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Dollar Outlook and Currency Rotation

Marc To Market's picture




 

The US dollar posted gains against all the major currencies over the past week save the Australian and New Zealand dollars. The Reserve Bank of Australia appears to have moved to a more neutral stance on rates, relying on the currency to provide the necessary adjustment.  

 

The dollar's gains were helped by a strong July auto sales, a jump in the service sector ISM, and a jobs report that was consistent with recent trends.  Over the course of the week, a greater risk of a September hike was priced into the September Fed funds futures contract.  

 

On the other hand, the Bank of England seemed to dash speculation of a rate hike this year.  This sapped whatever strength the sterling bulls had been mustering.  It was the best performing major currency against the dollar in July, but has fallen out of favor again.   

 

There seems to be a bit of a rotation taking place among the major currencies.  The dollar-bloc is beginning to show preliminary signs of stabilizing while the Swiss franc and Scandis have taken over the leadership on the downside.   Some suspect the Swiss National Bank has covertly driven the franc down.  Since the middle of July, the euro has rallied nearly 3.5% against the franc.  The Swiss franc lost 2% against the US dollar last week.   The franc's weakness will help recoup some of the paper losses the central bank experienced in H1. 

 

Both Norway and Sweden publish July CPI figures in the week ahead.  Despite the strong growth in Sweden in Q2 (1% quarter-over-quarter), the deflation pressures likely to remain evident are the key to monetary policy (negative rates and asset purchases).  Falling inflation and the tick up in unemployment keeps the door open to for lower rates in Norway.  The Norges Bank meets next on September 24. 

 

The technical condition for the euro is weak, but it is not clear that the $1.08 area that provided support in May and July is about to break.  There are some suspicion that a large bid near there may be from Swiss officials.    Risk-reward considerations favor selling into bounces.   The euro posted a big outside up day before the weekend.  To do so, it had to shrug off the US jobs data that boosted the risk of a September lift-off by the Fed.  This suggests scope for follow through euro gains. The $1.1030-50 may be the first serious hurdle, but risk extends toward $1.1100-20.    

 

The dollar made a new marginal high of almost JPY125.10.   However, there was momentum, and despite the constructive US employment data, the yield on the 10-year Treasury slipped. Despite a number of attempts since early June, has only managed to close above JPY125 once. That proved to be a near-term top. The dollar's technical condition deteriorated with the reversal after the US employment report. Initial support is seen near JPY124.00, which also corresponds to the 20-day moving average.  Look for better dollar buyers on a move toward JPY123.20. 

 

Sterling has fallen out of favor amid disappointment that the Bank of England did not signal any urgency to lift rates.  The strong close negated the intraday break of the trendline off the June and July lows (~$1.5470).   A convincing close below there is technically important as it represents the neckline of a potential topping pattern.  If confirmed, it would signal risk toward the July low near $1.5330 on its way toward $1.5250.  On the upside, initial resistance is seen in the $1.5550-70 area. 

 

The Australian dollar bottomed near $0.7235 at the end of July.  There were modest bullish divergences in the RSI and MACDs.  The five-day moving average is crossing above the 20-day average for the first time since late-June.  The close above $0.7400 before the weekend is a constructive development.  Initial short-covering gains can carry it toward $0.7500. 

 

The US dollar peaked just above CAD1.3200 in the middle of last week.  Like the other currencies, the Canadian dollar recovered before the weekend.  However, it appears poised to be the laggard within the dollar-bloc.  The market may retest the US dollar high if oil continues its slide.   Initial US dollar support is seen near CAD1.30 where the 20-day moving average is found.  The greenback has not traded below its 20-day moving average since last June.   

 

The September light sweet crude oil futures contract extended its losing streak to eight consecutive weeks.  During this streak, it has lost about 27%.   The technicals are stretched nut do not show the kind of divergence that is associated with a bottom.  The September contract settled on its lows following news that the US rig count rose for the third consecutive week.  Nearby resistance is seen near $45 and then $47.  On a continuation contract, the target is the mid-March low just above $42.00.

 

In the face of stronger US economic data, US 10-year Treasuries remained firm.  The mid-week sell-off that took yields to almost 2.30% was reversed, with the help of falling commodity prices and a weak equity market.   While the S&P 500 briefly pushed through its 200-day moving average near 2073, the US 10-year yield is approaching its 200-day moving average, which is found near 2.14%.  Below there, the May lows beckon just below 2.09%. 

 

The S&P 500 lost 1.25% last week.  It flirted with the 200-day moving average but closed above it. Technical indicators warn against picking a bottom quite yet.  Both the RSI and MACDs are moving lower.  A move above the 2085-2095 area would likely neutralize the technical tone.    The VIX had fallen to new lows since July 2014 in the middle of last week near 10.85% and spiked above 14.5% when the 200-day moving average broke before the weekend.  It finished the session on its lows near 13.4%.     Broadly speaking, continued range trading is the most likely scenario.

 

 

Observations from the speculative positioning in the futures market:

 

1.  Speculators made two significant shifts (10k contracts) in gross currency positioning in the CFTC reporting week ending August 4.  The gross short euro position rose 12.2k contracts to 184k.  The gross short yen position rose 19.8k contracts to 129.6k.

