This page has been archived and commenting is disabled.

Dollar Breakout or Range-bound?

Marc To Market's picture




 

The US dollar had a difficult week. It lost ground against all the major currencies. Falling interest rates, sparked by the FOMC minutes that reassured investors that an early US rate hike is highly unlikely and a drop in the equity markets that wiped out the first quarter gains, appears to have been the main culprit.  

 

Recall that the dollar-bloc had led the move against the dollar last month, but since the new quarter began the euro and yen have participated. Last week, the yen and Swiss franc were the strongest of the majors, while the dollar-bloc seemed to tire.

 

Given the technical damage inflicted on the dollar and the decline in US interest rates, it is tempting to look for the greenback's losses to accelerate. Yet ,we are more inclined to think that rather than breaking out, the dollar simply moved to the lower end of its ranges.  

 

This means that the greenback may do a bit better in the days ahead as participants will likely be denied fresh incentives. The pullback in US interest rates has likely run its course, US data, including retail sales and industrial production, will point to a recovery from the sluggish start of the year, and important chart levels have been approached. 

 

Dollar Index: From the high on April 4 through the low set on April 10, the Dollar Index fell about 1.6%. Last week, it posted its largest decline since late Q3 13. However, it the bears stalled in front of last month's lows, just below 79.30, which also corresponds to the bottom of the Bollinger Band. A move now above 78.80 would help stabilize the tone.

 

Euro: After the ECB meeting and the US employment report in the first week in April, the euro had probed the bottom of its Bollinger Band and finished last week near the upper band ($1.3935). Given the psychological importance of the $1.40 area, and what will be a long holiday weekend for many, we suspect the short-term participants will shy away from pushing the euro much higher in the days ahead. Support is likely to be found in the $1.3780-$1.3800 initially.

 

Yen: The dollar also fell to the lower end of its range against the yen near JPY101.30. We suspect a break would require US 10-year rates to fall through the 1.60%. The stronger economic data we expect should prevent this. An upside correction for the dollar would likely encounter initial resistance near JPY102, which corresponds to the 5-day moving average. The dollar has not closed above it since April 3.

 

Sterling: The push above $1.68 on April 10 appears to have exhausted the short-term sterling bulls. Sterling stalled just in front of the multi-year high set in mid-February near $1.6825. The gains had lifted sterling above the upper Bollinger Band. On April 9, sterling closed above the upper band for the third time this year and after each of the other times sterling came off at least two cents. Downside potential extends toward $1.6600-40. Sterling also looks heavy against the euro. The euro's move toward GBP0.8230 appears to have completed the drop from GBP0.8400 in late March.

 

Canadian dollar: From the FOMC meeting on March 19 through the middle of last week, the US dollar lost about 3.8% against the Canadian dollar. The move to CAD1.0860 appears to have completed the greenback's decline. The RSI has already turned up, and the MACDs are about to cross. The initial retracement target is CAD1.1020 and then CAD1.1070, which roughly corresponds to the 20-day moving average.

 

Australian dollar: The head and shoulders bottom we have discussed, projects to about $0.9500.  The Australian dollar reached $0.9460 on April 10, before giving up a cent on profit-taking ahead of the weekend.  That pullback met a minimum retracement objective of the bounce from the test on $0.9200 on April 3.  Provided this area holds,  the bulls may be emboldened.  

 

Mexican peso:   The dollar is likely to recover against the peso.  The RSI is neutral but the MACDs are about to cross.  The dollar traded below the MXN13.00 level in five of the past six sessions and managed to finish only once below there, which seems to have been a clue of the waning downside momentum.  The initial retracement target near MXN13.1330 was approached before the weekend.  The MXN13.1750-MXN13.20 area represents a more important resistance area. 

 

Observations from the speculative positioning in the CME currency futures:

 

1.  The net speculative Australian dollar futures position swung to the long side (3k contracts from -5k) for the first time since last May.  As recently as early February, speculators had a gross short position of 80k contracts.  It has been more than halved to a little more than 34k contracts.  The gross long position bottomed a month ago around 9k contracts.  It is now almost 38k contracts.

