Dollar Remains Out of Favor

Marc To Market's picture

The US dollar fell against all the major currencies over the past week.  Helped by speculation that the Bank of England will likely hike rates before it currently envisions, lifted sterling to its highest level since April 2011, as it tacked on almost 2% last week.  Even the Japanese yen strengthened against the dollar, despite the rise in equities and an increase in the US interest rate premium over Japan.  We had generally anticipated the weaker dollar, but did not expect the yen to have participated.


The technical indicators we use are not providing any compelling reason to try picking a top in the foreign currencies or a bottom to the US dollar, though we recognize that sterling is a bit stretched and bumping against the upper Bollinger Band.  This raises the risk of some consolidation at the start of the new week.  Yet with the March 2015 short sterling futures still falling (implying a yield of just over 100 bp compared with the current 50 bp base rate), the consolidation may be shallow and brief.  


Initial support for sterling is seen in the  $1.6680-$1.6700 area, though the bulls are unlikely to be really deterred unless the $1.66 level goes.  The RSI and MACDs are trending higher and five-day average crossed above the 20-day average on Thursday, February 13.   The 2011 high near $1.6750 is the next immediate target, but a move toward $1.70 in the coming weeks would not be surprising.  The euro has approached a key retracement objective against sterling near GBP0.8160.  A convincing break could spur a move toward GBP0.8000. 


The euro is at the upper end of its six-week trading range.   The technical indicators are positive and the five-day average crossed above the 20-day average on Tuesday, February 11.  The upper Bollinger Band is near $1.3740, which also corresponds to the late January high and the 61.8% retracement objective of the decline from the December 27 multi-year high near $1.3900.   We suspect that pullbacks toward $1.3630-50 will be seen as new buying opportunities.  


The dollar initially extended its recovery from the JPY100.75 area seen on February 4-5.  However, the momentum faltered in the JPY102.60-70 area.  In fact the dollar recorded lower highs in each of the last four sessions.   The MOF and CME data suggests at least part of the reason why:  Japanese investors have sold foreign bonds for six consecutive week.  Foreigners have sold Japanese stocks (and covered their short yen hedges) for three weeks in a row.   In the CME futures, the speculators (a proxy for momentum and trend followers) have been reducing short position for seven consecutive weekly reporting periods through February 11.  The gross position short position has been cut by more than 40% over this period. 


The technical indicators, however, are not generating clear signals at the moment.  We are more inclined to still for a weaker yen.  Rising through the previous day's high would be the first sign that the dollar's correction may have run its course.  The 20-day moving average provided support in November and December.  Since it was convincingly violated, the moving average has capped bounces.  It is found now near JPY102.55. 


The Australian dollar looks to have legs.  Even the disappointingly weak jobs data was not able to derail the short-covering  rally, spurred on by the shift in the RBA's stance from its easing bias to neutrality.   The next upside target is near $0.9085,which corresponds to the 38.2% retracement of the drop from last October's high near $0.9760 to the recent low about 11 cents below that high and the mid-January high.    A break of that could spur a move toward $0.9160, and possibly $0.9200, before the bears try to pick another top.  The $0.8930-60 area offers support.  


The Canadian dollar's technicals are not as clean.  The RSI warns that momentum has waned, though the MACDs are still trending lower.  A bounce in the greenback could see a test on the CAD1.1020-35 area.  A break of this could spur ideas that the correction has run its course with a 2.5% USD pullback.  On the downside, we had suggested potential toward CAD1.0850. 


The Mexican peso has been frustrating.    It has lagged behind the recovery many of the other emerging market currencies over the past week, which has seen the Indonesian rupiah rally 2.8%, the South African rand almost 2% and the Turkish lira 1.7%.  The peso rose about 0.3% against the dollar over the past week.  Technical indicator are not generating strong signals.  The dollar has spent the last eight sessions between roughly MXN13.20 and MXN13.40.   We are more inclined to sell into a dollar rally than buying a further pullback, but are most comfortable on the sidelines pending better risk--reward opportunities. 


Observations from the speculative positioning in the CME currency futures: 


1.  Position adjustments were minor in the most recent reporting week that ended on February 11. There were not gross position adjustments more than 10k contract.  In fact, there were only two adjustments more than 5k contracts (gross euro longs grew by 7.4k contracts and gross short Australian dollar positions were pared by 9.6k contracts).  Eight of the 14 gross positions we track changed by less than 2k contracts.


2.  Speculators generally lightened up on gross long positions, the exceptions were the euro, which we already noted, and sterling, which added 1k long contracts.  Short positions were mostly reduced, except, ironically enough the euro and sterling, and the Swiss franc.  Yet all together these added less than 3k contracts.


3.  In terms of gross short positions, there are still some substantial positions, warning of the risk of more serious position adjustment.  Speculators remain most short the Japanese yen, with 92.5k contracts, but Canada with 86.7k gross short contracts is not far behind.  And there are 82k gross short euro contracts.  There are 57.6k gross short Australian dollar contracts.


4.  The gross long positions are highly concentrated.  There are 75k long euro contracts and 53k long sterling contracts.  Canada's 28k contracts puts it at a distant third place.  The others have less than 15k long contracts.

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BeetleBailey's picture

I think it's hilarious that the BOE is looking to raise interest rates.

