Dollar Outlook

Marc To Market's picture

Contrary to what many, including ourselves thought, the expected divergence of monetary policy between the Federal Reserve tapering on one hand, and the European Central Bank (and Bank of Japan) which likely to have to provide more monetary support next year on the other hand, has not spurred a US dollar rally against European currencies.  There is little reason to expect this to change, from a technical point of view.


That said, the dollar's losses have not been broad based.  Sterling and euro (and the Swiss franc and Danish krone) are where the greenback's losses have been concentrated.  In part, the market appears to be taking the Fed's guidance seriously.  Tapering is not tightening.   The premium the US offers over Germany on 2-year money has been nearly halved over the past week to 9 bp.  The nearly 20 bp discount of the US compared to the UK is near the largest since late 2011.


Yet, when it comes to the yen, it does not appear that interest rate differentials were the key driver. Normally, we find the exchange rate is more sensitive to long-term rate differentials.   The US 10-year rate premium over Japan widen to new multi-year highs of almost 224 bp on December 5, even as the dollar was recording six-day lows against the yen.  We suspect the pullback in Japanese equities (~4.5% fall Dec 3-5) was a more significant factor.  The combination of the bounce in the dollar against the yen after the US employment data, the rally in US shares, and the strong close in the Nikkei, warns that last week's gap, found 15579 and 15661 will likely be tested early in the week ahead (pre-weekend close 15300) . 


This suggests that the dollar  will have another run at JPY103.75, high set in late May.  Support has been established near in the JPY101.65-80 area. 


The dollar's weakness against the European currencies does not appear exhausted.   The only cautionary note from technical indicators is that the euro and Swiss franc are at the top of their Bollinger Bands, which are set +/- 2 standard deviations from the 20-day moving average.  Although the returns (changes) in currency prices are not normally distributed, a break of the bands may still be seen as reflecting  a stretched market.     This should encourage buying on the next pullback. 


The next technical target for the euro is $1.3800-30.   A similar level for the dollar against the Swiss franc is found just below CHF0.8900.  There is little chart-based support below there before CHF0.8500. 


The US Dollar Index, which is heavily weighted toward the complex of European currencies,  tested the 80.30 area which represents a 50% retracement of the rally from late October through the first part of November.  The next retracement objective is near 79.90.  A break of this area could signal a move to the year's recorded in February just below 79.00. 


Sterling has been a bit disappointing after rising to new two-year highs at the start of last week near $1.6440, it has under-performed, but the advance does not seem to be over.    Support is seen near $1.6260, which correspond to the Oct highs.   We target the $1.6600-$1.6750 on the next leg up.   That said, the recent highs in sterling were not confirmed by the RSI or the MACDs. 


We have been frustrated by the Australian dollar.  Last week, we suggested the Aussie was set to bounce.   The bounce was muted and the Aussie fell to lows since early Sept before the US jobs data.  It subsequently rallied and finished the North American session above the previous day's high, setting up a potential key reversal.  Initial resistance is seen near $0.9140 and then $0.9200. 


The US dollar extended its recent gains against the Canadian dollar to the CAD1.07 level.  It was tested Wed-Fri last week and the greenback failed to close above it even once. The technical indicators are not suggesting an important high is in place, but a break of CAD1.06 will likely spur a bout of profit-taking. 


The US dollar began last week by extending its gains against the Mexican peso.  It reached almost MXN13.27 on Dec 3 before reversing lower and finished the week near 3-week lows, having tested the MXN12.90 area.  Technical indicators warn of potential of additional dollar weakness in the period ahead that could extend to MXN12.80 or a bit lower. 


Observations on speculative positioning in selected currency futures at the CME:


1.  The mixed spot performance of the dollar is reflected in the speculative positions in the currency futures. On a net basis, speculators are long the euro, sterling, Swiss franc, and Mexican peso.  They are short yen and the Australian and Canadian dollars.   This is almost the opposite of earlier this year, though the speculative market was short yen then too.


2.  Gross long currency positions were generally added to, except in the yen and Mexican peso.  Almost a quarter of the peso longs were squeezed out (10.9k contracts), but in the three sessions after the reporting period ended, the peso has come back strongly.  Gross short currency positions were more mixed, but the larger adjustments came from adding to shorts (especially the Canadian dollar, 17.2k contracts and Australian dollar 13.8k contracts).