 

2.  After trending lower in recent weeks, the net long Swiss franc position flipped to the short side.  It is the first net short franc position since May.

 

3.  The recent general pattern has continued.  Gross long and short positions mostly increased among the currency futures we track.  Of gross long positions, only the Canadian dollar was cut, and that was by a minor 1.2k contracts, leaving 34.0k.   Of the gross short positions, sterling was slimmed by 1.3k contracts (to 52.3k), and the peso was trimmed by 6.1k contracts (to 104.6k).

 

4.  Speculators sold into the rally in US  Treasuries.  Speculators liquidated 11.1k contracts (leaving 480.4k) and went short 22k contracts (boosting the gross short position to 447.9k contracts).  This halved the net long position from 65.6k contracts to 32.5k.

 

 

5.  Speculators were largely content with their positioning in the oil futures.  The net long position rose 3.7k contracts to 247.1k.  The gross longs rose by 2.7k contracts to 478.7k, while 1k contracts shaved the gross shorts to 231.6k.

 

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Sun, 08/09/2015 - 11:15 | 6406835 Mewa
Mewa's picture

Watch the PBOC break from the old boy's central bank club and devalue their currency against Gold after the US games with deny entry on SDR's....there is a retaliation coming and it will likely be revaluing gold higher which will take out the comex rigging game and hammer the corrupt US bullion banks....

The game of musical chairs will currency devaluations will end with a return to the one true money with no counterparty risk - phyical gold. My pile or dick is bigger than yours so I make the rules....bend over Americans....

 

Sun, 08/09/2015 - 00:54 | 6406279 GRDguy
GRDguy's picture

Marc's income must depend on folks keeping their wealth in the deep blue sea of financial paper promises, where the whales and sharks can get at it.  I prefer "pet rocks" on "dry land."

Sun, 08/09/2015 - 00:37 | 6406254 Jack Oliver
Jack Oliver's picture

The US dollar is on life support - The FED has created 15 trillion and 'lent' it out to foreign banks since the FAKE GFC - FED is monetizing ALL Bond purchases - The US dollar should have crashed years ago - the FED has NO tricks left !

Sat, 08/08/2015 - 22:10 | 6406047 buzzardsluck
buzzardsluck's picture

I miss leo and the madhedgefund guy.  Too bad this fucking guy seems to be the best replacement for comment 'laughs'...

Sun, 08/09/2015 - 01:01 | 6406299 Bay of Pigs
Bay of Pigs's picture

The fact he works for Brown Brothers Harriman (Prescott Bush fame) is one very good reason to completely dismiss this guy as a bankster shill.

I have no idea why the Tylers and ZH post this garbage knowing that most TA these days is devoid of truth and honesty in rigged and manipulated markets.

Sat, 08/08/2015 - 21:53 | 6406028 Lazane
Lazane's picture

a reason that the dollar remains in favor is because the dollar represents living in the best house of a brutally fucked up neighborhood. Where are you going to squirrel away your stash? These folks know manipulation and juggling like no others before them, and they are teaching the next generation that because we are allowed to live in a lawless world, just about anything goes to keep the economic balls in the air. I used to believe that this endgame was just around the corner, though now because anything lawless goes on without repercussions, I have decided to not to worry about guessing when, where and how and live out my days keeping watch and being prepared for anything at anytime, this way I will not miss a thing. cheers! 

Sat, 08/08/2015 - 21:17 | 6405979 Well Hungarian
Well Hungarian's picture

Is this guy Krugmans retarded younger brother?

Sat, 08/08/2015 - 19:57 | 6405850 Consuelo
Consuelo's picture

 

"The demise of the dollar has been greatly exaggerated."

 

Funny how the author would toss out this odd premise, when most of the mainstream financial press has been cackling the precise opposite for well over a year now...

Sat, 08/08/2015 - 17:51 | 6405629 lucky and good
lucky and good's picture

Almost more important than the Fed's interest rate is the value of the dollar in comparison to other currencies. The yen and the euro are in serious trouble, and the pound is very vulnerable to contagion. The path Janet Yellen has continued down is reckless, but what the ECB and BOJ have done borders on criminal. While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known.

It appears the dollar has been in a consolidation period and when the next leg up begins risk will dramatically increase. This could signal the onset of the next global crisis to which 2008 was just the warm-up. More on the problems this will cause in the article below.

http://brucewilds.blogspot.com/2015/08/dollar-about-to-soar.html

Sat, 08/08/2015 - 17:35 | 6405594 Spitzer
Spitzer's picture

The dollar's gains were helped by a strong July auto sales, a jump in the service sector ISM, and a jobs report that was consistent with recent trends.

 

LOL

 

but hey its Marc to -dollar bull- Market we are talking about.

Sat, 08/08/2015 - 17:41 | 6405607 CarpetShag
CarpetShag's picture

This stuff is worthy company on the leaderboard for the 2 crap Phoenix pieces on either side.

Sat, 08/08/2015 - 17:32 | 6405585 KnuckleDragger-X
KnuckleDragger-X's picture

Everybody is playing the currency game instead of fixing their problems. Something is going to break, somewhere, and then the endgame will truly begin.....

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