Currency Review and other News from the Markets

The US dollar gained of all of the major foreign currencies a week ago, but the overall tone, departing aside the yen, had been largely consolidative in nature.  The buck was soft in the first half of the week but retrieved in the second half.  

The Australian and Canadian dollars were the only major currencies that were able to hold onto some of their gains (0.55% and 0.40% respectively).  The actual yen was the poorest of the majors, losing 1.2%, because the panic from the week prior to died down.  Equity marketplaces were mostly higher, using the Nikkei’s 5.2% rise, leading the major markets.  US 10-year Treasury yields flower 8 bp. Core bonds generally traded heavier, but European peripheral bonds had been firmer, in line with the calmer conditions.   

We were never persuaded that last week’s turmoil would prevent the Fed from completing it’s tapering operation, and see that in the market, cooler heads are prevailing.  Talk of "declining the tapering" has diminished, and no one is taking too seriously the prospects of QE4.  Nevertheless, we note that both the Dec 2015 Fed funds and Eurodollar commodity contracts were unchanged on the week at 46 british petroleum and 77 bp correspondingly.  

Perhaps offsetting the diminished interest rate support for the dollar has been speculation that more action from the Western Central Bank and the Bank of Japan could be imminent. Reports suggested that the ECB might consider adding corporate bonds to the asset purchase program.  There were also report suggesting the BOJ sees risk that rising cost of living may fall, and this could prompt an extension of the currently aggressive Qualitative and Quantitative Easing.  We’re skeptical that either may materialize in the coming days.  The BOJ meets next week and the ECB the following week.    

Technically, the dinar looks poised to continue in order to consolidate.  Most of last week’s cost action took place within the $1.2625-$1.2886 range set on October 15.  Within recent session, the dinar flirted with the lower end and slipped to about $1.2615.  The euro spent the second half of the week underneath the 20-day moving average, which comes within near $1.2690. This is the nearby limit.  Of note, the nearly four-cent bounce in the euro has not been accompanied by a sharp change in euro positioning. The confidence of the euro bears is palpable and quite widespread.  

The bearishness toward the pound was more evident in the price action than in the euro.  We had identified the actual yen’s gains as among the most overstated in last week’s technical note.  The dollar’s recovery last week recouped 61.8% of its slide from the push marginally above JPY110 upon October 1.  It closed above its 20-day moving typical in the two sessions prior to the weekend for the first time since earlier this month.  The RSI continues to be recovering, and the MACDs have now crossed higher. The risk is that the speculation of more action by the BOJ gets ahead of itself.  This may assist cap the dollar, in which a trend line drawn off the early October highs comes in around JPY108.70-80 next week.  

From a specialized perspective, sterling continues to look good.  Bullish divergences continue to be evident within the daily RSI and MACD.  It could be important that the $1.60 area mostly held in the second half of a week ago.  It appears that sterling may be carving away a head and make   near $0.8650.  Before the weekend, the Aussie tested both sides from the pattern.  It closed firm, in an outside day, although off its high and merely below the previous day’s higher.  This is still impressive because of increased speculation that the main bank is considering reducing interest rates.  This chart design is notorious for fake breaks, and the technical indications do not appear to be generating powerful signals. 

The US dollar retracted against the Canadian dollar in order to challenge the past month’s uptrend. It’s found near the 20-day moving average, just above CAD1.1210.  The US dollar could not get back above CAD1.13 in the first half of the week and came down to test CAD1.1180-CAD1.Twelve hundred in the second half of the week.  It’s been unable to close below the 20-day average for a month.  The MACDs tend to be turning lower, though the RSI is within neutral.   

The US dollar has additionally been riding the 20-day moving average higher against the Mexican peso. It comes in now near MXN13.48.  The greenback has lost some momentum in recent day but has not pulled back from the highs very much.  There is no compelling technical evidence to conclude a dollar top is in place.  

Last week we anticipated that the S&P 500 could recover toward 1940, and it finished just above there on the week.  It retraced more than 61.8% of the decrease from the record highs.  To help keep the bullish momentum undamaged, the 1920 area should stay intact. On the upside, there is previous congestion in the 1980-1995 region.  There was an interesting gap that was created last week that is discovered between 1905.03 and 1909.Twenty-eight. This is Monday’s high (October 20) and Tuesday’s low.  That it has not been filled suggests it is unlikely to be a "normal" gap.  The "calculating gap" takes places in the middle of moving.  That would also project the S&P 500 toward 1990.  

US 10-year yields trended higher last week however remained unable to return to it’s former range. On the top aspect, yields look capped within the 2.30%-2.40% area.  On the drawback, the new range may extend to 2.10%-2.15%.  The MACDs are consistent with higher yields, while the RSI is soft.    

The CRB Index has been embracing the 270 area because October 15.  It signifies two-year lows. Although technical readings are stretched, especially MACDs, there is still no sign of the convincing low.  The Next year low, which itself would be a two-year low, was near 267. The 2010 low was just above 247.  The actual December crude oil futures contract lost $1 last week and documented lower highs for the last 3 sessions.  Bids around the $80 level are being absorbed without much consternation.  The marketplace still feels heavy.  The actual $83 level may be the top of the near-term range.  A break of $80 could see a push toward $76.  

Observations from the risky positioning in the futures market:

1.  Despite the large swings in the spot market, position adjustments in the currency futures were limited.  There was only one yucky position adjustment larger than 10k contracts.  Gross short yen positions were culled by Twenty five.6k contracts to 98.4k.  This was the largest short-covering since March.  

2.  Investors responded to the large price swings by reducing positions.  Of the 14 gross positions we monitor, nine were reduced.   Yucky long positions were cut except in the Japanese yen, where they grew by under 4k contracts.  Gross euro long euro positions were flat, but at 60.Two thousand contracts, it remains the largest gross long position among the currency futures.   Short positions were also generally decreased but did edge greater in the euro, Australian dollar and Mexican peso.

3.  The net brief euro position has grown for three consecutive weeks.   Speculators are accumulating a large short position in the dollar-bloc currencies and the Asian peso. The net short Canadian dollar position of 21.5k agreements is the largest since late-May. The actual 31.5k net short Aussie dollar contracts are the largest net short position since March.  Speculators are net short 21.1k peso contracts, the largest since late-February.  

4.  The net short 10-year US Treasury speculative futures placement was reduced to 90k agreements from 123k.  Speculators piled in to the longs, growing the gross position by almost 37k contracts to 456.7k.  The short added a small 3.6k contracts to 546.7k.

The Buck: More of the Same is republished along with permission from Marc to Market