FX: Diverging Performances

Marc To Market's picture

There was a clear divergence in the performance of the major currencies over the past week. Simply put, the dollar-bloc was strong, and the continental European currencies were weak.


Sterling, with the help of Carney's warning that a rate hike could be delivered sooner than the market thinks, remained sympatico with the dollar-bloc. The New Zealand dollar led the majors, and was rewarded for the hawkishness of its central bank as well.


The yen moved with the dollar-bloc, gaining almost 0.5% against the US dollar. The impulses did not come from US yields, where the benchmark 10-year Treasury note was flat. It is true that US shares traded heavily, in the first of the week, the Nikkei itself closed slightly higher on the week.


The demand for peripheral European assets failed to lift the euro. It appears to have been mitigated the wider differentials. The premium the US offers over Germany on 2-year paper is at its highest level in seven years. The ECB's measures have driven EONIA below the effective Fed funds rate for the first time in six months.


The euro's bounce off $1.35 failed to be very convincing. We look for a push below there in the coming days. The year's low was set in early February just below $1.3480. A dovish Fed could spur a bounce, but the market seems to be inclined to sell into bounces still. This psychology may be neutralized on a move into the $1.3580-$1.3620 band. The 200-day moving average is slowing rising from the $1.3660 area.


Sterling is the market's darling. In the futures market, the speculative gross long sterling position is the larger that the gross long euro, yen and Swiss franc positions put together. Carney's unexpectedly hawkish comment saw sterling approach the $1.70 level again (similar high in early May) before stalling). We look for penetration in the days ahead, perhaps fueled by sterling purchases against the euro (and yen). Sterling peak since the end of 2008 was in early 2009 near $1.7045, but a convincing break would likely target the $1.7250-$1.7350 area, from a technical perspective.


The immediate technical tone is strong. The 5-day has crossed back above the 20-day average. The MACDs are turning up. The note of caution comes from sterling finishing last week above its upper Bollinger Band. In a pullback, support may initially be seen above $1.6900.


The divergent monetary policy trajectories are pushing the euro lower against sterling. In the medium term, the goal is the 2012 low near GBP0.7750. The more immediate target is GBP0.7880. Here too, the Bollinger Band has been broken on a weekly closing basis, and this signal favors a little patience.


Technically, the dollar appears set to edge higher against the yen. More likely, it can churn higher in narrow trading ranges. On the upside there seems to be resistance levels every 20 pips from JPY102.00. It is important that the JPY101.60 area held. There appears to be an increased influence coming from the crosses. A key level to monitor in the euro against the yen is the 200-day moving average (~JPY138.80). The ECB's initiatives appear to have trumped Abenomics as the euro has not sustained a break of its 200-day moving average against the yen since before Abe was elected.


The Canadian and Australian dollars look vulnerable, though the former's strength over the past week surprised us. The US dollar's streak of lower lows came to a halt with the upticks before the weekend. The greenback fell to almost CAD1.0840 and provided this holds it would help solidify the lower end of the greenback's range over last six weeks. Initial resistance is seen just below CAD1.09.


The Australian dollar exceeded our favorable outlook. It approached the year's high set in April near $0.9460. There was not follow through after the outside up-day was posted on June 12. A break now of $0.9370 would likely signal a corrective phase rather than consolidation, in which case the next target would be around a cent lower.


The Mexican peso was considerably weaker than we expected. In the recent past, surprise rate cuts by the central bank spurred a quick drop in the peso and then a strong recovery. It was the same thing this time, except for the recovery. The US dollar took out the significant downtrend line drawn off the January, February, March and April highs. Technically, the dollar is poised to record another leg up in the coming days. The next target is the MXN13.12-15 area and then MXN13.20.


The yield of the US 10-year Treasury note flirted with the downtrend line going back to January, but unlike the dollar against the peso, it was unable to sustain the break. That trend line comes in near 2.62% though an intra-day high was recorded near 2.66%. On the downside, a move below 2.60% could see slippage toward 2.55%. Most of the technical readings suggest that the price of oil may still advance. However, it did finish the week above the upper Bollinger Band, which warns of a pullback, or at least some sideways trading at the start of the new week.


