FX: Position Adjustment or Trend Reversal ?

Marc To Market's picture

Last week, which straddled the New Year holiday, saw a reversal in the trends seen in second half of Q4 13.  These trends were characterized by the strength of the euro, sterling and the handful of currencies that move in their orbit, like the Swiss franc, and Danish krone and the weakness of the yen and dollar bloc currencies.


Full participation will return for an event-packed week that features the non-manufacturing PMIs, ECB and BOE policy meetings, the minutes from the December FOMC that saw the Fed announce the beginning of the end of QE3+, and the December US non-farm payrolls. 


We had expected some backing and filling after the dramatic moves on December 27,  the thinness of market conditions last week likely exacerbated the price action.   The price action that saw the euro drop around 1% on the week, and sterling shed about half as much, damaged the technical outlook.   


The push above $1.38 in the euro was not confirmed by the RSI or MACD, leaving a bearish divergence in its wake.   The euro was turned lower after testing the trend line drawn off the July '08 high near $1.6040 and the May '11 high near $1.4940 and just above $1.3900 at the end of the year (last week mistakenly estimated that trend line near $1.4050 in early Jan--hat tip to Mark Etzkorn at Currency Trader for setting me straight).  The 5-day moving average has slipped below the 20-day average.  A convincing break of $1.36 would signal a move toward $1.3500-25, while a move above $1.3725 would help stabilize the tone.  


The Swiss franc is interesting from a technical perspective.   The dollar fell to a 2-year low on Dec 27 at CHF0.8800.  It has rebounded and, before the weekend, took out the downtrend line drawn off the July and Nov highs.  The RSI and MACDs are trending high, never confirming that low on Dec 27.  The next upside target is seen in the CHF0.9080-CHF0.9100.  


Sterling posted a key reversal on the first trading session of 2014 by making a new high for the move (poking briefly through $1.66) before selling off to five day lows and settling below the Dec 31 low dismissing the price action that Bloomberg recorded for Jan 1).  The technical indicators are more mixed for sterling than was the case for the euro.  There does not appear to be a bearish divergence in the RSI as there was in the euro, but there is a bearish divergence with the MACDs.  In addition, the 5- and 20-day averages are not poised to cross.   Still a convincing break of $1.6400 could trigger another bout of long liquidation that could push it toward $1.6320.  On the upside, it may require a move back above $1.6500 to indicate a resumption of the uptrend. 


The dollar put in a key reversal against the yen on Jan 2 by making a new (albeit marginal) high and then selling off to its lowest level since Dec 27.  Japanese markets were closed for much of the period and the local market's response will likely be important.   The dollar found support near JPY104, which corresponds to the 20-day moving average.  This moving average has not been violated since early Nov.  


The RSI and MACDs have turned lower and market positioning is still extreme, suggesting a vulnerability in the market.  However, with Fed tapering and US rates firm, many look for the yen to weaken sharply this year.  This will likely encourage dollar buying on pullbacks. 


The 20-day moving average had turned back bounces in the Australian dollar twice in November and twice in December.  It stalled there again on Jan 2, but short through it on Jan 3.    While the RSI and MACDs have turned up, we are suspicious of a bull trap.  A break of the $0.9000-35 area would ease these suspicions and suggest scope toward $0.9150-$0.9200. 


On several occasions in recent weeks, the US dollar has tried establishing a foothold above CAD1.07, but for naught and frustrating ideas of a breakout.   While the MACD is trending lower, the RSI has been bouncing along the 50 level, giving no strong directional signals.  We would be more inclined to buy US dollars in the CAD1.0560-80 area, with a fairly tight stop to play the six week range, with a view of additional USD strength in the period ahead. 


The technical outlook for the Mexican peso is far from clear.  The trend line drawn off the dollar's Sept and Nov high was approached in Dec (before the dollar fell to MXN12.80) and comes in now just above MXN13.20.  On the other hand, the dollar has not traded below MXN13.00 since Christmas eve.   While we like the peso on a medium and long-term view, but don't see a favorable risk-reward trade at current levels. 


The CFTC Commitment of Traders report on positioning in the currency futures is not available for the most recent period.  

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disabledvet's picture

My view is that this will be the year of currency trading. to call this recovery "odd" since what is easily the biggest financial collapse in history is an understatement. We should have interest rates that are even lower than Japan right now...but for a myriad of factors not the least being QE and the extraordinary measures (while clearly panicky...clearly panic was warranted btw) the "epic fail" simy failed to materialize. Indeed you got an epic boom as the capital spending that began after 9/11 and continued long past the entire global economy failed to recover is now leading to some truly amazing sustained moves in very large scale production and of course in very significant inventory builds. simply put while incredibly weak "generically" I don't think the US dollar has ever been this strong in history. even with the incredible growth in the US economy in the 1920's the British pound and Empire was alive and well back then and it was the Continent that had simply become "despaired" by one of the greatest tragedies in human histrory...The Great War. These passions are still with us today only "writ large" now as all "peoples" now have an identity and in that sense an inferiority complex. Simply put the human race has no clue about World War II. Hard to say this is the reason why outside of the Pound, euro and Yuan the dollar and certain dollar bloc economies have suddenly been laying waste to entire economies...clearly no other currency block is however. The biggest stand out to me is Panama. This is one of the most horrific and God-awful pieces of real estate on earth...the only reason there is anything of value there is because man made it so...and has been created and continues to be created there could easily rival Singapore. "that's a lot of dollar creation." Ecuador is another interesting play going forward and of course there is Saudi Arabia et al. We'll see about Hong Kong which truly has moonshot here in spectacular fashion. Infrastructure buildouts on this scale simply don't "disappear." They provide economic benefits that can last for decades if not centuries. The fact that the dollar/yuan exchange remains "fixed" in a dejure way has yielded incalculable benefits to Wall Street and obviously to HSBC USA which is a major bullion bank...not HSBC proper. If it is true that JP Morgan tried to make a ridiculous basis trade against the British debt markets and lost (which according to Felix Solomon was what Jamie Dimon appeared to have been doing) ...talk about a catastrophe. Sure the stock price has recovered beautifully...but you can kiss goodbye to Greece now. And of course this has now spread...an "uber dollar"...all across the globe..the scariest and most terrifying example being the yen. I just don't think people understand just how truly massive the Japanese economy is. There is/was? no Sony in Great Britain...let alone the entire Continent of Europe. Needless to say not just Japan but Korea and China have simply taken it from there and built out a truly massive "dollar anchored" industrial/tech economy. This entire "machine" is built by steel but powered in my view by natural gas and the massive production and infrastructure build out that has now been completed in the USA isthe "engine" as it were. The actual engine and platform will be the fuel cell battery...I think you can simply go long the means of production of that product and system and it will wind up paying for many things for a very long time. since this production can be...indeed of course is being levered...this gives the financial backers of this technology an awful lot of power. I think that power will be...indeed is being expressed in the currency markets on a grand scale right now. with spreads this wide (300 basis points in the USA) in theory you could get some massively levered bets in that space that again...in theory...will suck in hundreds of billions if not trillions of dollars. these bets do not actually "appear" on the COT since they are done internally within the banks themselves. simply put the world at the same time it has never been more awash in debt is also more than ever awash in truly staggering amounts of dollar liquidity. the equity markets alone have added at least a trillion dollars to that liquidity in just the past year alone. If Ford really does create a car that is a net energy producer...as Tesla is already doing I might add...well, obviously this is a significant factor for currency traders such as yourself to take into account when the trading day begins. That's Sunday night in Japan in my view. hope you have a great 2014.