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The US dollar lost ground against all the major currencies over the past week. The yen (3.5%) and New Zealand dollar (2.0%) led the pack against the greenback. Canada, Australia and Norway were the laggards, the worst was flat, and the best, up almost a percent.

We had anticipated a better showing for the US dollar. Yet, indicators suggest we were early and that the near-term risk is still to the dollar's downside.

Of course, the key is how the market responds to the FOMC statement. We have consistently argued that the Fed is unlikely to taper as early as many participants and observers have suggested: Not in June, the summer or September. Our base line view was for a tapering late this year, but see a strong case to be made for allowing the next Federal Reserve chairperson have the distinction; partly on economic grounds, and partly drawing insight from game theory. We recognize the desire to enhance the Fed's anti-inflation credentials after a prolonged period of unorthodox and extensive easing of policy.

Both the Fed's "tapering" and ECB's "open mindedness" regarding a negative deposit rate were types of forward guidance, but now the rubber must meet the road, so to speak. Neither is inclined to follow through with what we have argued was a successful feint. In any event, we expect that the Fed's $85 bln a month in long-term asset purchases will continue unabated. And the ECB is likely to find in the flash PMIs more reason not to give up on their expectations for a gradual recovery going forward.

As the euro rose against dollar over the last few weeks, the premium the US offers on 2-year money has been more than halved. In recent days this has begun recovering and is consistent with a softer euro. However, the price action itself remains constructive and the euro finished the week just above the retracement objective near $1.3340. The RSI and MACDs are getting stretched, but have yet to turn.

In addition, the lows from March and May in the $1.2750-$1.2800 area may be a double bottom. The neckline is near $1.3200. The minimum objective of the pattern is $1.3650-$1.3700, which is near the year's highs. A move back below the $1.3200 area would negate the double bottom. Initial support is pegged in the $1.3260-80 band.

Arguably, the most striking thing about the yen's 8.1% rise against the dollar over the past month has been the incredible volatility. One-week implied volatility reached 25% last week and the 3-month poked through 16% briefly. Both are two-year highs.

As with the euro, so too with the yen--we are seeing greater dollar weakness than we had anticipated. The charts do not suggest a turn is necessarily imminent, but rather that we are in the later stages of the move. We had thought the JPY95 area, which has been our quarter-end forecast, would offer better support. The week's lows near JPY93.80 are set to be challenged at the start of the new week. Some optionality and stops are thought to be near JPY93.50. A break could spur a move toward JPY91.50.

A move now back above the JPY96.20 would suggest a low is in place. Perhaps, the performance of the Nikkei can be instructive. We might feel more comfortable with picking a bottom to the dollar against the yen if the Nikkei were to trade higher after giving up nearly 50% of the gains seen since mid-November 2012.

The broader dollar setback and favorable economic news from the UK has lifted sterling to 4-month highs. As with the euro, sterling's technical studies are getting stretched, but no sign of an imminent top. Provided the $1.56 area holds, sterling can move test the $1.5800 area.

The dollar has a much deeper retracement of its gains against the Swiss franc in recent weeks. While the euro recovered a little more than 60% and sterling a bit more than 50%, the dollar has shed 80% of this year's gains against the Swiss franc. Given the current dynamics, it seems risk to pick a dollar bottom against the Swiss franc until one thinks the dollar is about to recover against the Japanese yen. A move above CHF0.9300-30 would be technically constructive.

While the dollar does not look to have quite bottomed yet against the majors, it can probably be better bid against the dollar-bloc. Near the pre-weekend low, the US dollar has returned nearly 50% of this year's gains against the Canadian dollar. The disappointing merchandise sales figures saw the US dollar recover. The data offers important insight into the Canadian economy and that insight is not particularly encouraging: New orders fell by nearly 1% and inventories rose. The report points to a cooling of the industrial sector. Technically and on a risk-reward basis, the Canadian dollar looks interesting as a short leg of crosses or against the US dollar outright. The CAD1.0200-40 offers the first band of resistance.

In the second half of last week, the Australian and New Zealand dollars turned in better performances. This seemed to be more a question of short squeeze that has only marginally something to do with those countries per se and more to do with market positioning. That said, it is true that expectations for a July RBA rate cut have been scaled back.

There are a certain number of generally agreed upon facts. First, the short-term speculative community has established a large short Australian dollar position. Second, the Aussie has fallen a long way in a relatively short period of time. Third, sentiment remains bearish. Fourth, despite the depreciation, the central bank and private sector models still show the Aussie to be significantly overvalued.

Taken together, these mean that while the Australian dollar is susceptible to a short-squeeze, it probably is not carving out a significant low. It put in a 3 cent bounce from lows early last week to Friday's high. The pre-weekend price action warns that that might be it. A break of $0.9500-20 area could signal the resumption of the downtrend.

The dollar also looks constructive against the Mexican peso, even though it made fresh two-week lows before the weekend. It did recover and technical support just below MXN12.60 held. We expect range players to look a return toward MXN12.85-90.

Observations on the speculative positioning in the CME currency futures:

1. In the CFTC's reporting week, the gross short currency futures positions were cut across the board. Gross long position adjustment were more mixed; the euro, yen, sterling and Swiss franc longs expanded, while the Canadian and Australian dollars and Mexican peso were reduced.

2. There were four significant gross position adjustments (more than 10k contracts): Both the gross euro longs were added to (25.2k contracts) and shorts were covered (18.9k contracts); gross sterling shorts were cut (18k contracts) and long Mexican peso positions were liquidated (-22.8k contracts).

3. The net currency futures positions were reduced (by a large 44k contracts in the euro and 24k contracts in sterling) across the board. The Australian dollar was the lone exception. The net short position grew as gross longs were cut more than gross shorts.

4. The net short euro position is the smallest since late February when it switched from net long. The next short yen position is the smallest since early May. The net short sterling position is the smallest since March. The net Australian dollar position, which is now short 63.3k contracts, was long 85.5k contracts at the end of Q1. The net long peso position has been more than halved since early May.

week ending June 11

Commitment of Traders

(spec position in 000's of contracts)

Net

Prior

Gross Long

Change

Gross Short

Change

Euro

-7.5

-51.6

69.0

25.2

76.5

-18.9

Yen

-72.9

-82.7

21.7

2.5

94.6

-7.3

Sterling

-53.7

-77.7

32.8

6.1

86.4

-18.0

Swiss Franc

-20.7

-25.8

6.6

0.7

27.3

-4.4

C$

-35.9

-39.8

17.3

-5.0

53.2

-8.9

A$

-63.3

-58.6

24.5

-8.4

87.8

-3.6

Mexican Peso

63.8

82.9

71.9

-22.8

8.1

-3.7

Source: Dollar Downside Not Over?