Bullish Dollar Bets Paying Off Again

The powerful divergence theme re-emerged and effectively ended the dramatic correction throughout the capital markets. The FOMC statement strengthened conviction of a mid-2015 lift off, even if the speed of tightening may be somewhat slower than previously anticipated. At the same time, the Swiss National Lending institution’s decision to move to unfavorable interest rates, partly in anticipation of the actual ECB expanding its asset buys as early as next month, underscores that Europe remains well at the rear of the US in the credit cycle.

Rather than attribute the downdraft within the dollar and equity marketplaces to a shift in underlying basic drivers, we had seen the actual hand of a technical modification, driven by short-term market placement, and aggravated by year-end portfolio adjustments.  Indeed the dinar peaked within a few ticks of the 50% retracement objective of its deficits from the October 15 high near $1.29. For its component, the dollar’s dramatic slide against the yen stopped just timid of a key retracement objective of their rally from both Oct 15 and October Thirty-one found near JPY115.50.

We anticipate the dollar’s higher trend to carry on.  However, the lack of participation within the next two weeks could imprecise this trend.  The Dollar Index made a new high before the weekend near 89.65.  A move above 90.00, which has held back previous dollar bounces since the start of the Great Financial Crisis, would signal an acceleration of the dollar’s advance.  The 88.Eighty area is Initial assistance.   

The euro recorded a new reduced for the move just before the weekend near $1.2220.  A break of $1.2200 would suggest losses towards $1.20.  It has not had the opportunity to resurface much over $1.2300 since breaking below in response to the SNB’s decision. 

Technical indicators suggest the dollar’s uptrend against the yen will resume.  The move above JPY119.50 strengthens the conviction that the greenback obtained care of back to the December Eight high near JPY121.85 as well as beyond.  Initial dollar assistance is in the JPY118.50-80 area. 

Sterling is not especially interesting now, caught between your strength of the dollar and the weakness of other currencies, including the euro, Swiss franc, yen and Australian dollars.  Against the greenback, a $1.56-$1.58 trading range since mid-November represents it’s confinement.  There have been a handful of violations of the two-cent range.  Technical indicators recommend risk remains to the downside.  Sterling set a low near $1.5540 upon December 17, but the click back into the range seemed halfhearted.  Resistance is seen $15680-$1.5700.      

The dollar-bloc currencies are heading lower.  They did not participate in the bounce that the euro and yen enjoyed.  Resistance in the Aussie dollar is near $0.8200.  Our next important target is actually near $0.8000, ahead of which are the lows from 2010 around $0.8060-70.  The US dollar reached a high of roughly CAD1.1675 upon December 15.  This was towards the lower end of the range we have been suggesting for the greenback.  The upper end of that variety is near CAD1.1725.  Since documenting the highs, the US buck has not been below CAD1.1560. 

The dollar peaked against the Mexican peso on Dec 12 near MXN14.95.  Five days later, it had slumped to MXN14.37.  By the end of the week, the dollar’s bull move have had recovered to over MXN14.70.  In the days ahead, the dollar may consolidate it’s gains.  It could pull back toward MXN14.50, though, over the moderate term, it appears the dollar can retest the 2009 high close to MXN15.60.  

The US 10-year yield bounced off the 2.0% level to near 2.25%, where the rally faded.  Economic data out in a few days expects to show stronger capex (long lasting goods orders) and more powerful growth momentum (upward modification to Q3 GDP to above 4%).  This may limit the pullback in yields.

At the same time, we observe that the premium the US pays over Germany widened out to almost 160 bp now.  This is the largest premium because mid-1999.  It began the year close to 110 bp.  The widening was a result of German bund produces falling further than US produces fell.  

Although the US 10-year yield continues to be relatively low, the 2-year deliver has firmed, and at 65 british petroleum is 1-2 bp below the five-year high set earlier this month.  The US high quality over German at this tenor is about 73 bp, which represents a new three-year high.  These relative rate of interest developments are constructive for the dollar.

The S&P 500 gapped higher December 18 following a powerful close the previous day after the FOMC meeting and seemingly aided by the Switzerland National Bank’s move to negative interest rates.  It had advanced further before the weekend.   In the mid-week low to the pre-weekend high, the actual S&P 500 gained about 95 points or 5.2%.

That gap is between 2016.Seventy five and 2018.98.  We do not search for this gap to fill in the near-term.  Rather the gap, like the one on October 21, signals the end to the corrective losses and the resumption of the bull advance that carries it to new highs.

There is a reasonable chance that the February oil futures contract has put in a short-term low around $54.30-60.  The RSI is turning up, and the MACD is about to mix. The sellers were tugging back, and bargain searching reported.   The $60.00 degree is the first hurdle and near $63.00. 

Observations based on the speculative positioning in the futures market:

1.  There was only one significant placement adjustment of more than 10k within the latest CFTC Commitment of Investors report for the week finishing December 16.  It was the 12.4k contract reduction in the gross short euro position, leaving 182k contracts still short.  The net short position is smaller by 52k contracts since peaking in early November, which is accounted by short covering.  

2.  There were other gross currency positions which changed by almost 10,000 contracts.  The short yen placement fell by 9.6k agreements to 132.6k.  The gross lengthy Swiss franc position doubled in order to 18.9k.  The speculative yucky long Australian dollar position increased by 9.4k contracts to 26.8k.  

3.  All the forex futures we track here but the Canadian dollar saw gross short positions trimmed in the latest week.  This seems very much consistent with squaring up ahead of the holiday season.  For its component, the gross short Canadian dollar position rose the by 300 contracts.  

4.  The speculative net short All of us 10-year Treasury futures position increased by 20% to 258k contracts.  Liquidation was a complete 10% of the gross long position, or 32.3k contracts offered to leave 273.4k still long.  The gross short position elevated by 24.6k contracts raising the short position at 531.6k agreements.  It has risen by 70k contracts over the past three reporting weeks. Over the same period, the actual gross long position offers fallen by 110k contracts.

Dollar Bulls Get back Upper Hand is republished with authorization from Marc to Market