Technically, the dollar is finishing the quarter on strong footing. It has risen against all the major currencies. The New Zealand dollar has eclipsed the yen as the weakest of the major currencies. It is off 7% since end of June. The Canadian dollar is strongest of the majors, losing only 2.7%, and that is after this week's leading 1.2% advance.
Neither the euro nor the yen have been able to sustain even modest upticks. Despite extended positioning, the bears do not appear to have had their fill. Into the weekend G20 meeting, there has been no official resistance to the euro and yen's depreciation. The poor participation in the ECB's new four-year lending facility (TLTRO) has boosted speculation that more aggressive measures will be needed to 1) revive lending and 2) bolster the ECB's balance sheet by the trillion euros Draghi mentioned.
In Japan, BOJ Governor Kuroda welcomed the yen's decline, and pledged to provide more stimulus if needed. This is in the context in which the Federal Reserve's forecasts appear to have increased the risk of an earlier rate hike, and a US economy that is running a bit faster than appreciated. Q2 GDP will likely be revised (September 26) to something closer to 5% than 4% (from 4.2%) and estimates for Q3 GDP are creeping up as well.
A note of caution may be in order for the euro. The multi-month lows set at the end last week were not confirmed by the RSI or MACD. This could be an early signal of a market losing momentum. However, the upside is not compelling, with new selling anticipated in the $1.3000-20 area. On the downside, the next key target is near $1.2750.
The dollar reached almost JPY109.50 before the weekend. It has gone almost straight up since the JPY101-JPY103 four-month range was broken in late August. We had suggested potential toward JPY110. The market may grow cautious as this level is neared. A pullback would be seen as a new buying opportunity for dollar bulls. Downside support is near JPY107.80 to JPY108.00.
The weakness in the yen will likely continue to help lift the Nikkei, which finally turned positive for the year just before the weekend. Since the dollar broke out of the range against the yen on August 20, the Nikkei has advanced by 6.2% to new multi-year highs.
In an almost classic case of "buy the rumor, sell the fact", sterling fell two cents after initially rallying on new that Scotland will remain part of the Kingdom. It appears to have posted a shoot star pattern, a bearish candlestick formation. Recall sterling had rallied from the $1.6050 low on September 10 to $1.6525 shortly after it became clear that the unionists would win. It then proceeded to reverse lower. Initial support is seen a little below $1.6300, and there is a daily trend line that comes in just below $1.6250, in front of a retracement objective near $1.6235.
The Canadian dollar looks interesting from a technical perspective. For those US dollar bulls looking for a currency to diversify into, the Canadian dollar may be attractive. The US dollar was turned back from CAD1.11 at the start of last week, and with the help of a stronger core inflation print, it dipped below CAD1.09 before the weekend. Trend line support, drawn off the mid-July and the early September lows comes in near CAD1.0875 at the start of the new week, which is just north of the 100-day moving average (~CAD1.0855). There are US dollar bearish divergences in the MACD, but that does not rule out some modest upticks toward CAD1.0980-CAD1.1020 The bottom of the range is CAD1.08.
Since it tested the $0.9400 area on September 5, the Australian dollar has slumped 4.3% or nearly five cents. Immediate resistance is seen near $0.9000. Given Australia's interest rates it is expensive to be short when the downside momentum stalls. Weaker commodity prices and the China slowdown are often cited as factors that have sparked the dramatic drop in the Aussie. The Australian dollar appears to have carved out a large head and should pattern from April through early-September. The neckline was broken on September 9 near $0.9220. The minimum objective is just above $0.8900, and below there is $0.8850. Further a field, the 2014 low near $0.8660 from late-January beckons.
Technical indicators are not generating strong signals in the Mexican peso. The US dollar appears in a new broader range of MXN13.00 to MXN13.30. We have a slight bias toward a stronger peso, and see that local stocks have performed better than the MSCI EM index recently, perhaps aided by strength of the US economy and somewhat better Mexican data.
US 10-year yields edged single basis point higher last week. While the near-term risk extends toward 2.70%, many are talking about 2.65%, which corresponds to the 200-day moving average. Perhaps a sharp drop in the headline of August durable goods orders (September 25), as the July surge in Boeing orders is unwound, may encourage some backing off of the yield, but 2.55% may be the most that can reasonably be hoped for now.
Observations based on the speculative positioning in the futures market:
1. There was an unusually high number of significant position adjustments, which we have defined as a change of 10k of more contract in the gross position. This increase in activity has been observed in the spot market as well.
2. The gross long euro position increased by 20.2k contracts to 79.6k. This seems to be a case of bottom picking. The net short position fell as a result of new longs entering the market rather than a bout of short covering. The gross short position fell by 200 contracts to 216.7k.
3. The gross long yen position jumped by 20.3k contracts to 37.6k. This was the principle cause of the decline in the net short position to 83.2k contracts from 101k. The gross short position actually increased by 2.8k contracts to 120.8k.
4. The gross long sterling position was cut by a 25.7k contracts to 55.6k. The gross short position grew by 7.6k contracts. This was sufficient to switch the net position to the short side (6.6k contracts) for the first time since last November.
5. The gross long Australian dollar position was culled by 17.7k contracts to 55.6k. The gross short position increased by almost 1.5k contracts. The net long position was essentially halved to 22.1k contracts (from 41.2k).
6. The gross short Mexican peso position rose by almost 15k contracts to 47.4k. The gross long position was trimmed by 1.6k to stand at 69.4k contracts.
7. Speculators generally added to gross short currency futures positions, with the euro the main exception. The adjustment to the gross long position were more mixed.
8. The net short US 10-year Treasury bond futures position fell to 6.8k contracts from 33.3k. This was mostly a product of 23.2k gross short positions being covered. The bulls added 3.3k contracts, which lifted the gross long position to 443.5k contracts.
