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The key issue facing market participants is whether the dollar is trending or moving in a range.

We retain a favorable outlook for the dollar on a medium-term basis. We had expected the range trading environment to persist. This is primarily because we do not anticipate a resolution to what we see as the key issues facing investors--the U.S. fiscal cliff and the European debt crisis, and in particular, some closure for Spain and Greece. The week ahead will test this view as the ranges are being threatened

In a trending market, one wants to buy low. But in a ranging market, one typically wants to buy low and sell high. To respect the ranges requires the picking of tops and bottoms, which, as one can appreciate, is fraught with risk. It also means that one will get caught out on when the ranges do break. Disciplined money and risk management are even more important.

We suggest a two-pronged approach. First, assume the ranges will remain intact until proven otherwise. Given the uncertain fundamental backdrop, we remain reluctant to anticipate a breakout. Second, we are cognizant that sometimes the price action leads the fundamental developments. If a break does take place, on a closing basis, that too should be respected. This is especially true if the break comes in the direction we suspect fundamentals will move- and that is in the dollar's favor.

Euro: Our understanding of the likely dynamics of both the U.S. and the euro area underlies our bearish fundamental view of the euro. The technical tone has deteriorated in recent days and the close before the weekend was just off the lows. However, on a risk-reward basis, new shorts are not favored. The euro closed just above the 200-day moving average (~$1.2830) and the lower Bollinger band (~$1.2825). Underneath these is the lower end of the recent trading range ($1.28). The downside looks sticky, at least in the first half of next week. The pattern whereby Monday's direction is opposite the direction remains intact, with one exception, since the end of August.

Yen: The dollar extended its recent gains to score a six-month high against the yen. At JPY80.65, it has retraced half of the decline seen from March's JPY84.20 high. The next key retracement objective is found near JPY81.50. The yen's weakness is puzzling, not because it is backed by strong fundamentals, but rather that the typical drivers, such as change in interest rate differentials and the performance of equity markets (risk-on/risk-off), do not appear to be operative. Initial dollar support is seen near JPY80.00-15.

Sterling: The inability to push through the $1.62 area saw sterling set back to the $1.60 area. A break of $1.5980 signals a test on the two-month low set in a couple of weeks ago near $1.5915-30. Below there lies the 200-day moving average (~$1.5845) and then the 50% retracement of the advance off $1.5270 June low, which comes in just below $1.5800.

Swiss franc: Over the last few weeks, there seems to be some decoupling between the euro-Swiss cross and the euro's performance against the dollar. This has created a bit more of a trading opportunity in the franc. The dollar finished last week strongly and closed above CHF0.9400, albeit by a few ticks. The top of the dollar's recent range comes in near CHF0.9440. A convincing break of the range would likely confirm the bottoming pattern the greenback has been tracing out, and projects toward CHF0.9600. Support is now seen in the CHF0.9325-45 area.

Canadian dollar: The U.S. dollar rose to 3-month highs against the Canadian dollar. The Canadian dollar has fallen a bit out of favor recently, though the speculative longs in the futures market remain substantial. Support for the U.S. dollar is now found in the CAD0.9880-CAD0.9900 area. Our CAD1.0040 target has moved within reach. However, the 200-day moving average, which is found just below parity, continues to check USD strength on a closing basis.

Australian dollar: The Australian dollar posted a potential key reversal before the weekend by make a new high for the move before selling off and closing the North American session below the previous day's low. The price action reinforces the importance of the ceiling in the $1.04 area. On the downside, follow through selling would target just above the $1.0290-$1.0310 band. A break of this would signal a return to the lower end of the 3-month trading range near $1.0150.

Mexican peso: The peso's attempt to rally before the weekend was turned back and the dollar staged a bit of a reversal. Support is now seen for the dollar in the MXN13.93-95 area, with the MXN13.10-12 area offering initial resistance. The liquidation of stale peso longs could see the dollar rise toward MXN13.25.

week ending Oct 30Commitment of Traders
(speculative position in thousand of contracts)
NetPrior WeekGross LongChangeGross ShortChange
Euro-58.2-55.238.2unch96.43.0
Yen-37.0-18.219.9-5.756.913.2
Sterling23.418.457.93.034.5-2.0
Swiss Franc2.4unch11.81.09.4-1.0
C$78.889.186.3-12.37.5-1.9
A$52.145.791.07.438.91.0
Mexican Peso126.0132.0130.1-6.14.60.3
***Gross short euro positions have been reduced by 60% from peak, but is that it?
***Net short yen positions double to largest in nearly six months
***Gross long sterling positions have rarely gotten above 60k this year.
***Second consecutive week net speculative long franc position.
***Gross long CAD position continue to be pared and now near two-month lows.
***The Aussie remains a favorite of the futures market.
***Gross long pesos trimmed, but remain substantial. Vulnerable?
Source: Currency Positioning And Technical Outlook: Trending Market Or Not?