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Dollar's Next Leg Up

Marc To Market's picture




 

The US dollar had a good week to close out October.  It was bolstered to new highs against the euro and yen.  It is driven by both positive developments in the US and negative developments in Europe and Japan.  

 

There were two highlights from the US.  First, the FOMC statement was read with a hawkish tilt. The decline in inflation expectations seemed to have been played down while the improvement in the labor market was recognized.   The two hawks that dissented last time, joined the majority, while there was new dovish dissent.  Q3 US GDP surprised on the upside.  

 

Second, the preliminary estimate of 3.5%, was above the 3.0% consensus, and the 4.2% rise in final sales was the strongest since 2010.  The April-September period is the best six-month economic performance in the US since the second half of 2003.  

 

Underpinning the dollar has been a shift in the pendulum of market expectations of Fed policy. During the panic in the middle of October, the effective Fed funds rate at the end of 2015 fell to 32 bp, according to the December 2015 Fed funds futures contract.  It finished last week at 53 bp, which is almost half way back to where the contract finished September (77 bp). 

 

Developments on the US are positive for the dollar, but developments in Europe and Japan have been negative for their respective currencies.  The lowest inflation in nearly a year, and apparent confirmation that the large government pension fund (GPIF, which acts as a path setter for other pension funds) will reduce its JGB purchases, spurred the BOJ’s unexpected decision to increase its asset purchases from JPY60-JPY70 trillion to JPY80 trillion.  This sent the yen reeling.  The dollar soared to near JPY112.50, the highest level since late-2007. 

 

The dollar's 3.8% advance against the yen was the largest in seven years and pushed the greenback well above its upper Bollinger Band, which is set two standard deviations above the 20-day moving average.  In fact, dollar finished the week near 3.5 standard deviations away from the 20-day moving average.  This should make one cautious even though the RSI and MACDs look constructive.   

 

Since the high was recorded, the dollar has not been below JPY111.80.  A break of this area could spur a move toward JPY111.00.  The dollar's pullbacks may be limited because many weak longs had already been squeezed out on the pullback to almost JPY105.25 in the middle of October. In addition, the  bulls are not just talking about JPY115.00, but JPY120.  

 

Euro area data, especially until the end of the week, was generally better than expected.  These reports included the Asset Quality Review and stress tests, PMI, M3 money supply and the bank lending survey.  The euro's rally fizzled mid-week near $1.2770, from which it staged a reversal and an outside down day.  Data in the second half of the week, including German and French retail sales and soft German inflation figures pushed a soft market even lower.  

 

The euro was pushed to almost $1.2485 before the weekend.  The technical tone is poor.  The RSI continues to head lower, (but is not over-extended), and the MACDs have turned down.  The only note of caution comes from the weekly close below the lower Bollinger Band (~$1.2550).  There is little chart support until $1.20.   Initial resistance is pegged near $1.2560 and then $1.2600-20.  

 

The inverse head and shoulders pattern sterling appeared to have carved out failed.  Sterling has found bids below $1.60, but the upside may be limited.  Initial resistance is seen in the $1.6060-70 area, more formidable resistance near $1.6200 seems miles away.   

 

The Australian dollar was the only of the major currencies to have held its own against the US dollar last week. The RSI is neutral, and the MACDs are set to cross.  A rally into the $0.8880-$0.8900 will likely be sold while initial support is seen in the $0.8770 area.  

 

The Canadian dollar was pushed lower ahead of the weekend by a poor August GDP figure.  The 0.1% contraction is the first such contractions this year.  The US dollar appears to be comfortable in a CAD1.12-CAD1.13.  A close beyond that range may point to the direction of the next big figure move,  

 

The strong dollar environment is too much for the peso.  At the start of last week, the dollar pushed above MXN13.60, before reversing.  In the second half of the week, the greenback tested MXN13.40 and found bids there.    Look for a test on the dollar cap again in the week ahead.  

 

 

Observations based on speculative positioning in the futures market:  

 

1.  There were no significant (more than 10k contracts) adjustment in the gross currency futures positions in the CFTC reporting week ending October 28.  Of the 14 gross positions we track, only four changed by more than 5k contracts.  

 

2.  The bearish currency view is highlighted by the increase gross short position, except for the yen (-7.1k contracts to 91.3k) and Canadian dollar (-2.9k contracts to 47.5k).  Gross long positions mostly fell, except for sterling (+4.2k contracts to 40.7k) and the Australian dollar (+3.5k contracts to 17.4k)

 

3.  The net short yen futures position has been nearly halved to 67.4k contracts early September.  It is the smallest since July.  This has been mostly a function of short covering.  The gross short position has fallen by 60k contracts over the past four reporting periods.  The gross long position has fallen by about 6k contracts over the same period.   The yen's sell-off in the second half of last week occurred as the gross short yen position was the smallest in two months.

 

4.  The gross short 10-year US Treasury futures position was cut to 35.8k contracts from 90.0k.  The longs were trimmed by 25.5k contracts to 431.2k.  The gross short position fell 79.7k to 467.1k contracts.  

 

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Sun, 11/02/2014 - 09:30 | 5403619 orangegeek
orangegeek's picture

as unpopular as it sounds, the USD is the safe haven - ahead of PMs

 

USD dailly shows near vertical ascent

 

http://bullandbearmash.com/chart/usd-weekly-rockets-year-high-push-89-we...