3.  Gross sterling longs saw the biggest increase, 17k contracts.  The gross long sterling position is the largest of the currency futures we track.  At 18.4k contracts it is nearly twice as large as the second place euros (9.3k contracts).


4.  At 134.7k contracts, the gross short yen position is at a new five year high.  The gross short Canadian dollar position (41.6k contracts) is the largest in six months.


5.  The net euro position swung back to the long side (9.3k contracts) after briefly and shallowly (0.4k contracts) to the short side the previous week.  The net position had been near 72k contracts in early Nov. The shift was more about longs liquidating than new shorts entering.  From Oct 22 through end of November, the gross long position fell 55k contracts, while the gross shorts rose by about 15k contracts in roughly a slightly longer period.  The price action since the reporting period ended suggest this position adjustment was being reversed.

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harleyjohn45's picture

Article means nothing, next week Mark will have an entirely different outlook.

Marc To Market's picture

Yes Harleyjohn 45, the technical condition of the market changes.  These are weekl;y updates.  They change.  It is a function of the $5.3 trillion a day foreign exchange market.  What, pray tell, is the alternative ?  One adjusts ones views to changing evidence.  What do you do?  I do provide longer term views as well, but I don't want to confuse you with the facts.  

Overdrawn's picture

The first textual reference to the use of the word Sterling, as pertaining to currency, emerges from the autobiography of Guibert of Nogent from 1115.

Nogent writes, in his autobiography, that in 1107 he bribed a group of cardinals with 20 sterling to secure papal confirmation of the election of Waldric, chancellor of Henry 1, as bishop of Laon.

"The earliest firmly dated use of sterling thus involved papal corruption on behalf of a senior English government minister to help secure a lucrative European post," says Nicolas Mayhew, author of Sterling, The History of a Currency.

disabledvet's picture

So obviously the most important and only exchange rate that matters is the USD/CAD. They are by far our largest trading partner and our primary energy the extent that we need that anymore. Basically anything that has to be made as a consumable will now be done "as an epic battle between Japan and China." The USA no longer needs these things either. The euro is just a trading currency amongst the banks now...Europe itself is nothing more than a plaything for the rich and well capitalized. China banning bitcoin was a big mistake. This is very dollar positive going forward... We'll see if this is a prelude to a meaningless war in Northeast Asia. Interest rates have of course soared this year...the spreads have never been wider...nor has bankruptcy ever loomed larger. Detroit is now to be liquidiated. All Government assets will now be sold for pennies on the dollar on e-bay. We simply "no longer need" and in fact are producing massive gluts of everything. Simply put the inflation thesis has failed. That dollar should soar in my view.

odatruf's picture

I agree the Canadian dollar value ought to be a stronger metric, but the size imbalance is what prevents that. If Canada was more diversified in trade with other nations, we might see that.


OutLookingIn's picture

Canadian trade diversification has been proceeding at an excellerating rate for a number of years now. As can be seen with recent trade agreements, visa vis the 'Pacific Rim' countries. Also, the recent bond issue by Canada's western most province of British Columbia in Hong Kong, valued in Yuan (renminbi) CNY, was the first by an international governmental authority to do so. The bond issue was over-subscribed and sold out within hours.

The Obama administration has dropped the ball on the question of the construction of an oil pipeline, pumping Canadian tar sands crude to the gulf coast refineries. Canada is now moving forward with the 'Northern Gateway' pipeline project to the west coast, to trans-ship crude to Asia via VLCC tankers. This pleases China very much since their ownership of tar sands properties is now in the multiple billions of dollars.

Canada is happy with the CAD trading at the current level, since Canadian goods are priced to sell in the US market, while American goods are more expensive to import. As USD currency debasement continues, watch for the CAD to slowly disconnect from the USD as will most other fiat currencies. The Chinese yuan is making large strides in use around the globe amongst trading partners with China, fore-going the use of the USD as a vehicle for international trade settlement. The writting is on the wall for all to see.      

Marc To Market's picture

I make two methodological points.  First capital flows far and away outstrip trade flows.  Therefore when trying to forecast exchange rates, trade flows are less important.  Second, despite free trade agreements, the vast majority of Canada's trade is with the US.  


The US dollar has risen from about C$0.96 to C$1.07, what dollar debasement does Outlookingin refer to within the context of this discussion.  The dollar is only heavy against the euro and sterling, and currencies that move in their orbit, like DKK and CHF.  China's currency is appreciating, but has not even fully recovered from the huge devaluaiton that took place in the mid-1990s.  

