Seeking Alpha
Currencies, macro, deep value
Profile| Send Message|
( followers)  

The Lebanese-American poet Kahlil Gibran observed that sometimes a mountain is clearer to a climber from the plain than the summit. In this spirit, we take a step back this week.

Given the sizable moves in the foreign exchange market, we thought it might be useful to look at the long-term technical picture of the major currencies. Rather than provide analysis using the daily bar charts, we look at the weekly and monthly charts.

Euro: The recent price action has pushed the single currency through the uptrend that has been in place since ECB's Draghi unequivocally committed to doing what is necessary to save the monetary union in late July last year. That trendline came in near $1.3220 and the euro has now made two consecutive closes below it. We should be looking at retracement objectives of that large move. The first retracement objective is near $1.3070; the 50% near $1.2880 and the 61.8% near $1.2680.

The last phase of the euro's advance began in mid-November and the $1.3070 area also corresponds to a 61.8% of that move. In addition, there is a potential topping pattern in the euro that has been carved out over the past month that projects a bit below $1.2900. On the upside, resistance in the $1.3250-$1.3300 area should cap corrective upticks.

Yen: The dollar has been consolidating against the yen for the past three weeks after rallying sharply since the Japanese election was announced in mid-November 2012, and Abe's election and policy mix was anticipated. The dollar has stalled around JPY94, which corresponds to a 38.2% retracement of its losses since the financial crisis began in mid-2007. In the rally, and the more recent consolidation phase, the 20-day moving average has held dollar dips. It comes in just below JPY93.00.

It is possible that the dollar is also carving out a topping pattern against the yen. A break of JPY92.00 is needed to confirm the pattern, which projects toward JPY90. However, we suspect that the dollar bulls may try one more time to sustain a push above JPY94.00. We are cautious at these levels and see the appointment of the new BOJ management team as a possible incentive to make that attempt on the dollar's upside.

Sterling: Sterling appears to have broken out of the consolidative pattern that it has traced out since early 2009. Recall that in late 2007, sterling moved through the $2.00 level only to slump to $1.35 in early 2009 as the crisis unfolded. Since then sterling has been carving out a clear consolidative pattern. The top of it is found by connecting the 2009, 2011, and early 2013 highs. The lower part of the pattern is found by connecting the 2009, 2010 and 2012 lows. The lower boundary was near $1.5740 recently. We think the downside break of the pattern will allow sterling to decline toward $1.48-$1.50 and possibly even back down to the $1.35 area in the somewhat longer term. If this bearish view is valid, sterling should not trade back above the $1.56-$1.57 area.

Canadian Dollar: The US dollar has moved above a down trendline against the Canadian dollar going back to the 2011 high near CAD1.0660. It came in near CAD1.0235 last week. Additional near-term resistance is seen near CAD1.0270. A convincing break could spur a move toward CAD1.0450-CAD1.0500. Although nearby support is seen near CAD1.0150, it probably takes a move back below CAD1.01 to call the bullish US dollar outlook into question.

Australian Dollar: The Australian dollar has been confined to a range that was first established in second half of 2011 and has been carving out a large triangle pattern. The upper end is drawn off the record high above $1.10 in July 2011, the Q1 high in 2012 near $1.0850 and the January 2013 high near $1.06. It is falling about a quarter cent a month. The lower end of the pattern is drawn off the late 2011 low just below $0.9400 and the 2012 low set in June below $0.9600. The trend line comes in near $0.9800. We are more inclined to sell into gains toward the upper end of this triangle pattern. A convincing move above $1.037 could signal stronger retracement of the 3.5% loss seen this year. A move back into the $1.0450-$1.0500 area could provide the selling opportunity we anticipate.

Mexican Peso: The dominate long-term technical pattern is a dollar uptrend drawn off the August 2008 lows, which was the last time the greenback traded below MXN10.00. The trendline comes in now near MXN12.45. A test on this area requires a modest range extension beyond the MXN12.55 low thus far this year. Since late November 2012, the dollar has been trending lower against the peso and that trendline is near MXN12.77 now. The policy backdrop has changed and combination of weakening growth and softer price pressure is fueling speculation of a rate cut possibly late Q2 or early Q3.

We share the following observations about the speculative positioning in the futures market.

1. For the first time since late November 2012, the net speculative position in the Swiss franc has switched to the short side. It joins sterling, which switched two weeks ago, and the yen, where the net speculative position is also short.

2. During the most recent reporting period, the gross short positions increased in the currency futures, except for the euro and the Australian dollar. Yet we do not think the anomalies are very important. While the gross short positions may have fallen, it was only marginally so: 1k in the euro and 1.7k in the Australian dollar, but the long positions fell even more (6.1k and 11.8k respectively).

3. The gross long positions were mostly cut except for sterling and the Canadian dollar. Here too we fail to see a signal. Gross short positions increased more than the increases in the gross long positions. The real signal is the dramatic reversal of sterling positions. At the start of the year, the net speculative sterling position was long 40k contracts. Now it is short 23.3k contracts, the most since March last year. The key take away from the Canadian dollar is not that gross longs grew, but rather that the gross long position has been culled by 100k contracts since mid-September and that the gross short position doubled last week.

4. The net long Mexican peso position remains substantial and is by far the largest in the futures market at 116k contracts. However, it has been trimmed and is now at a three-month low. A shift in the stance by the central bank and an increased risk of a rate cut appears to have encouraged some profit-taking. The gross short position is still the smallest among the futures contracts we track.

week ending Feb 19

Commitment of Traders

(spec position in 000's of contracts)

Net

Prior

Gross Long

Change

Gross Short

Change

Euro

19.1

24.2

81.0

-6.1

61.9

-1.0

Yen

-65.9

-61.3

54.7

-1.1

120.6

3.5

Sterling

-23.3

-16.8

40.7

2.0

64.0

8.6

Swiss Franc

-0.7

4.6

11.1

-1.0

11.7

4.2

C$

19.4

26.6

46.0

6.7

26.7

13.9

A$

44.0

54.1

87.9

-11.8

43.9

-1.7

Mexican Peso

116.0

125.0

124.6

-7.0

8.4

1.4

Source: Currency Positioning And Technical Outlook: A View Of The Long-Term Charts