FX: Position Adjustment or Trend Reversal ?
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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