The UK economy is sputtering like an old clunker ...and these idiots want to turn the screws.....LOL

Da chief's picture

Toby Conner is an alias for the royal jackass "Gary Savage" the apparent Smart Money Tracker...better named the "Dumb Money Tracker" by his arch rival Forex Kong.

You want to get a bead on markets / forex in particular....


It's Forex Kong at

Soul Glow's picture

The dollar hasn't been in favor for a long time.  I'd like to see the return for dollar bulls since the crash of '08.  I assume it is marginal at best, especially in real terms.

Marc To Market's picture

Soul Glow is an example of a person who won't let the facts confuse them  The dollar has recently made multi-year highs against the Japanese yen, Canadian dollar, and Australian dollar, along side a number of emerging market currencies.  On a trade weighted basis the dollar has appreciated.   

Fuh Querada's picture

The trends described here could certainly continue in the short to medium term, however it cannot be excluded that they will level off or reverse in a similar time frame.

oddjob's picture

2 weeks ago the same author posted a piece entitled 'US Dollar Poised for Additional Gains', and now its 'Dollar Remains Out of Favor'

Marc To Market's picture

oddjob, yes guilty has charged.  This is a weekly piece and the time frame is usually for 1-2 weeks.  Did not the dollar make new highs a couple of weeks ago ?  Has it not declined since ?  I would agree with your implicit criticism if this was a long-term piece, but it is not.  The point in this piece is to get the direction and some sense of the magnitude.  

Fuh Querada's picture

Yeah I saw that too, I guess it sort of depends on the definitions of "poised", "additional", "gains" and "remains", or even "US" and "dollar".

Marc To Market's picture

Fuh querada, it does not depend on defintions but time frame.  These are short term market calls.  Why don't you give the Tylers a hard time or other market commentary for the same thing in at ZH ?  

Soul Glow's picture

The dollar, as all fiat currency, is a piece of shit investment that is about to go the way of the dinosaur.

Trade that.

lasvegaspersona's picture

Interest rates are controlled by swaps.

The gold price is controlled through the Forex markets.

The value of the dollar is ultimately up to those asked to take it in payment for goods and services....but...

for now there is not much in the monetary realm that the Fed cannot control. As long as the world accepts our paper, which the

Fed can produce in limitless quantities, the world is under the Feds command.

This will continue until something changes, something breaks, someone says no.

Marc To Market's picture


Frankly, I don't think you get it.  The foreign exchange market is $5.3 trillion a a day turn over.  It is not about the demand for money to pay for goods and services.  It is about capital flows and hot money.  

I am not sure what world you live in but the world that I live in the Fed does not control the world.   Pray tell how the Fed commands the PBOC or the BOJ ?  The ECB ?  I think you would be hard pressed to show how the Fed commands Canadian monetary policy or Mexico's.    Can you support these assertions with anything resembling evidence ?  

Soul Glow's picture

No, you are absolutely wrong.  The force of reality in its essence will constitute how long the dollar, in its fiat form, stays in effect.  

If you want to believe that the masters of the paper universe are going to do as they want forever then don't cite the American Revolution, don't site that Rome crumbled because of its debt and lack of ability to pay (in gold and silver mind you).  Don't think that the system could collapse because it is built on sand.

Imagine if you built a sandcastle on the beach where "no wave had come in the last few years" and then an earthquake created a tsunami and presto chango.....

Poof! It's gone!

disabledvet's picture

meh. UAW shot down in can add them on the endangered species list now. Economy appears to be clearly slowing in the USA...taper has already happened so going back to QE won't solve anything...probably make it worse.

Buy up a trillion in student loan debt?
Probably what the plan is.

More reason to buy bank stocks...certainly Sallie Mae.

I think we have a bunch more Detroits coming...and unlike Michigan which is an energy super state too I think this next batch of implosions will have a greater sense of permanency.

Big deficit in Virginia was a surprise apparently.
Ironic considering that's where all the Federal Government stuff is located.

There's a lot of New coming out of the USA and clearly spending is getting slashed dramatically as the "Warfare State" economizes.

Sufiy's picture

Toby Connor: Dollar Breaks Down, Great Inflation to Push Gold And Silver Much Higher

We are  following Toby Connor with his very interesting concept of The Great Inflation in 2014. Gold was in a breakout mood this week and finally has broken to the upside from $1270 level with intraday high on Friday at $1,322 and close at $1,319. We have now the massive short squeeze in action in Gold and Silver. Silver has broken to the upside as well on Friday closing at $21.51. Gold mining shares are making the very good progress as well.   On the chart above you can see that Gold has crossed the very important level on daily chart and moved above its 200MA at $1,309. It will bring a lot of attention of traders and shorts will be running to the exit now. Mass media will be picking up the Gold story as well now. CNBC is talking about Gold and Miners already and Jim Cramer advises to watch GDX - Gold miners ETF. Next levels in Gold to watch is $1,360 and $1,420 to complete Double Bottom Reversal pattern on weekly chart.   Silver had its massive breakout as well following the Gold footsteps this week. Next levels to watch here are $22.75 and $25 to confirm its Double Bottom Reversal pattern on weekly chart. The most important here that Silver has broken to the upside above its 200MA at $21.13 and closed above it at $21.49.