 

2.  There were four gross position changes that are significant (more than 10k contracts).  The gross short yen positions was shaved by 10k contracts to 101k.  The net position did not change much as 9k longs also moved to the sidelines.  The gross long sterling position jumped almost 16k to 92k contracts.  This is a new 7-year high.  The Mexican peso accounted for the other two significant gross position adjusted.  Gross longs surged 21k contracts to 70.k.  Shorts were halved to about 14k contracts.

 

3.   It is interesting to think about the positioning a year ago.  Then the net speculative position was short the European currency futures.  Now it is long.  It has been about a 74k contract swing to create the net long 23k contracts has now.  For sterling it was more than 116k contract swing to produce the net long 47k it has now.  The net speculative yen position at -88k contracts is about 10k more shorts than it was a year ago. Speculators are net short half as many Canadian dollar futures as the 71k contracts that they had a year ago. At 3.3k contracts, the net long Australian dollar position is a sliver of last year's 78k contracts. Even though the net long peso position of 57k contracts is the largest among the currency futures, is a little more than third of the size of it year ago position (143k contracts).

 

4.  The gross long euro position fell by 10% to 92.6k contracts, which is the largest gross long position among the currency futures.  It just edged out sterling with its 91.6k contracts.  The yen's gross short position of 101k contracts is easily the largest.  Next is the gross short euro position of 69k contracts.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 04/12/2014 - 15:45 | 4651661 delivered
delivered's picture

Too many people are too focused on technical analysis right now and not on the structural/systemic problems with the USD. The above analysis is fine when looking at the USD against other Western currencies (which support countries are basically all insolvent) over the short-term. But against the changing power structure and rebalancing of the world's economies and wealth (from West to East), it's pointless. History is happening right before everyone's eyes as the world's economies rebalance with the new era of growth squarely centered in the Asian block (Russia to the north providing energy, China through SE Asia and India at its heart, Europe to the west just sticking around for a while, and the Middle East to the Southwest providing energy resources competing with Russia). 

The USD should be showing much more strenght right now in relation to world geo-political events, EM economic problems, and social unrest. Yet it keeps coming under pressure. Something much bigger is happening in the world FX markets right now and I suspect it has to do with the PetroDollar. With the two world's biggest energy producers (i.e., Russia & the Middle East) looking to sell their products into Europe and Asia, why even bother with the PetroDollar anymore. Just an unneeded currency in the middle of the transaction. Remember, those who sell first sell best. I suspect this is happening with the USD as CB reserve currency balances will need to be re-allocated away from the USD to accept the fact that the PetroDollar is simply not needed anymore. 

The irony in all of this is really quite startling. First, the development of energy in Russia (and thus their power base) was the result of the US winning the Cold War. With the old style communist out of the way in Russia and they new crony capitalism established, the West could jump in, earn their riches while impowering the US's major threat for the past 70 years. Unintended consequences I guess. Also, with the the US becoming energy independent, the Middle East has to look for new customers. Asia is a prime target so instead of selling to the US (and supporting the PetroDollar), the Middle East now sells to India, China, etc. Just really no reason to us the USD to buy and sell oil anymore as the markets have moved on. Wonder if any of the SFBs in Government saw this happening 20+ years ago?

Sat, 04/12/2014 - 16:27 | 4651801 Ifigenia
Ifigenia's picture

Excellent.

May i add that since 2008, Bernake, the zio-jew, printed more than 4 trillion of dollars to save and enrich a few to the detriment of USA interests? And i think this act of treason just break the last straw of the camel and force the rest of the World to accelerate the decoupling from petrodollar.

Sat, 04/12/2014 - 14:41 | 4651522 Fuh Querada
Fuh Querada's picture

.

Sat, 04/12/2014 - 14:15 | 4651476 Soul Glow
Soul Glow's picture

Fiat currency is worthless.  Have fun trading.

Sat, 04/12/2014 - 14:42 | 4651528 Fuh Querada
Fuh Querada's picture

well as long as your Bollinger bands get lifted, who cares....

Sat, 04/12/2014 - 13:59 | 4651429 Quinvarius
Quinvarius's picture

The dollar is trying to collapse.  The Fed and Treasury are trying to not let it collapse.  That is pretty much all you need to know.  It will resolve itself with continued hyperinflation.  No matter what the DXY says, it won't make the USD buy anything in the real world.  There has never been any doubt in my mond that the hyperinflation thesis is correct.  It will play out despite the fantasy handshadows people think are real in the futures and currency markets.