 

USD monthly shows more much more upside there is - potentially

 

http://bullandbearmash.com/chart/usd-dollar-monthly-closes-1-key-resista...

Sat, 11/01/2014 - 23:21 | 5403079 jomama
jomama's picture

'cleanest' fouled disgusting shirt.  put that bitch on and wear it with pride!

Sun, 11/02/2014 - 09:20 | 5403606 JamesBond
JamesBond's picture

mega depression bitchez

 

 

 

jb

Sat, 11/01/2014 - 15:55 | 5401991 WTFRLY
WTFRLY's picture

AE 9/11 Truth researchers plan lawsuit to seek release of 500,000 documents held by FEMA, NIST

 

http://wtfrly.com/2014/11/01/ae-911-truth-researchers-plan-lawsuit-seek-...

Sat, 11/01/2014 - 14:28 | 5401848 joego1
joego1's picture

Flee to safety on U.S.S. Titanic.

Sat, 11/01/2014 - 13:29 | 5401744 Consuelo
Consuelo's picture

The tag line to this piece:

"A look at the currency market as if analysis mattered."

Onward then:

"Second, the preliminary estimate of 3.5%, was above the 3.0% consensus, and the 4.2% rise in final sales was the strongest since 2010.  The April-September period is the best six-month economic performance in the US since the second half of 2003."

If indeed 'analysis' really does matter, Mark Chandler, how about giving the audience a bit of that same analysis to explain just HOW we got to that vaunted 3.5% GDP print, and what the likely DOWNWARD revisions will be next time around...?

Sat, 11/01/2014 - 15:46 | 5401969 ebworthen
ebworthen's picture

My thoughts exactly. 

I was going to say he was making progress when I read the headline: "A look at the currency market as if analysis mattered" but I think he is serious.

In a laundry bin of dirty shirts reeking of body odor the U.S. Dollar may be the cleanest.

The problem is not finding a shirt, the problem is that no one is willing to do the laundry.

Sat, 11/01/2014 - 12:53 | 5401674 disabledvet
disabledvet's picture

So great stuff as always. Obviously I'm a micro guy so while bollinger bands and standard deviations matter nothing matters more that actual data that can explain what is truly inexplicable namely the collapse of not one but "the other" world currency reserve as well (yen AND euro.)

It is ironic indeed in the age of "know it all ism" that folks who call themselves professionals can only find themselves staring at their computer screens in wonder. There are people who are driven to produce in this world...and sometimes that is exactly what they do.

Can't we just be honest here and say the yen and euro are in total freefall?

Of course we said that that would require an explanation (s)...actual thinking rather than responding emotionally to the "trade de jure."

Sat, 11/01/2014 - 12:37 | 5401657 limacon
limacon's picture

Man from La Mancha , the Man-with-no-name and the Magnificent Seven meet in Almeria .

"No dollar to die for , not even a fistful of dollars . 

Too many dollars . Death has no value ."

 

http://andreswhy.blogspot.com/2014/06/the-quiet-revolution.html

Sat, 11/01/2014 - 12:29 | 5401642 AdvancingTime
AdvancingTime's picture

The dollar should continue to get stronger as people flee weaker currencies. Recently released minutes from the last Federal Reserve meeting confirmed growing concern about the pressure a stronger dollar is putting on other currencies around the world. Bottom-line is other currencies are under assault because both economies are weak and countries are buried in debt they can never repay at real market interest rates. When investors become unwilling to buy the bonds of heavily indebted nations causing the bond bubble to burst the values of currencies in those countries will tumble.

While there are not many Bond Vigilantes there are a slew of  Currency Vigilantes and they are ready to make their presence known. Recent weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The Currency Vigilantes are acutely aware of when a currency is overvalued or ready to be re-pegged and pounce on the weak currency to tear it apart. The article below questions just how stable the currency markets really are and may be a signal that currency trading is about to get very wild. Please note, this may also be sending a signal that the whole system is unstable and the stock market is about to drop like a stone if hit by contagion.

 http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.h...

 

Sat, 11/01/2014 - 12:23 | 5401628 limacon
limacon's picture

"Dollar , dollar on the wall ,

Who's the fairest currency of them all ?"

 

"Alas ! your beauty is linked to the inflation rate .

By tomorrow , you will be yesterday's date !"

 

Sat, 11/01/2014 - 12:42 | 5401662 Bossman1967
Bossman1967's picture

Where is the bottom for gold and silver? Watch out below

Sat, 11/01/2014 - 23:17 | 5402776 Bastiat
Bastiat's picture

The bottom is the lowest price where a bid can still be met with delivery in exchange for digi-fiats. 

Sat, 11/01/2014 - 12:15 | 5401617 limacon
limacon's picture

Zeroth: You must play the $ game in Casino Gaia
First: You can't win.
Second: You can't break even.
Third: You can't quit the game.

 

But we now have a more honest game :

http://andreswhy.blogspot.com/2011/10/ostrum-game.html


Sat, 11/01/2014 - 12:10 | 5401609 limacon
limacon's picture

Well , you can always stretch or lop like in Procrustes's Ballroom in Hotel California .

http://anime.stackexchange.com/questions/4457/how-much-is-sixty-billion-...

 

Sat, 11/01/2014 - 17:00 | 5402162 Rememberweimar
Rememberweimar's picture

Parasite Obolinite to meet with Federal Jew Reserve on Monday... http://www.reuters.com/article/2014/10/31/us-usa-fed-obama-yellen-idUSKB...

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