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Summary

  • Dollar strength is seen vs. euro, yen and Swiss franc.
  • Dollar weakness is seen vs. dollar-bloc,.
  • Sterling is acting more like dollar-bloc currencies.

There have been four notable price action developments in the foreign exchange market:

  • The euro has pulled back from the attempt seen earlier this month on the $1.40 level.
  • Sterling has recouped more than half of what it lost this month.
  • The dollar has moved to the upper end of its two-week trading range against the yen.
  • The dollar-bloc has powered ahead.

Euro: The combination of the dovish comments from ECB officials, where even the Bundesbank appears to have warmed to the idea of QE, and the somewhat more hawkish FOMC, has prompted some profit-taking on long euro positions. The euro peaked just shy of the $1.40 level on March 13. While Draghi's comments helped put the euro's top in, it was Yellen's comments that exposed the downside.

The euro was briefly pushed through the $1.3720 area, the 50% retracement of the euro's rally from early February lows, just below $1.33, which is the low for the year, thus far. Resistance is now seen in the $1.3800-30 area. The outlook hinges on the ECB meeting on Thursday. The failure to take strong action (this means more than a symbolic 10 bp cut in the repo rate, which would have little consequence) could send the euro back to $1.40, if not above. On the downside, the $1.3650-75 area is technically interesting, housing a key retracement objective, the 100-day moving average and the late-February lows.

Yen: The dollar moved to the upper end of its two week trading range against the yen near JPY102.80, which corresponds to a 61.8% retracement of this month's decline. There does not appear to be any technical obstacle for additional near-term gains, with the JPY103.10-20 area offering the next proximate target. The controversial retail sales tax hike goes into effect on April 1 and a government adviser warned that the BOJ could make its assessment as early as May whether additional stimulus is needed. This may help widen the US-Japanese 10-year spread, which at 208 bp is near the middle of the 2-month range. A strong US employment report at the end of the week could also help underpin the spread and dollar.

Sterling: With the gains in the second half of last week, sterling has recovered 50% of this month's losses after being rebuffed near $1.68 on March 7. Technical indicators, like the RSI and MACDs, are constructive. A move above $1.6660 could signal another run at the $1.68 cap. Support is now pegged near $1.6600 and then $1.6550.

While we have preferred sterling over the euro on fundamentals and technical considerations, we have liked sterling against Swiss franc more. It has approached the CHF1.48 area and the 5-day moving average has crossed above the 20-day average for the first time in five weeks. Provided the CHF1.47 level holds now, sterling can work its way to the upper end of our target range near CHF1.50.

Swiss franc: For its part, the dollar tested the CHF0.8900. It corresponds to the 50-day average, the 50% retracement of the dollar's decline since early February, and the highs from earlier this month. Additional resistance is seen near CHF0.8945. Support is a big figure lower, nearly CHF0.8845.

The Canadian dollar: It has been the weakest of the major currencies this year in Q1, losing about 3.85% against the dollar. This is after it rallied about 1.6% in the past week, to eclipse the New Zealand dollar as the second strongest behind the Australian dollar. Encouraged by a recovery in retail sales and the lack of fresh deterioration in Canada's CPI, a short-covering rally in the Canadian dollar saw the greenback test CAD1.10. Technical indicators are still somewhat supportive of the US dollar, and the real test may come on a bounce to CAD1.11. Quebec's general election (April 7) and Canada's employment data (April 4), at the same time as US jobs report pose event risk.

The Australian dollar: The Aussie recorded higher highs for six consecutive sessions through the end of last week. After being shunned, it is back as in the markets' favor. It gained 1.9% to lead the major currencies last week and was the strongest currency in March gaining 3.6%.

Early last week it broke above its 200-day moving average (~$0.9140) and has not looked back. It also surpassed the 50% retracement of the decline from the late October high near $0.9760. The next target is near $0.9330.

Although it is looking a bit stretched against the dollar, we note that the Australian dollar looks particularly good against the euro. The euro has traced out what looks to be a head and shoulders pattern. The neckline is near A$1.50, and the measuring objective is near A$1.42. The 20-day moving average was tested before the weekend near A$1.4795, while a retracement objective is found near A$1.4730.

We had also liked the Australian dollar against the New Zealand dollar. It met our N$1.0680-N$1.0700 objective last Thursday. The technical indicators are not suggesting a top is in place. However, a move now below N$1.0640 could weaken the constructive case.

Mexican peso: The chase for yields helped lift the Mexican peso to its best level since mid-January. However, after slipping below MXN13.05, the dollar rebounded and finished the session near the highs. If this does not mark a near-term bottom for the dollar, it probably came close. Our reading of the technical indicators warns of a risk of a move back into the MXN13.15-MXN13.20 in the days ahead.

Observations based on the speculative positioning in the CME currency futures:

1. Most position adjustments were minor in the reporting week ending March 25. which may be surprising since it covered the FOMC meeting and BBK President Weidmann suggesting that, if needed and conducted properly, he could support QE. Of the 14 gross positions we track, all but four were changed by less than 4k contracts.

2. The Canadian dollar accounted for half of the four notable adjustments. Gross longs rose 12.7k, which is about 33% increase. Gross shorts were culled by almost 24k contracts, which is nearly a quarter. Euro longs were cut by nearly 11k to 107k contracts. Long yen positions were cut by a quarter to 17.6k contracts.

3. The recent price action shows divergent US dollar performance. The greenback is doing a bit better against the euro (and Swiss franc) and less well against the dollar bloc. This is reflected in speculative positioning. The euro and yen saw longs cut and shorts increase. The dollar-bloc was the opposite: gross long Australian and Canadian grew and shorts were reduced. Over the past week, sterling was the best performer outside of the dollar-bloc. In the futures market, the gross long sterling position rose and the shorts fell.

week ending Mar 25

Commitment of Traders

(spec position in 000's of contracts)

Net

Prior

Gross Long

Change

Gross Short

Change

Euro

39.6

53.0

106.9

-10.9

67.3

2.5

Yen

-68.9

-61.1

17.6

-6.5

86.5

1.2

Sterling

29.7

25.5

66.8

2.6

37.0

-1.6

Swiss Franc

14.8

51.1

25.0

-0.3

10.2

0.0

C$

-33.2

-69.8

40.4

12.7

73.7

-23.9

A$

-20.5

-24.5

24.4

2.8

44.9

-1.2

Mexican Peso

-1.7

-1.3

22.8

3.4

24.4

3.8

Source: Dollar Mixed To Start Q2