly.   Indeed, it is entirely possible that the low point in interest rates is behind us.  

That said, we suspect the first wave of the position adjustment is over and this may translate into a somewhat firmer dollar, and better performing emerging market currencies and a recovery in equities in the days ahead.  The dramatic moves last week seemed to have flushed out some of those who came to the party late.

The major currencies stopped near key technical levels.  For example, the Dollar Index bottomed in front of the 81.00, which corresponds to a 61.8% retracement off the early February lows.    For their parts, on an intraday basis the sterling and the euro rose through the 50% retracements of the large decline from early January and early February respectively.  Those who suspect that the move still has legs, their sights are set on the 61.8% retracements that are found just below $1.58 and $1.3345 for sterling and the euro respectively.  

The dollar reached out quarter-end target against the yen of JPY95 after the  US data.  This also appears to have completed a technical move.  The 38.2% retracement of the dollar's gains since the election was called in the middle of last November came in near JPY94.30.  The dollar's recovery before the weekend leaves a bullish divergence on the momentum indicators.  We look for a return to the JPY100 area. 

While the Swiss franc is widely understood to trade in the euro's orbit,  there has been a dramatic shift in recent weeks toward the Japanese yen.  The 60-day rolling correlation of the return (percentage change) of the Swiss franc and yen stand at almost 0.42.  From November through mid-March the two were inversely correlation.  Even as recently as mid-April there the correlation was near 0.  The euro and franc correlation is higher near 0.87, but has hardly moved since mid-April.  

The technical weakness in the yen we expect, implies a weaker Swiss franc.  The dollar has scope toward CHF0.9450-CHF0.9500, while the euro can move back toward CHF1.25 ahead of the SNB meeting on June 20. 

The Australian dollar remains a dog, still unable to sustain the slightest of upticks.  And the New Zealand dollar is performance is no better.  They were the two major currencies over the past week and month.  The fact that the Reserve Bank of Australia is still engaged in an easing cycle, while, as we will likely be reminded next week at the conclusion of RBNZ meeting, it is more likely to tighten than loosen and the drop in the kiwi makes it more likely, on the margins.

The Canadian dollar was the strongest of the major currencies before the weekend, bolstered by the strongest jobs growth in a decade (95k).  With subsequent loss in the US dollar, it has retraced 38.2% of the May rally (~CAD1.0014 to ~CAD1.0420).  However, it finished back above CAD1.02 suggesting the risk of some near term consolidation.  Provided the greenback is capped near CAD1.03, it appears technically vulnerable to slippage back toward CAD1.01.   The Canadian dollar looks set to continue to outperform the other dollar-bloc currencies. 

Last week, we warned that although the technical factors looked constructive for the dollar, the fundamentals, in the form of the ECB not delivering on the negative deposit rate (that Draghi said he had an open mind about) and additional aid for small and medium size businesses, were less supportive.  We also anticipated that the jobs data would not support notions from some Fed officials (and market participants) that tapering of the purchases of long-term assets could being as early as this month.   Now we suspect the dollar's down move has been largely exhausted and we anticipate a recovery in the dollar into a new trading range.  

Observations on the speculative positioning in the CME  currency futures:

1.  There were unusually large moves in the spot foreign exchange market in the three sessions since the CFTC reporting period ended.  For example, the dollar had a five yen range, while the euro and Australian dollar traversed a 2.5 cent range.  Sterling traded in a 4 cent range.  This makes the data less timely than usual.

2.  Gross long positions were generally reduced, except for the euro and yen.  Gross short positions were more mixed.

3.  There were three significant (more than 10k contracts) adjustments.  Gross short euro and yen positions were covered and long peso positions were slashed.

4.  As of the end of the CFTC reporting period, speculators have the largest gross short position in sterling.   Sterling rose to its highest level in almost 4-months after the reporting period ended.