Sat, 04/12/2014 - 12:35 | 4651184 Ifigenia
Ifigenia's picture

So, there are  lot of reasons for the investors to run away from dollar and take a risky bet on Greece IOU. What a World we leaving now? Even the risky greeks debts outrun dollar.

More wars crisis manufacture ahead until December.

Sat, 04/12/2014 - 12:39 | 4651153 Winston Churchill
Winston Churchill's picture

Looking at the bland sauce of the G20 communique and reading between the lines,

there is going to be no waiting on IMF rule changes, by the G20-G7 group.

They are going to ditch the petrodollar this year.

The FedRes has only two choices at this point.Either

Support the dollar in the forex market.

Continuing to pump the stawk markets.

Its obvious from watching the 'market' closely that they cannot do both at once.

This coming Monday will tell us what they have decided.

Sat, 04/12/2014 - 12:41 | 4651205 Ifigenia
Ifigenia's picture

And the BRICS Dev Bank will be up and running(?) in July in "BRICS Finance Ministers meet in Washington"
April 11, 2014 in thebricspost.com and India even lunch a missile today to celebrate.

Sat, 04/12/2014 - 11:36 | 4650965 FieldingMellish
FieldingMellish's picture

"The pullback in US interest rates has likely run its course, US data, including retail sales and industrial production, will point to a recovery from the sluggish start of the year, and important chart levels have been approached. "

 

So... weather? LOLZ... nope.

Sat, 04/12/2014 - 11:42 | 4650981 Pool Shark
Pool Shark's picture

 

 

Fielding,

I was about to comment on this exact same quote; but you beat me to it. Greenie for ya...

 

 

Sat, 04/12/2014 - 17:13 | 4651983 disabledvet
disabledvet's picture

the Secretary of State and it would seem even the President himself have declared war on not only Putin but all of Russia and the Russian People.

Very confusing.

Needless to say this is very ambitious policy objective and strikes me as very expensive. As a consequence it's hard to see interest rates heading to Great Depression like levels.

God forbid if we lose a single ship here...let alone an entire Armored Division.

LMT is well underway upgrading the entirety of the US force structure to
prepare for such an eventuality.

And they have a stock price to show for that.

That is just one company however. Many others will be needed.

Of course "Russia has a say" in this matter. Energy prices could double from here just going into Winter!

Sure is hard to argue the "reality of deflation."

Sat, 04/12/2014 - 11:14 | 4650893 DeadFred
DeadFred's picture

In 'normal' times I would definitly go with a USD range-bound bounce, but are these normal times? Unusual events tends to flock together and we are having more than our share now. As the dollar falls to support so do the equity markets. The old correlations would suggest a market correction now would be allowed to shore up demand for the cleanest-dirty-shirt USD but a correction could quickly become a crash, do they risk it? Geopolitics are not what one would consider dollar friendly right now. I can see the makings of a perfect storm if events go the wrong way. What I would love knowledgable input on is the question of how that vast body of derivatives would react to the dollar suddenly dropping to support at 73 and threatening to go through? Anyone generous enough to give real insight into this will will earn my gratitude. With that and $1.75 you can get a cup of coffee at Starbucks (inflation recently killed my 'buck fifty' version of that joke)

Sat, 04/12/2014 - 15:58 | 4651691 Kreditanstalt
Kreditanstalt's picture

The ridiculous thing is you need a "good" economy, risk-taking/speculating and price inflation to get the weaker dollar that is a certainty anyway...just don't know the timing... 

Sat, 04/12/2014 - 13:30 | 4651348 deKevelioc
deKevelioc's picture

Starbucks coffee must be $2.75 by now, but you offer a good point.  Correct, these are unusual times, and I'm not hip on technical analysis when interventions are common and geopolitics are not common.  How many Crimeas come along?

Sat, 04/12/2014 - 10:19 | 4650793 USisCorrupt
USisCorrupt's picture

I just wish the game of Make Believe ends soon. This is really getting old.

Sat, 04/12/2014 - 14:16 | 4651477 Soul Glow
Soul Glow's picture

+1

Do NOT follow this link or you will be banned from the site!