Currency Outlook: Market In Knots
Marc Chandler | Jun 09, 2013 01:06AM ET
The foreign exchange market has become more treacherous than usual. The main culprit is a growing realization that the low interest rate environment that has characterized the investment climate over the last several years is going to end. Whether it is in 3 months, 6 months or 9, investors realize it is better to be early than late in adjusting positions accordingly. Indeed, it is entirely possible that the low point in interest rates is behind us.
That said, we suspect the first wave of the position adjustment is over and this may translate into a somewhat firmer dollar, and better performing emerging market currencies and a recovery in equities in the days ahead. The dramatic moves last week seemed to have flushed out some of those who came to the party late.
The major currencies stopped near key technical levels. For example, the Dollar Index bottomed in front of the 81.00 area, which corresponds to a 61.8% retracement off the early February lows. For their parts, on an intraday basis the sterling and the euro rose through the 50% retracements of the large decline from early January and early February respectively. For those who suspect that the move still has legs, their sights are set on the 61.8% retracements that are found just below $1.58 and $1.3345 for sterling and the euro respectively.
The dollar reached our quarter-end target against the yen of JPY95 after the US data. This also appears to have completed a technical move. The 38.2% retracement of the dollar's gains since the election was called in the middle of last November came in near JPY94.30. The dollar's recovery before the weekend leaves a bullish divergence on the momentum indicators. We look for a return to the JPY100 area.
While the Swiss franc is widely understood to trade in the euro's orbit, there has been a we warned that although the technical factors looked constructive for the dollar, the fundamentals, in the form of the ECB not delivering on the negative deposit rate (that Draghi said he had an open mind about) and additional aid for small and medium size businesses, were less supportive. We also anticipated that the jobs data would not support notions from some Fed officials (and market participants) that tapering of the purchases of long-term assets could being as early as this month. Now we suspect the dollar's down move has been largely exhausted and we anticipate a recovery in the dollar into a new trading range.
Observations on the speculative positioning in the CME currency futures:
1. There were unusually large moves in the spot foreign exchange market in the three sessions since the CFTC reporting period ended. For example, the dollar had a five yen range, while the euro and Australian dollar traversed a 2.5 cent range. Sterling traded in a 4 cent range. This makes the data less timely than usual.
Get The News You Want
2. Gross long positions were generally reduced, except for the euro and yen. Gross short positions were more mixed.
3. There were three significant (more than 10k contracts) adjustments. Gross short euro and yen positions were covered and long peso positions were slashed.
4. As of the end of the CFTC reporting period, speculators have the largest gross short position in sterling. Sterling rose to its highest level in almost 4-months after the reporting period ended.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.