Price Action Clouds Near-Term Dollar Outlook
It had looked easy. Strong US data underpinned speculation about Fed tapering later this month, while other major central banks do not appear close to reduce stimulus. After generally trading heavier over in the July-August period, the US dollar was going to stage a recovery.
That was before the disappointing August jobs report and news that the June and July employment gains were not quite as strong as previously reported. In fact, the three-month average private sector payroll growth stands just below 158k, the lowest since last October. The report caught the market leaning in the wrong direction.
The dollar weakened and US yields fell amid jitters about the Fed's tapering. This in turn helped spur an apparent risk-on move, with equities and emerging markets staging an impressive recovery. On top of that Russia's Putin made some bellicose remarks about aiding Syria that also undermined the US dollar and equities.
The price action served to cloud the dollar's near-term technical outlook. This may produce a consolidative market rather than a trending market in the days ahead. This may mean a heavier dollar bias. There is scope for the Dollar Index to move back toward 81.50.
This means the euro likely put in a near-term low near $1.3100 and has potential back toward $1.3220-50. Sterling too looks to have put in a low before the weekend near $1.5565. Last month's high, almost $1.5720 is the next immediate objective. In a similar vein, the greenback has stalled against the Swiss franc at the 50% retracement objective of its decline since early July. Assuming then that CHF0.9450 marks a top, the initial target is just below CHF0.9300.
The dollar traded above the JPY100 for the first time since late July in the second half of last week, after having broken above the downtrend line drawn off the year's high struck in late May near JPY103.75. That trend line came in near JPY98.70 on Friday and it provided the greenback with some support.. This area (~98.55) corresponded to a 50% retracement of the dollar's bounce from JPY96.80 on August 28 to JPY100.25 on September 6.
That downtrend line was the upper boundary of a large triangle pattern. As we noted, this pattern is often subject to false breaks. Yet, unless the JPY98.50 area breaks, we prefer the upside and look a move back toward JPY99.50-70 in the days ahead.
The dollar-bloc is particularly interesting from a technical vantage point. The Australian dollar appears to have carved out a double bottom and is testing the neckline near $0.9200. A convincing break would project a move toward $0.9500, although the $0.9300 area may prove difficult to breach initially. Initial support is seen around $0.9100.
The constructive technical view dovetails with our favorable near-term fundamental outlook based not so much on economics, but politics. The weekend election is likely to lead to a new government that campaigned on a platform calling for an end to the carbon/mining tax. This may encourage speculators to anticipate new foreign capital inflows.
The better than expected Canadian employment report and the move back above 50 in the IVEY survey, in the context of the disappointing US employment data spurred the biggest US dollar drop (against the Canadian dollar) since late-May. With the losses, the US dollar is approaching a key up trend line (drawn off the mid-May low just above parity). It is found near C$1.0350 on Monday and C$1.0370 by the end of the week. Other technical indicators lend support to a more favorable outlook for the Canadian dollar.
The Mexican peso turned in a most impressive performance. Despite the US data and the largely unexpected 25 bp rate cut bv the central bank, the peso rallied and rallied strongly. The greenback had been testing the MXN13.40 area for the better part of two weeks, but never managed to close above it. Assuming this is the high, a break now of MXN13.11 will likely signal a move toward MXN12.90-MXN13.00.
Observations on the speculative positioning in the CME currency futures:
1. In the last week of August and into the US holiday on Sept 2, speculative positioning adjustments in the futures market were minimal. There was only one adjustment of gross positions larger than 10k contract and that was the liquidation of long euro contracts. Recall that the summer rally in the euro coincided less with short covering and more with new longs being established. Those longs are now being cut. Of the remaining 13 gross positions we track, 10 of them saw adjustments less than 5k contracts.
2. The lack of substantial adjustments did not prevent a clear pattern from emerging: the gross long positions of all the currency futures, but the Japanese yen, where pared. The adjustment of the short positions was less consistent, with the euro, yen, sterling and Canadian dollar seeing an increase in shorts, while the franc, Australian dollar, and peso saw minor reductions.
3. While the gross long euro position is the largest still near 100k contracts, the gross short positions are substantial as well (almost 76k contracts). Given the price action, and in particular, the fact that the euro was broadly sideways between $1.32-$1.34, perhaps it is understandable. However, the nearly as large gross short sterling positions, and even larger gross short Australian dollar positions (71k and 85.2k respectively) seem more like resisting the price action. Over the past month, those two have been the strongest of the major currencies, gaining 1.9% and 2.2% respectively, against the greenback. These positions therefore seem vulnerable.
4. The washout of the gross long peso positions took place in June. Bulls tried again starting in early July to re-build a long position, but retreated in mid-August through the latest CFTC reporting period. Macro data has been softening, but the rate cut before the weekend took most investors and observers by surprise. However, the resilience of the peso to the rate shock, and frankly the disappointing US jobs data (though the manufacturing sector added roughly three times the number of jobs economists expected), suggests the bulls are in the ascendancy.
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