In the week ending May 8, speculative players generally bought dollars
against the major currencies in the futures market according to the
latest Commitment of Traders report. There were two notable exceptions,
the yen and sterling. Short yen positions were reduced and long
sterling positions were added.
Last week, we noted
that after a period of divergence, our reading of both technical and
fundamental factors aligned in the US dollar's favor. That continues to
be the case. The gaps
left on the euro and Swiss franc's daily and weekly bar charts are
important. One need not be a technician to appreciate that 1) that gaps
in the major currencies are rare and 2) they reflect an important shift
in market psychology. Prices in the most liquid currency pair in the
$4 trillion a day market adjust incrementally. A gap is a break of that
incremental adjustment. It is a mark down.
The news stream and marginal new information that will hit the market in
the week ahead are likely to underscore the weakness of Europe, outside
of Germany. It will offer stark contrast to the anticipated evidence
that the US economy continues to expand at a modest clip and the
Japanese economy, which likely expanded at the fastest rate in the G7 in
the Jan-Mar period after contracting 4 of the past five quarters.
Euro: The net short speculative euro position increased to 144k
contracts in the week through May 8 from 107k the previous week. This
was almost entirely from new shorts being established. They jumped 38k
contracts to stand at 180k contracts. This represents about a 50%
increase since early April. While this is large, it is below the record
set in January just above 200k contracts. It is however, interesting
to note that the commercials have a net gross long position of almost
253k contracts, which is itself a record.
The speculative euro bears are in the driver's seat. If the gap that
runs from $1.3166-$1.3180 is a measuring gap, the price objective is in
the $1.2860-80 area. If it is a head and shoulder pattern that broke
down, it would project to around $1.25. Watch the 5-day moving
average. It is catching the euro's highs and the euro has not closed
above it since the first of the month. It finished the week just below
$1.2970. The euro remained below the $1.30 level for two consecutive
days at the end of the week for the first time since Jan 19-20.
Yen: The net short yen position was pared to 41.1k contracts
from 50.2k. This was a function of both new longs being established
(+2.3k) and shorts being cut (-6.8k). During the reporting period, the
dollar was confined to about a 1 yen range in the spot market. The
consolidative tone may be the market carving out a near-term dollar
bottom. To demonstrate this though the dollar needs to re-establish a
foothold above JPY80 A trend line off the March high comes in now near
JPY80.50, which also corresponds to the 20-day moving average. The RSI
and MACDs suggest better potential for dollar gains then declines
against the yen in the period ahead.
British pound: Speculators still were scooping up the pound and
the net long long position grew by almost 9k contracts to 25.3k.
Shorts were cut by 2.3k, while the longs rose almost 6.6k to stand
just below 60k.
Sterling longs are vulnerable. Sterling peaked on April 30 near $1.63.
It was still near $1.62 on May 8 the last day of the reporting period.
It then fell and finished the week at its lowest level since April 20.
It also finished the week below its 20-day moving average for the first
time since April 16. The 5-day moving average is poised to fall below
the 20-day moving average.
There is a clear uptrend line in sterling. It can be drawn off the Jan
13 March 13 lows. The April 16th low comes close to it. It comes in
near $1.5980 at the start of next week. A clear break of this will
likely see many sterling longs forced out. Technical indicators favor
the downside as well. A break of the trend line could spur a move
toward $1.58 initially.
Swiss franc: Speculative interest remains light. The net short
position rose to 16.5k contracts, an increase of about 2k. Longs were
pared by a little more than 700 contracts and the longs increase by
twice as much.
Last week we identified the significance of the the CHF0.9200 level.
The dollar gapped higher against the franc and that gap is found
between CHF0.9185 and CHF0.9195. If it is a measuring gap, it projects
to about CHF0.9330. That area also corresponds to the high from
mid-March and a retracement objective. A move above there would likely
suggest potential toward CHF0.9600.
Canadian dollar: The net speculative long position was cut by 10k contracts to 60.1k and
it still remains the largest net long currency futures position.
Longs were cut by 14.5k to just below 70k contracts. The last day of
the reporting period saw the US dollar rise above C$1.0 for the first
time in a few weeks.
The technical tone is less clear than some of the other currencies.
Perhaps it is the drag from the decline in commodity prices and the
weakness in the equity markets that is muddying the waters. While
fundamentally the North American story looks superior, these factors and
market positioning suggest that the Canadian dollar may do better on
the crosses than against the greenback. A range of CAD0.9900 to
CAD1.0100 may confine the bulk of the price action in the period ahead.
Australian dollar: The net long position was cut in half to
25.1k contracts from 52.3k and is the smallest of the year. Shorts
jumped in, rising by 10.6k contracts, perhaps encouraged by expectations
of further rate cuts by the RBA and weakness in commodity prices.
Longs were forced out and 16.5k contracts were culled. Still, at 72.1k
contract, the gross long is the largest in the currency futures.
The bids for the Australian dollar near $1.00 are getting absorbed. It
finished the week near its lows and seems poised to take out that
support. A break, especially if it to be accompanied by weakness in
commodities and equities, could spur a quick move toward
$0.9880-$0.9900. It may take a move back above $1.01 to stabilize tone
at this juncture.
Financial Analyst (CFB)
(0508774861)
asad@cfb.ae
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