Speculative data points to USD struggle

December 29, 2009 — Mitul Kotecha

The latest CFTC Commitment of Traders (IMM) data shows just how massive the shift in speculative USD positioning has been over recent weeks.  Net aggregate USD short positions (vs. EUR, JPY, GBP, AUD, NZD, CAD, CHF) have shifted from -172k at the beginning of December to -11k in the week ending Dec 22nd.   This corresponds with the sharp rally in the USD versus various currencies over the same period.  

The net speculative USD position is now at its highest since May 2009 and at this pace of improvement the market will be net long USD very quickly.  However, the data also suggests that there should be a degree of cautiousness in buying the USD from here.  The USD may simply be repeating the pattern seen in 2006 and 2007 when the USD strengthened into year end only to drop sharply in the weeks after. 

If the rally in the USD has largely been due to short covering into year end then this source of support for the USD is looking exhausted. Indeed it is difficult to argue that interest rate moves have helped the USD as correlations are still low between the USD index and US rate futures. The shift in USD speculative positioning may explain the inability of the USD to make much further headway over recent days and suggests difficulty for the USD in the days ahead, with the USD index likely to struggle to get above last week’s high o 78.449.

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US Dollar Déjà vu

December 18, 2009 — Mitul Kotecha

The USD is in a win-win situation at present.  Good economic data in the US helps to advance expectations of US monetary tightening, lending the USD support, regardless of the positive impact on risk appetite.  Similarly, bad economic news is also supporting the USD as it leads to higher risk aversion.  Either way the USD has surged over the past few weeks, appreciating by close to 5% since its low on 25 November. 

There was a similar but directionally opposite move in the USD last year taking place from almost the same time.  The USD index hit a high around 21 November 2008 but fell by over 10% in just less than a month.  If the same pattern is repeated this year the USD index has much further to strengthen although it is worth noting that the drop in the USD last year reversed practically to this day a year ago, with the USD subsequently rising by close to 13% in the next few months. 

Given that the move at the end of last year may not be the best comparison given the distortions due to the crisis and massive repatriation to the US in Q1 2009 it’s worth looking at what happened in 2006 and 2007 for a better comparison.   From the beginning of December 2006 to 11 January 2007 the USD strengthened by 3.5% but then dropped by around 4.5% within the next 3 months.  Similarly, the USD strengthened by close to 4% from the end of November 2007 to 20 December 2007.  However, the USD dropped by over 8% in the three months after.  So what I am saying is that it is way too early to suggest that the USD rebound will be sustained over coming months and judging by past evidence all its doing is proving better levels to sell for a subsequent decline over Q1 2010.   

Is the USD really in a win-win situation? Well, the more plausible explanation is perhaps a bit more simplistic.  It’s year end and the market is squaring up, with FX moves being exaggerated by thinning liquidity.  There is some support to this theory from the CFTC Commitment of Traders IMM data which revealed a sharp reduction in net aggregate USD short positions in the latest week, with a further sharp reduction in net short positions expected in next week’s release. 

Whilst it is too early to buck the trend yet, going into early next I look for a reversal of the recent appreciation in the USD against the background of improving risk appetite and US interest rates that are unlikely to go for a long while yet.

Posted in Currencies, Economics, FX, Interest rates, US. Tags: , , , , , , , , . 1 Comment »

Buffer for risk trades

November 25, 2009 — Mitul Kotecha

Firmer data, most recently in the form of the stronger than expected US consumer confidence and dovish Fed comments as reiterated in the Fed FOMC minutes will provide a buffer for risk trades, supporting the USDs role as the prime funding currency over coming weeks.  Nonetheless, any improvement in sentiment will have to push against the weight of position adjustment into year-end as investors book profits on risk trades.  The net effect could be an increase in volatility especially in thinning liquidity expected in the wake of holidays in Japan and the Thanksgiving holiday in the US.

This could make it difficult for many asset markets to sustain key psychological and technical levels.  Whether the S&P 500 can hold gains above 1100 could prove significant as could EUR/USD’s ability to hold onto gains above 1.50.  The expiry of last week’s EUR/USD 1.48/1.51 option may provoke a move out of its range but there seems to be little appetite for a sustained break above the 23rd October high around 1.5061.  Even so, an upside bias is more likely given the likely softer tone to the USD. EUR/USD looks well supported around 1.4865.