Observations based on speculative positioning in the futures market:  


1.  The largest position adjustment in the reporting week ending June 10, was the euro.  Gross longs and gross shorts both changed by more than 10k contracts.  There were only 3 other gross positions that were adjusted by more than 5k contracts.  As has been the recent pattern, the gross euro longs continue to be culled. They fell by about 30% to 43.7k contracts.  As recently as early May, there were 111k gross long euro contracts in speculators' hands.  The gross short position rose by a little more than 10% to 100.9k contracts, which is about a quarter more than in early May.  Since flipping to the short side in early May, the net short position has grown in each of the past four weeks.  


2.   We note that this reporting period ended prior to BOE's Carney rate warning that saw sterling futures experience record volume.  The high volume in a rising market suggest new longs were established that are not picked up in this report.  The gross short sterling positions rose for the second week in a row and we suspect that some of the late shorts capitulated.  


3.  The net short yen position rose to a new 2-month high of 82.2k contracts.  Longs were pared slightly and just below 12k contracts, it is the third lowest gross long positions since 2003.  Gross shorts increased by 7.3k contracts to 94.1k.  


4.  The dollar rose nearly 20 big figures against the Mexican peso during this reporting period, but the peso bulls were not shaken.  The gross longs grew by less than 1k contracts and about 3.3k short gross short contracts were covered.  This resulted in an increase in the net long position to 90.2k contracts.


5. In the US 10-year note futures, the bears continued to dominate.  The net short position rose to 71.9k contracts form 43.3k.  This was the result of gross longs shaving 11.2k contracts (to 372k) and the gross shorts adding 17.4k contracts (to 443.9k). 

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Jano's picture

uk economy missed all indicators in Q1 and is well off in comparison.

how much off are then the others?


SAT 800's picture

Kyle Bass has the Yen reaching 115 by Dec.; and I like his market judgement a lot better than the usual attempts to detect "trends" which usually turn out to be illusory. Accordingly, I'm short the Yen for Dec. There's a lot of conversation about the evident attempt to "regulate" or control the Yen from not dropping below 102/ US$. this is the type of control that has never happened historically; it doesn't work; there's not reason at all to believe that it's possible in this case. The Yen has no redeeming virtue.

Haager's picture

If $usdyen goes to 115 it will be below 100 soon. It's unlikely that it's going hike without a serious drop b4. 

SAT 800's picture

The British Pound has been in an uptrending channel this year which is now ended at a flat top with two nicely separated spike tops; ( a double top ). It will trade down now for the rest of the year. As it moves down from the 1.69 area to t he 1.59 area it will generate a taxable return of $6,250 per contract, at the CME. If you don't have a futures trading account you might want to open one at SaxoBank.com. These markets are moved by the trading desks at major banks; they do whatever is easiest; it's now easier to move the pound down; since it's too high; then it is to try to re-ignite the rally. In the case of the London Based Banks, of course, this will have the enthusiastic approval of the British Gov. as they hope they may actually be able to export something, somewhere, that someone will want to buy. This is a currency that represents a moribund economy that is mired in debt, and has a big and incurable defecit of payments; in short they're broke and getting broker all the time. Interest rate differentials are often cited as major movers of currency exchange rates. This is an outdated concept; the price charts don't bear it out. If you already have a futures account, you can sell the Pound Monday Morning; basis Dec. and wait paitiently. you have to understand that you must have a reasonable time-line, (months), not days; and good money management; eg. don't overdo the margin.

BeetleBailey's picture

Excellent...as always...well done Marc

disabledvet's picture

I don't know why I even bother.

"We're swimming in liquidity" in the USA...the only reason the State (s?) is/are bankrupt is a matter of policy.

"Currency trading" as such is of no consequence here.

The impending defaults, credit annihilation and surge in interest rates in public debt is a prima facie direct result of Central Bank policies that simply put bank balance sheets ahead of the existence of the State itself.

It is of course completely absurd..a "Financial Barbarossa" so to speak...but do not confuse abject policy hopelessness with an inability to create wealth.

The performance of equities alone is sufficient to show there is no fundamental "error" in the market itself.

Simply put "when you spend 100 million dollars on a fighter plane that can be brought down by a 14 year old teenage hacker" the one with the problem is not the 14 year old.

I do like Hobby Lobby here as a consequence.