The euro positioning shift and yield factors, allied with underlying US fundamental trends, will provide dollar support. A solid base for the US currency against the euro should be in place particularly given net global reserve flows, which will strongly favor the US dollar. It will still be tough going for the US currency to regain much ground in the short term given that a September Fed tapering has been priced in. Overall, only a limited EUR/USD retracement to the 1.31-1.32 area is likely for now.
The latest CFTC positioning data recorded a net long speculative euro position against the dollar for the first time since the middle of June. The Euro dipped sharply from mid-June and the positive euro speculative positioning seen in February also marked a peak in EUR/USD.
The overall net positioning was still long dollars even though short positions were cut for the third successive week. Price action over the second half of last week in sterling, yen and the Australian dollar suggests that net shorts in these currencies was cut substantially further. In this context, the dollar may struggle to gain much ground overall, but the threat of substantial losses has diminished.
The Federal Reserve minutes for July's meeting will not be released until next week and the focus this week will continue to be on Fed speakers. Only Bullard among the voting members is due to speak this week and the net tone is still likely to keep a September Fed tapering on the table. Price action suggests that this has been broadly priced in, which will limit buying support, but will still provide protection.
Politics surrounding the next Federal Reserve Chairman will also need to be watched very closely as the painful politically-dominated selection battle continues to be played out through briefings and leaks. The presumed front-runners of Yellen and Summers, together with compromise candidate Kohn, and apparently a fourth unnamed person is also under consideration. Comments from President Obama emphasizing the need for a Federal Reserve that concentrates on unemployment suggests he is looking for a broadly dovish candidate. This is a slight net dollar negative, but Obama looks unlikely to make a decision this month.
As far as economic data is concerned, the retail sales report will be important on Tuesday with scope for a solid report. The New York Empire index and Philly Fed surveys on Thursday should register continued momentum in these districts, which will maintain overall optimism surrounding the third quarter outlook. US benchmark Treasury yields are likely to edge higher over the week on a positive data flow, which will provide underlying dollar support. Overall yield spreads still suggest that fair value for EUR/USD is nearer 1.30 and should provide a cushion against further dollar losses.
June's trade deficit fell sharply to $34.2bn from $44.1bn the previous month, with the petroleum deficit falling by over $30bn for the first half of 2013. The US energy-account improvement and recovery in manufacturing remains an important source of bullish medium-term dollar potential. Global reserve management operations should also provide strong dollar support as recent intervention and dollar sales to support local currencies trigger euro selling to keep reserve ratios intact.
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