 

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Sun, 06/09/2013 - 11:50 | 3639110 Bohm Squad
Bohm Squad's picture

Thanks for the post Marc...I guess I'm the 0.1% that enjoys reading your thoughts...even though I don't always agree with them.

I hope the downward pressure on the USDJPY is done...but you never know - we'll see if there is another scary week upcoming; I'm not sure everyone's thoroughly scared away from the JPY short, yet.  I'm still buying the USDJPY...let's see if it gaps up or down in five hours...lol.

 

 

Sat, 06/08/2013 - 19:01 | 3637967 Marc To Market
Marc To Market's picture

Fuh Querada--you don't get.  Your boss, assuming you have a job, pays you in fiat currencies.  You landlord, unless it is still the folks basement, takes fiat currencies for rent.  You grocer takes fiat currencies to groceries.  Do that with bitcoins or bars of gold or whatever non-fiat money you have and let us know how that goes.  All we go t is fiat currency.  So we can pretend we have something else or moan and whine about fiat currencies, or we can live in this world--try to change it yes, but accept it for what it is.  

Again, I am struck that the when the Tylers talk about the fx market, this type of criticism is not to be found.   

Sat, 06/08/2013 - 13:41 | 3637289 disabledvet
disabledvet's picture

Our economy is still a wreck...wages in fact are collapsing along with faith that the TPTB have any clue what they are doing. I think the dollar going to CRASH here. Get out while you still can folks. this PRISM thing is a global phenom...being used to target domestic not foreign entities. Islam will now start marching Forward as an Army of God descends on a weak and impotent West.

Sat, 06/08/2013 - 11:54 | 3637103 Tinky
Tinky's picture

I'm wondering what percentage of ZH readers are fx traders? 1%? .1%?

Sat, 06/08/2013 - 19:53 | 3637960 Marc To Market
Marc To Market's picture

Tinky, try to think bigger.  How many ZH readers have equities and fixed income outside of their domestic markets ?  The currency market is the key to the total return of those investments.   I don't get why you want to hold me up to a higher standard than others here at ZH?   Do not the Tylers discuss the fx market?  Do you ask them WTF?  How many ZH readers invest in JGBs or Japanese equities?  Yet the Tylers have written about that too ?  It is not like a dupe you with a misleading headline about what I am writting about.  So if you are not interested in fx, my advice is simply don't read about it.  It is the largest of the global capital markets and offers a window glass to look at politics and economics rather than a key hole, but by all means suit yourself, but don't assume every one else at ZH has such a narrow view.  I am going to watch the Blackhawks hopefully make it to the Stanley Cup and I don't have money on the game.  I will still enjoy it.   

Sun, 06/09/2013 - 15:08 | 3639502 Cosmicserpent
Cosmicserpent's picture

Keep up the good work! At the very least, the nutty goldbugs should be paying attention to the correlations in various currencies to their precious metals.

Sun, 06/09/2013 - 01:22 | 3638590 Tinky
Tinky's picture

Marc –

How on earth are those "who have equities and fixed income outside of domestic markets" likely to benefit from your technical posts which often imply very narrow trading windows? The title of your post is "FX Outlook in Week Ahead", for God's sake! 

How, exactly, are the vast majority of readers (i.e. non-traders) likely to benefit from opinions that end with "better performing emerging market currencies and a recovery in equities in the days ahead"? The days ahead? Sounds very valuable to those who think of their investements in terms of years.

Virtually every aspect of this, and many of your posts, caters to those who have an interest in narrow trading windows. The reason that I don't jump down Tyler's throat is because his fx-related posts are, in contrast, generally more expansive and connected to broader themes to which most can relate.

I attended Blackhawk playoff games the last time that they faced the Bruins in a final. Hull and Mikita were on the team. I grew up in Evanston, and benefitted immensely from front-row seats, compliments of a friend's father who was the President of American National bank.

Sat, 06/08/2013 - 12:34 | 3637168 Fuh Querada
Fuh Querada's picture

Doesn't matter, you can make a shitload of fiat by reading this

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