Position adjustment towards the end of the year has been particularly evident in FX markets.  For instance, the latest CFTC Commitment of Traders’ data revealed that speculative investors have sharply reduced net long EUR positions into last week whilst there was a significant degree of short covering of GBP positions.  It is worth noting however, that aggregate USD net short speculative positions actually increased, largely due to a sharp jump in net JPY positioning, suggesting that overall sentiment for the USD remains very negative.

It is difficult to see a strong reversal in USD sentiment into year-end and the Fed’s commitment to maintaining interest rates at a low-level for an “extended period” taken together with hints of extending asset purchase programmes suggests little support to the USD over the short-term unless there is a more significant increase in risk aversion and or profit taking/book closing into year-end.  It seems that the impact of improved risk appetite is winning for now, giving no respite to the USD.

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Respite for the dollar

October 27, 2009 — Mitul Kotecha

Markets are increasingly discounting stronger than expected Q3 earnings.  Further gains in equities and risk appetite may be harder to achieve even if profits continue to be beat expectations, which so far around 80% of Q3 earnings have managed to do. Measures of risk such as the VIX “fear gauge” have highlighted an increasingly risk averse environment into this week.  The negative market tone could continue in the short term.

The USD has found some tentative relief, helped by the drop in equities and profit taking on risk trades.  The fact that the market had become increasingly short USDs as reflected in the latest CFTC Commitment of Traders’ (IMM) report in which aggregate short USD positions increased in the latest week (short USD positions numbered roughly twice the number of long positions), has given plenty of scope for some short covering this week.

The USD has even managed quite convincingly to shake off yet another article on the diversification of USD reserves in China.  The USD index looks set to consolidate its gains over the short term against the background of an up tick in risk aversion.  The USD index will likely remain supported ahead of the main US release this week, Q3 GDP on Thursday, but any rally in the USD is unlikely to be sustainable and will only provide better levels to short the currency.

Given the broad based nature of the reversal in risk sentiment with not only equities dropping but commodities sliding too, it suggests that high beta currencies, those with the highest sensitivity to risk will suffer in the short term.  These include in order of correlation with the VIX index over the past month, from the most to the least sensitive, MXN, AUD, MYR, SGD, NOK, EUR, CAD, INR, ZAR, BRL, TRY and NZD. The main beneficiary according to recent correlation is the USD.

EUR sentiment in particular appears to be weakening at least on the margin as reflected in the latest IMM report which revealed that net long EUR speculative positions have fallen to their lowest level in 6-weeks.  Whether this is due to profit taking as EUR/USD hit 1.50 or realisation that the currency appeared to have gone too far too quickly, the EUR stands on shakier ground this week.  EUR/USD may pull back to near term technical support around 1.4840 and then 1.4725 before long positions are re-established.

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Earnings in focus

October 19, 2009 — Mitul Kotecha

The majority of US Q3 earnings have beaten market expectations resulting in a boost to risk appetite and further pressure on the US dollar. At the time of writing, 61 companies have reported earnings in the S&P 500 and an impressive 79% have beaten forecasts according to Thomson Reuters. This week there are plenty of earnings on tap and although a lot of positive news appears to be priced in the overall tone to risk appetite remains positive. This implies a weaker US dollar bias given the strong negative correlation between US equities and the USD index.

Aside from the plethora of earnings there are plenty of data releases on tap this week including housing data in the US in the form of building permits and starts as well as existing home sales. The data will likely maintain the message of housing market stabilisation and recovery in the US. There will also be plenty of Fed speakers this week and markets will once again scrutinize the speeches to determine the Fed’s exit strategy.

Highlights this week also include interest rate decisions in Canada and Sweden. Both the BoC and Riksbank to leave policy unchanged and expect a further improvement in the German IFO in October though at a more gradual pace than in recent months. There will be plenty of interest in the UK MPC minutes given conflicting comments from officials about extending quantitative easing. RBA minutes will be looked at for the opposite reason, to determine how quickly the Bank will raise interest rates again.

The USD index managed a slight rebound at the end of last week but is likely to remain under pressure unless earnings disappoint over coming days. US dollar Speculative sentiment became more bearish last week according to the CFTC IMM data, with dollar bloc currencies including the AUD, NZD and CAD benefiting the most in terms of an increase in speculative appetite. GBP short positions increased to a new record but the rally towards the end of last week may have seen some of these short positions being covered. Overall any recovery in the USD this week may just provide better levels to go short.

Posted in central banks, Currencies, Economics, Economy, Interest rates, Monetary Policy, UK, US. Tags: , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »
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