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US Dollar Correction Continues

Marc To Market's picture




 

The disappointing US employment data reinforces our expectation that after a strong advance in Q1 the US dollar will correct lower in Q2.  The euro's performance is also broadly consistent with the US experience in which the dollar sold off in anticipation of QE and than rallied on the fact. The euro recorded its low within a week of the ECB's launch of its public sector purchase program.

 

Our long-term constructive outlook for the dollar remains intact and driven by the divergence of monetary policy trajectories.  We do not expect any one high frequency report to alter the calculation of monetary policy.  Fed officials, including the leadership, recognize that the economy had lost momentum in Q1 15 but understand the headwinds to be transitory.

 

That puts the onus on Q2 to show improvement.  We anticipate that improvement to be led by the consumer, who pulled back in Q1 after going on the biggest shopping spree in a decade during Q4 14.  The rise in hourly earnings, the relatively cheap gasoline, and an increase in savings will provide the fuel.  The strong March auto sales figures give an inkling of what we expect.

 

Even before the jobs data,  our reading of the technical condition warned that the dollar's downside correction may not be over. The pre-weekend price action,  even with the light participation, reinforces this judgment.  From a high level view, this offers emerging markets an important reprieve.  There is scope for their assets and currencies to do better.    

 

The MSCI World Index (Developed) has outperformed the MSCI Emerging Markets equities over the past six months but has begun lagging recently. This trend is poised to continue over the next several weeks.  However, it is mostly tactical and opportunistic, as we remain concerned about the end of commodities super-cycle, slower growth in China and the impact of higher US rates eventually. We continue to favor Asia and Eastern Europe over Latin America.  

 

The euro has carved out a roughly $1.07-$1.1050 range.  Given the positioning and the mounting evidence indicating that the eurozone growth surpassed the US in Q1 15, the risk is that the range breaks to the upside.  The technical indicators we look at are consistent with this view.  We have suggested that an upside break would target $1.1265 and possibly at most $1.15.  A stronger euro in the current environment is likely consistent with lower implied volatility. We would peg initial support now for the euro near $1.09

 

The dollar has been in a broad trading range against the yen since last November after appreciating by around 15% following the BOJ's surprise and closed decided decision to expand its already aggressive monetary policy at the end of last October.  That large range is seen between JPY115.50 to JPY122.00. Within that broad range, it has most recently been confined to the middle third or roughly JPY118.30-JPY120.00.    Beyond the bottom of this narrower range, support is seen near JPY117.50.  In this environment, implied yen vol may also ease.  

 

We note that speculators have been reducing short yen positions in the futures market, leaving positioning considerations not nearly as extreme as the euro's.  In addition, after BOJ's targeted inflation measure has fallen to zero and the Tankan report showed poor sentiment and planned to cut capex, there is likely to be speculation of additional easing measures.   On top of this, Japanese pension funds are believed to be continuing to diversify away from JGBs and into local equities and foreign assets.  This implies that the yen will likely underperform the euro in the period ahead.

 

With the national election dominating attention, sterling is also likely to underperform the euro in the period ahead.  With the risk of deflation and lowflation in any event, the central bank is in no position to begin normalizing monetary policy.  Sterling frayed the lower end of the $1.48-$1.50 range but did not close below $1.48 over the past two weeks.  The technical indicators are constructive, and sterling finished the week above its 20-day moving average for the first time in a month.  A break of $1.50 could spur a move into the $1.51-$1.52 area.  

 

The fundamentals for the Australian and Canadian dollars are not particularly favorable, but the technical indicators are constructive.  A rate cut by the RBA in the week ahead is largely priced in, and the RSI shows a bullish divergence.  There is scope for a sell the rumor buy the fact type of activity that could lift the Aussie toward $0.7800 though the upper end of the two-month range is closer to $0.7900.     

 

The Bank of Canada surprised the market with a 25 bp rate cut in January.  The Canadian dollar sold off in response as one would expect.  However, since late-January the US dollar has been in a clear range against the Loonie:  1.2350-1.2800.  The greenback approached the upper end of its range on March 31. The range held before the US employment disappointment, which saw the US dollar fall to CAD1.2430.  While additional dollar slippage is likely, the market is unlikely to get too aggressive ahead of April 10 release of Canada's jobs data and the central bank meeting on April 15. 

 

The technical indicators for oil are not generating strong signals, and the fundamental backdrop is mixed.  US output fell ever so slightly, and the rig count decline has begun moderating. Excess production continues to pour into the storage facilities.  There as some financial risk to supply emanating from banks reassessing the value of collateral by the shale producers.  Meanwhile, reports suggest OPEC likely boosted output in March.   A final agreement with Iran has not been reached, and sanctions have not been lifted.  The possibility that an agreement is reached, which still has significant work to be done and faces formidable political obstacles, especially in Tehran and Washington, not to mention Jerusalem and Riyadh, may weigh on forward prices and reduce the contango.