Seeking Aphids's picture

Canada is not moving forward with Northern Gateway. It has been blocked by the BC population and native groups. There will be an LNG terminal built and pipelines to supply it.....that will happen. The $CAD should continue to go down as there is no demand for commodities right now with the possible exception of oil/gas. The 'recovery' cannot exist if there is no demand for commodities.....consequently the current S&P levels are really all based on doing more with less - less workers, less pay, lower imput costs. We have reached the limits of this process and profits should now begin to drop imo. That should result in a weaker market going forward. Low commodity demand and zero employment growth seem to be the new normal.......a strange in/deflationionary world. The Fed and CB's are going to have to keep the whole ZiRP/QE thing going for a very long time indeed if there is no fiscal stimulus forthcoming (and that would not even be sure to work) could still benefit in this environment, however, as currencies will continue to be debased.  Also, many will want to diversify away from US stocks given the all-time highs....where else can they park their money? Real Estate? Also in a bubble in the areas where the Chinese are investing. The Chinese should also continue pouring money into precious metals so I am bullish re: gold/silver going forward...........comments anyone?

disabledvet's picture

agree completely. this is all hot money in the States in my view. the theory that "China is an unlimited money spigot" is now meeting the "reality that is bitcoin." this smells like 1998 all over again...only this time "the hot money is in the USA et al." The theory that "the Fed is about to Taper" is a falsehood. The Fed has already tapered...simply by saying "taper"...whatever expectations the market had...all created by the Fed mind you...of "extended for an extended period of time" was their constant guidance..."and then we get taper." not saying the original policy was wrong or the policy change was wrong even...i happen to believe both might be right actually...that a fixed income bubble existed in the Spring of this year and that it had to be "put down" so to speak. i simply refuse to be fooled by the recovery talk and "Government is back to work" baloney. The Government is in effect shutting down (no Syria, ACA debacle)...i think there is a real danger here of a deflation...all the Fed worked to prevent back in 2008...and with all the leverage and hot money...well, i hate to spoil the Christmas cheer but seriously...this recovery sucks. does that mean dollar weakness dead ahead? to me it means the exact opposite actually..."a super spike in the dollar." the USA has suddenly become the world's largest oil producer...and the world's largest gas producer...and has always been the world's largest producer of electricity. and has always been the large producer of industrial goods. and has always been the largest producer food and food stuffs. and has the deeepest and richest capital markets in the world. and has the most advanced transportation system in human history. and is on the bleeding edge of technology "writ large." and...we're deflating. go ahead...compete with the dollar on price. the only reason China can do it is because the currency is manipulated in order to get some "definition" vis a vis terms of trade. love silver...would not touch gold with a ten foot pole here. the only cure for excessive leverage (Wall Street being Wall Street) is a correction. EMPIRICALLY speaking the Fed did not "bailout Wall Street" in 2008 but bailed out LEVERAGE. the irony of course is that might be considered an even GREATER sin than "bailing out the banks" actually. so roaring recovery in Wally World...but then what? no WAY am i going near gold. Elon Musk has ten rockets ready to go. these crazy kids are gonna put something on the moon and bring back so much gold we'll be swimming in the stuff for the next thousand years. i've read you can "mine the Ocean" (through osmosis) actually and create millions of tons of gold that way as well. in other words "the purpose of the price rise is nefarious in nature" (create yet another bubble? only one group of people trade on inside information) and needs to watched very closely. to me...relative to the recovery...we're way over-levered. where is Keynes in all this again? i see nothing but cancellations going forward in the immediate to near term as the Federal Government goes full on Darth Vader on the big ticket items. "Elon Musk is leading the way." Nissan has had an epic sell off here as well...they might be worth taking a look at. thanks for the comment stream.

EnslavethechildrenforBen's picture

Dollar outlook?


See Zimbabawe...


Also, pathetic that this author thinks that Central Banks can actually offer "financial support", when in effect every cent printed is a cent STOLEN in the long run. Sad but in todays world, wealth is stolen, not created.

odatruf's picture

Even more pathetic is the notion that prior data charts have any use. Things like bands and deviations are dodgey in the best of cases. They are meaningless when you are plotting manipulated and non-market driven information.

disabledvet's picture

really? resistance can become support (tesla at 120/silver at 20) but support can become resistance too (Nasdaq 4000/one bitcoin equal to an ounce of gold.) the price of oil surges but the shale plays are rolling over. what do the best oil drillers in world history know that i don't?