The Dollar Doesn't Live Up To Expectations

After the strong US jobs data, there was no follow through purchasing of the dollar.  The buck fell against all the major currencies last week, save the New Zealand buck, where the central bank cut rates and signaled the likelihood of another one.

Many, including ourselves, expected the actual dollar to perform better because the recent string of economic data plays into the Fed's fingers.  Even though a rate hike by the FOMC next week is highly unlikely, it can be expected to recognize the reinvigorated financial momentum.  Yellen will most likely try to keep the marketplace focused on the data, not a particular time frame.  Based on current info and the expected trajectory of economic data, a September lift-off continues to be most likely scenario. 

There is a recent pattern.  Whatever direction the euro moves on Friday, it has been moving in the opposite direction on Monday.  After unable to proceed $1.1400 in the middle week, the dinar was sold on Thursday and was drifting lower on Friday.  Then Merkel's remarks (which many observers got of context and used it for what we think is a hyperbolic forex war narrative) sent this quickly lower to $1.1150.  From there, a bout of short covering took it back toward $1.1300.

The euro remains broadly range bound.  After bottoming in mid-March near $1.0460, it spent the next six weeks between $1.05-$1.10.  With the notable exception in late-May and early-June, it has been in a $1.10-$1.15 variety.  The technical indicators tend to be neutral and are not generating a strong signal at the present.

If Merkel's surveys are part of a currency battle, the BOJ's Kuroda comments pointed in the opposite direction.  He suggested that the real effective yen was near a bottom.  Their comments spurred a quick razor-sharp yen advance.  After the razor-sharp move on Wednesday, the yen has spent the next 2 sessions consolidating within which range set at mid week.  The triangle pattern becoming formed is often seen as a continuation pattern, which in the current framework means a lower dollar.  The technical indicators are in conjuction with the dollar retesting the Kuroda-inspired lows close to JPY122.45.  The dollar documented lower highs each program last week.  Rising above the prior day's high then would be the first indication of a possible dollar low.

Sterling snapped a three-week decline against the dollar. The five-day moving average crossed back again above the 20-day average.  With a 2% gain against the dollar, it finished a 618% retracement of its decline from mid-May (~$1.5575) and finished the week above it’s 200-day moving average (~$1.5490).  Near-term potential extends toward $1.5670-$1.5700.  Support is pegged in the $1.5420-40 area.

The Australian buck gained about 1.5% against the US dollar over the past 7 days, but it remains in a $0.7600-$0.7815 range.  Of note, it has generally finished the North American program near the day's highs.  All of us suspect the RBA minutes, to be released next week, will be dovish, offering a contrast to what we expect to be signals that the Given is still planning on moving in the alternative direction.  The Aussie hasn’t closed above its 20-day moving average since May Eighteen.  It is found now close to $0.7760, which may serve as a pivot.

The US dollar saw follow through promoting against the Canadian dollar earlier last week after reversing lower upon the release of the employment data on June Five.  The US dollar turned better bid after easing to CAD1.2200.  Offers in the CAD1.2350 region have checked the greenback's recovery.  If this area isn’t taken out, the risks increase for any test back to the lows.  A break of CAD1.22 alerts of losses toward CAD1.Twenty.  The Bank of Canada's neutrality contrasts with the easing trajectory of the RBNZ and the dovish RBA. 

August light sweet crude is the front month contract now.  Technical indicators are not particularly illuminating.  US stations continue to shut while All of us production remains resilient.  A few shale well has re-opened, and there tend to be reports about how the fracking technology continues to improve.  Now there is more discussion of re-fracking–returning to aged wells with new technology.  For the past month, the July contract has been confined to the $58-$62 range, with a few short-living exceptions.  It is near the middle of that variety now, making it a poor basic level for new exposure. 

US 10-year yields contacted 2.50%, the highest since final September, but the market is reluctant about pushing through there.  The September note futures staged a key reversal on June 11.  First, this pushed through the previous day'utes low to make a new low for the year, and the rallied to shut above the previous day's high.  The yield can fall back toward 2.25%. 

The ten-year German bund yield also rose to its highest level since last September (~1.05%).  Its downside change seemed more powerful, even if not as technically elegant as All of us Treasuries. On the week, the bund yield eased a single basis stage.  The 80 bp region has been a recent shelf, and a break could see yields drop back toward 70 british petroleum.  We want to be attentive to a shift in the relationship whereby bund yields and the euro have been moving in the same direction.  

The S&P Five hundred was virtually unchanged on the week.  However, the technical tone seems to have deteriorated, and also the pre-weekend close was poor.  The actual RSI has turned down, and the MACDs continue to be moving lower.  A break associated with 2088 would signal a retest upon 2072.

Observations based on speculative positioning in the futures market. 

1.  There were 2 significant (10k contracts) position adjustments.  The gross short euro position was cut by 24.4k contracts to 190.6k.  It is the biggest short covering since March 2014.  Remember that the gross short euro position peaked in 03 at 271k contracts.  This decrease in the gross short position accounts for the bulk of the adjustment of the new position.  The actual speculative net short dinar position has fallen through by about 90k contracts since peaking in early April.  The other significant position adjustment was investors continued to amass a large short yen position.  In the reporting period ending June Nine, speculators grew their yucky short yen position by 26.4k contracts to 158.7k. Since the end of April, when the gross short yen position had fallen in order to 54k contracts, it has grown almost three-fold.  The net short position appears at 116k contracts. In late-April, investors were short 5.5k yen contracts.

2.  Speculators generally added to short currency futures positions.  The euro was the best.  So was the Switzerland franc.  The gross short position was trimmed by Eight hundred contracts.  Speculators have been net long francs since early 04.

3.  The speculative net short 10-year Treasury note futures were cut in half to 36.6k contracts. Yucky longs rose by 71.6k contracts to 412.4k.  While they might have been trying to pick a bottom, the bears grew went with the actual momentum, and expanded gross short positions by 34.6k contracts to 449k.

4.  The risky net long oil commodity position was pared by Thirteen.7k contracts to 325.8k. This was the purpose of gross longs becoming trimmed by 10.7k contracts (to 483.8k) and a small increase (3k) of gross short positions (to 157.9k contracts).

Dollar Tone Large – Can FOMC Lift This? is republished with permission from Marc to Market