 

US 10-year Treasury yields fell to 1.80% in exceptionally thin trading in response to the jobs data. Technical indicators allow for an additional decline in yields though profit-taking is likely as 1.75% is approached.  The decline in US yields ahead of the weekend may encourage the same globally in the days ahead.   The December Eurodollar futures tested its contact high (implied yield lows of 57.5 bp) and the pricing of the Fed funds futures strip suggests some are shifting their lift-off expectation into next year.  

 

The pullback in the dollar and bond yields should help support the S&P 500.  It has successfully retested the lows set earlier in March and appears technically poised to retest the record highs.   Given investors preference in Q1 for European equities over the US, perhaps a contrarian play would be to go the other way   For those who have been tactically hedging euro risk on their equity purchases they may want to consider reducing them.  

 

 

Observations based on the speculative positioning in the futures market:

 

1.  There was only one significant (10k+) gross position adjustment among speculative accounts, and that was a 16.7k cut in the gross short yen positions.  As of March 31, 68.3k speculative gross short yen contracts remain open, which is the smallest since last July.  In early December 2014, there were 153k gross short contracts.  This has seen the net short position fall sharply.  In the last week alone it was nearly halved to 23.9k contracts (from 45.9k).  

 

2.  The net speculative Swiss franc position swung back to a small long (0.7k contracts).  Throughout the month of March, it has been back and forth, long and short on alternating weeks.  Over the past week, it was more a function of shorts covering (3.6k contracts) than new gross longs being established (1.1k contracts).  

 

3.  The overall pattern among the speculative participants in the futures market is to reduce exposures.  Of the 14 gross positions we track, all but four were reduced.  The exception were  in the small increases in gross yen (5.3k contracts),  Swiss franc (1.1k contracts), Australian dollar (3.7k contracts) and the Mexican peso (8.2k contracts). 

 

4.  The speculative net short US 10-year Treasury note futures position fell to 114k contracts form 180k.  This was more a function of short covering (52.9k contracts) rather than new speculative longs being established (13.1k contracts).  

 

5.  The speculative net long light sweet crude oil futures increased by 19.8k contracts to 226.7k.  Speculators reduced gross short positions by 17.4k, leaving 289.3k contracts. The gross long position edged 2.4k contracts higher to 516.0.   

 

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Sun, 04/05/2015 - 00:25 | 5960201 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

short CAD & Oil state mortgages!!

Sat, 04/04/2015 - 22:12 | 5960004 swmnguy
swmnguy's picture

"...The dollar's downside correction may not be over."  What, you mean the collapse from 99.5 all the way down to 96.8?

Um, yeah, there's still downside left for USD.

Sat, 04/04/2015 - 21:06 | 5959830 Aussiekiwi
Aussiekiwi's picture

'That puts the onus on Q2 to show improvement.  We anticipate that improvement to be led by the consumer,'

And at that point I fell off my chair laughing.

Sat, 04/04/2015 - 22:26 | 5960040 swmnguy
swmnguy's picture

Yeah, I was anticipating Q2 improvement to be led by a majestic herd of skittle-shitting flying unicorns, myself.

Sat, 04/04/2015 - 20:12 | 5959715 orangegeek
orangegeek's picture

US Dollar daily remains inside bull channel

 

http://bullandbearmash.com/chart/dollar-daily-closes-flat-euro-closes-mo...

 

For USD to fade, the Euro needs to climb higher (with their NIRP already in place).   When the Euro falls, the USD arithmetically climbs.

 

Any pullback in the USD will likely be short lived.

Sat, 04/04/2015 - 19:30 | 5959609 Al Tinfoil
Al Tinfoil's picture

"US Dollar Correction Continues."

"The disappointing US employment data.....blah, blah, blah, blah, blah......"

Who comes up with this crap, and how brain-dead do they think the public are who would invest any credulity in it?

 

 

Sat, 04/04/2015 - 19:46 | 5959639 Gambit
Gambit's picture

Seriously, I love it how they rationalize their analysis by saying "the consumer will do x and y, since they did or didnt do it in the past quarter."  If they didnt spend in Q1 due to negative economic news, or felt that things were getting worse, what makes this idiot think that they will spend in Q2 when the same negative feelings are still there.  And he talks as though he knows the "consumer," who the fuck is the consumer anyways.  Anyways, I for one do not plan on changing my spending habits just because it's Q2... have the popoulation doesnt even know what Q they are in.

Sat, 04/04/2015 - 18:12 | 5959427 Jack4952
Jack4952's picture

MY QUESTION:

Why would ANYONE sane person at this point in history wish to be the Chairman of the Federal Reserve OR the next Prresident of the U.S. (to be elected in 2016 and assume office in 2017)?

Isn't that equivalent to being appointed the captain of the Titanic AFTER it hit the iceberg?

Sun, 04/05/2015 - 09:29 | 5960612 TeethVillage88s
TeethVillage88s's picture

Leona Helmsley might have fit in with the FED Culture. Is she dead now?

