The euro and Swiss franc rose to new highs since Q4 2011, while sterling moved to within half a cent of the best level since 2009 set in mid-February in recent days. The market was all rife with speculation of a breakout. However, our reading of the technical and fundamental condition suggests dollar bears tread carefully.
If the past week was about the lack of escalation in both Russia/Ukraine and China, coupled with the ECB holding pat, next week may see the pendulum swing back a bit. This could lend itself to more consolidative trading, which in the current context, may be somewhat supportive of the greenback.
With a referendum planned in Crimea next weekend that will likely lead to Russia's annexation of the peninsula, the confrontation may escalate again. Although the yuan strengthened in the past week, we suspect that uncertainty spurred by the first on-shore default and the apparent official desire to inject more volatility may weigh on the yuan. China unexpectedly reported a large trade deficit in February, and although it was distorted by the lunar new year, some will see evidence that the yuan is now over-valued. The ECB did not change policy, but the large pay-down of LTRO borrowings, and the strength of the euro, may spur speculation that the door to easing has not closed. Moreover, official efforts to jawbone the euro lower may also increase.
Euro: The rally in the second half of last week left the euro stretched. This is illustrated by the fact that it spent the pre-weekend session above the top of its Bollinger® Band (two standard deviations about the 20-day moving average). The last time it did anything close to this was in mid-September last year. In addition, its proximity to the psychological and technically significant $1.40 area may change the risk-reward calculations for many participants. This is not to say that a deep pullback is necessary, but we can see a move back into the $1.3780-$1.3825 band.
Sterling: Short-term market positioning, judging from the Commitment of Traders, remains extreme for sterling. This might help explain the market's cautiousness as sterling approached $1.68. There is a mild bearish divergence that is evident on the daily RSI. Support is seen at $1.6640-60. Separately, we note that the euro's downtrend against sterling from last August's high, near GBP0.8770, has been approached. We draw it coming in on Monday, March 10 near GBP0.8310, which is near the top of the Bollinger Band, and GBP0.8298 by the end of the week. While a convincing break has to be respected, we are bit wary.
Yen: The dollar is over-stretched against the yen. At its high, the dollar was nearly 3 standard deviations away from its 20-day moving average (~JPY103.55). The top of the Bollinger Band comes in near JPY103.10. By this measure, the dollar is the most stretched against the yen as it has been in years, including the earlier run-up in anticipation of Abenomics beginning in late-2012. We had suggested dollar potential into the JPY103.10-65 band, and now that it has reached it, we suspect a consoldative phase is near, especially if we are correct about the larger investment climate. Initial support for the dollar is pegged near JPY102.80-JPY103.10 now, with additional support near JPY102.50.
Canadian dollar: The optics of Canada's jobs data were worse than the details, but the Bank of Canada is now the most dovish within the dollar-bloc. The US dollar tested important technical resistance near CAD1.11 before the weekend. This corresponds to a retracement objective and a trend line off the Feb 21 high near CAD1.12. Our reading of the technical indicators warn that the dollar will likely rise through the CAD1.11 area and test CAD1.12 in the days ahead.
Australian dollar: With the help of spectacular first tier data, especially robust retail sales and trade surplus, the Australian dollar was the strongest currency last week, gaining about 1.75% against the US dollar. It closed on March 6 above the top of its Bollinger Band, for the first time since mid-January and moved back barely within before the weekend. The close was near its lows after new four month highs were recorded. The close below $0.9080, which corresponds to both the 100-day moving average and the minimum retracement objective of the Aussie's slide since last October, warns of additional near-term losses. There is potential from a technical point of view back into the $0.9015-40 range. On the upside, the $0.9200 is an important psychological level and coincides with the 50% retracement objective of the slide.
Mexican peso: The peso participated in the move against the dollar at the end of last week. After breaking below the lower end of the trading range since mid-January around MXN13.20, the greenback found support near MXN13.11. Technically, we see the risk that the break is not sustained and the greenback moves back into the MXN13.20-MXN13.40 trading range and possibly toward the middle to upper end again. On March 6, the US dollar closed below the bottom of the Bollinger band for the first time since last September. It moved back into the band before the weekend. The 20-day moving average, the middle of the Bollinger Band comes in near MXN13.26 and that seems to be the immediate risk.
Observations from the speculative positioning in the CME currency futures:
1. Position adjustments remained minor. In the previous reporting period there were no gross position changes of more than 10k contracts. In the most recent reporting period there was one: the gross long euro position rose 10.9k contracts to 103.9k. This is the largest gross long position since last November. There were no other gross position adjustment that exceeded 6k contracts.
2. Among the small adjustments, the general pattern was to add to gross short currency positions. They were only reduced in sterling (-4.3k contracts to 41.4k) and peso (-2.6k to 29k contracts). In both of these currencies, exposure was reduced as both the longs and shorts were pared.
3. Outside of the euro, which as we have noted saw a large rise in the gross longs, the gross longs of the other six currencies we review were evenly split between buying and selling.
4. The gross long euro and sterling positions dominate the speculative currency future long positions (103.9k and 71.0k respectively). None of the other currencies' gross long position is more than 24k. The 12.2k gross long Australian dollar futures position and the 6.2k peso futures position seems particularly small. It may be begging for a contrarian stance, but as we note above the technical outlook suggest this is not the time.
5. The gross short positions are less concentrated. The yen, of course, is the leader with 100.1k gross short futures contracts, but the euro's 80.4k and Canadian dollar's 84.4k contracts are also substantial. They are followed by the Aussie (53.4k contracts) and sterling's gross short 41.4k contracts). The lower level of gross short peso (29.0k contracts) and franc (19.7k contracts), in part simply reflects the lack of participation presently. .