Our technical note a week ago expected the dollar, yen and Swiss franc to outperform and for global equity markets to retreat. However, the euro's resilience continues to frustrate the otherwise respectable market calls.
The yen was the easily the strongest of the major currencies, gaining almost 2% against the dollar. The Swiss franc (0.6%) would have been the second strongest, but the hawkishness of the Reserve Bank of New Zealand helped push the Kiwi ahead of it (0.8%). Our technical work had identified the Australian dollar as particular vulnerable. It and sterling were the two weakest currencies last week. Both lost about 0.5%
Global equity markets sold off, as we anticipated. Japan's Nikkei led with a 6.2% decline, and more than half was registered just before the weekend. Many of the major European bourses were off around 3%. The Dow Jones Stoxx 600 was off about 3.3% to five week lows. The S&P 500 and the NASDAQ lost about two-thirds as much as Europe. Core bond yields fell, led by a 13 bp decline in the US and UK and 8 bp in German bunds. Spain, Italy, Portugal and Greece saw higher yields.
The euro's resilience is remarkable. It broke above the 5-month 5-cent trading range ($1.33-$1.38) in response to the ECB's decision not to adjust policy at the beginning of the month. However, as Draghi and other ECB officials hinted, the strength of the euro is becoming a more important factor in setting policy because it heightens the risk of deflation and acts as a headwind against growth.
The euro's strength comes amid heighten tensions with Russia over its actions in Crimea, which are seen as the highest since the end of the Cold War. Europe and the US are preparing additional sanctions early next week, and there is fear Russia may enter into eastern Ukraine as part of its response.
Technically, the euro continues to bump along the top of its Bollinger Band (~$1.3930), set 2 standard deviations above the 20-day moving average. Neither the RSI nor MACDs indicates that a top is in place. A move above $1.40 is likely to trigger buy stops. On the downside, the euro has built a shelf in the $1.3830-40 area, but it will take a break of $1.38 to signify anything important.
The dollar weakened against the yen every day last week for the first time in ten months. A break of JPY101.20 would send the greenback to the year's low set in early February near JPY100.75 and possibly to JPY100.20, which corresponds to the 61.8% retracement of the rally from last October's dip below JPY97 to the early January high near JPY105.45.
Sterling has under-performed. It lost ground against most of the major currencies, in recent days. The five-day average crossed below the 20-day average in the middle of last week for the first time in a month. However, there is a lack of momentum even sterling fell below support near $1.6600. A push higher may run into offers in the $1.6685-$1.6700 band. On the downside, a close below $1.6570 maybe helped, but it will take a move below $1.6530 to signal a move toward $1.6400.
We had expected the Australian dollar to be one of the worst performers this past week, and it did sell-off in the first three sessions from about $0.9070 to roughly $0.8925. However, with the help of strong employment report, even if skewed by a methodological adjusted, which follows a large trade surplus and a strong retail sales report, the Aussie staged a rebound. The pendulum of market sentiment has swung away from a rate cut and toward a hike.
The weekly close above $0.9000 puts it in a reasonable technical position to move higher, though the indicators we look at are not generating strong signals. The initial upside target is just above $0.9100, last week's high and then $0.9140, the high from the previous week. While a move below $0.9000 would weaken the tone, it may require a break of $0.8925-50 to raise confidence that a new leg down has begun.
The US dollar appears to be carving out a wedge or triangle pattern against the Canadian dollar. The bottom of it comes in near CAD1.0960 and rising. The top comes in near CAD1.1150 and falling. The technical signals are not strong as the Canadian dollar has been moving within the range established with the February 19 low ahead of CAD1.19 and the February 21 high near CAD1.12. The low implied volatility recognizes this.
The dollar is on the verge of breaking down through the bottom end of its recent range against the Mexican peso, which comes in near MXN13.20. It has not sustained a break below since it moved above that level in mid-January. The fact that it has been moving broadly sideways is illustrated by the convergence at MXN13.25-MXN13.26 of the 5, 20, and 50 day moving averages. There doesn't appear to be an attractive short-term opportunity at the moment.
Observations from the speculative positioning in the CME currency futures:
1. As was the case during the previous reporting period, there was only one gross speculative position adjustment of more than 10k contracts. Then it was about long euro positions being increased. This time it is the yen. Short yen positions rose 15k to 115.1k contracts. This is a two-month high. The yen strengthened after the reporting period and while some talked about it as safe haven buying, we suspect it was more about short-covering.
2. During the previous reporting period, outside of the euro, no other gross positions were adjust by more than 6k contracts. In the most recent reporting period, there were five gross adjustments more than 6k contracts. The euro longs added 6.2k contracts to 110k, while shorts cut 6.7k contracts to 73.7k. Long sterling positions were reduced by 6.5k contracts to 64.6k. The short Canadian dollar position was pared by 7k contracts to 77.4k. There were 8k short Mexican peso futures contracts were covered, leaving 21k contracts.
3. The 110k gross long euro contracts is the highest since last October when they reached about 137k contracts. This in turn was about 10k contracts below the record set in May 2007.
4. Looking at net positions, the euro and Swiss franc long positions were extended. The short yen position grew. The net short Canadian dollar, Australian dollar and Mexican peso positions were reduced, while the net long sterling position was cut.