Sat, 04/04/2015 - 17:47 | 5959378 Jack4952
Jack4952's picture

In the final analysis, especially when the SHTF, all PAPER CURRENCIES are simply PAPER. But with one caveat: those pieces of paper are worth LESS than identical pieces of BLANK paper, since the paper currency cannot be used for writing.

Gold, silver and farm land with a good water supply in a wooded area. These are the essentials of life when the "fiat currency well" runs dry!

 

Sat, 04/04/2015 - 17:06 | 5959301 kchrisc
kchrisc's picture

Is the dollar's recent run-up based on "strength," or "exit?"

My dollars are on "strength," but my gold is on "exit."

The banksters need to repay us.

 

Has anyone but me noticed how many Hollywood films are being financed, and/or made in Europe? The "hens" are moving to a new duck pond, as this one's just about out of water, and is going to soon be full of pissed off "ducks."

 

Sat, 04/04/2015 - 18:03 | 5959405 Jack4952
Jack4952's picture

Reply to kchrisc:

kchrisc asked, "Is the dollar's recent run-up based on "strength," or "exit?"

 

My opinion: Neither. All currencies are losing their value in terms of REAL "purchasing power". They are just doing so at differing rates over time.

As a former physician, my analogy would be having 3 patients who experienced  a severe coronary artery occlusion and consequent cardiac arrest ("heart attack") on the SAME day, but all 3 were successfully resuscitated and then hospitalized.

The patient with with the most severe cardiac muscle damage might die later that same day. The patient with less, but still very severe cardiac muscle damage might die within a week. The third patient, with the least, but still very severe cardiac muscle damage might die within 2 weeks.

The point is that all three patients are in the process of dying - the are just doing so at different rates.

 

John-Henry Hill, M.D.

retired physician

Sat, 04/04/2015 - 22:23 | 5960035 weburke
weburke's picture

the dollar is not sick. factors are pro strenghtening.

Sun, 04/05/2015 - 10:07 | 5960678 detached.amusement
detached.amusement's picture

so in your world, beyond sick is no longer sick?  hahahaha

Sat, 04/04/2015 - 18:14 | 5959433 Max Steel
Max Steel's picture

where were you DOC ? We've been missing your daily thoughtful updates on Ukraine crisis .

Sat, 04/04/2015 - 14:48 | 5959025 Kassandra
Kassandra's picture

Mark to toilet.

Sat, 04/04/2015 - 13:40 | 5958887 Bruce Krasting
Bruce Krasting's picture

Marc, Do you really believe that 'markets' are producing these rates?

 

You rightly point to the Yen that has been (functionally) 119 - 120 since November. If it slips below that, the invisible had appears. If it goes above the important 120, it fades as the BoJ leaves orders with the banks and trading companies.

 

The BoJ puts in a floor and a cap - this is not a market. It's rigged.

 

 

Sat, 04/04/2015 - 17:05 | 5959304 Bay of Pigs
Bay of Pigs's picture

You will never get this author to admit anything like that Bruce.

He is a Wall Street shill and FED defender.

Sat, 04/04/2015 - 13:18 | 5958829 Jack Daniels Esq
Jack Daniels Esq's picture

Yellen's winter will fuck this hypothesis all to hell

Sat, 04/04/2015 - 13:10 | 5958811 FIAT CON
FIAT CON's picture

There will be no advancement of solar or other renewable enregies with oil this cheap.

 

Sat, 04/04/2015 - 13:02 | 5958789 basho
basho's picture

"strong advance in Q1 the US dollar will correct lower in Q2"

and here i thought we were going to the moon.

tic toc

Sat, 04/04/2015 - 12:36 | 5958738 Bossman1967
Bossman1967's picture

Oil not going anywhere but down and what its doing to the Oklahoma economy is a terrible thing and will soon be felt across this nation as thousands of people are being laid off next are companies filling bankrupsy . So hold on a shit storm is breing and the Iranian oil is on its way. These geniousess have finally transformed the USA to a shithole

Sat, 04/04/2015 - 15:57 | 5959158 Berspankme
Berspankme's picture

Can't all those laid off oil workers get a job at Starbucks or something? Forward

Sat, 04/04/2015 - 18:10 | 5959423 lakecity55
lakecity55's picture

Mickey D's just gave out "big" raises, perhaps they can flip burgers until Oil comes back...

Sat, 04/04/2015 - 16:42 | 5959254 Consuelo
Consuelo's picture

'Berspankme'...

Gawd that is F'ing great...!!!   And here I was getting a chuckle every time 'alangreedspank' would show up with his bouncing stick-dick man...

Good 'ole fashioned cynicism just doesn't get any better than this place.   Love it!!

 

 

Sun, 04/05/2015 - 08:11 | 5960496 mvsjcl
mvsjcl's picture

Like this fucktwat know what the "dollar" will do as a result of specific "market forces" acting in a measurable, chartable fashion. LOL! Might as well poke around a pile of chicken entrails, for chrissakes!

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