The underlying driver of the foreign exchange market is the divergence between the US and the other high income countries. This was underscored in the past couple of weeks. Between the BOJ and the government's pension fund, monetary stimulus and capital outflows are set to accelerate from the world's third largest economy.
In the euro area, the ECB has underscored its commitment to expand its balance sheet, and will look for other measures to implement as the risks are aligned to the downside. The signal continuing to come from key Fed officials is that barring a significant downside surprise, the Fed will initiate a hiking cycle next year.
However, the dollar's technical condition is stretched. Sentiment is extremely one sided. Practically everyone is bullish the dollar and bearish the euro and yen. The dollar's inability to trade higher, despite the constructive employment report before the weekend seems to reflect the reluctance of new dollar longs to come in without a pullback. The dollar may indeed drift a bit lower at the start of the coming week, in a largely corrective/consolidative fashion.
Euro: Initial resistance is pegged near $1.2470. Above there, the $1.2500-30 area is seen a more solid cap. Given the conviction level of many participants, it seems to really trigger a short squeeze. A move above $1.2600 is needed at this juncture. The economic calendar warns of a slow start to the coming week. The next major downside objective, ahead of the psychologically important $1.20 level is the potential trend line connecting the 2010 low (~$1.1880) and the 2012 low (~$1.2040) comes in near $1.22.
Yen: Since the BOJ/GPIF surprised the market on October 31, the yen has fallen more than 5%. Like the euro, the technical indicators are warning of an over-extended market. However, downticks continue to be brief and shallow. Initial support is likely to be seen near JPY114. Chart-based resistance is seen in front of JPY116 and then JPY117.60.
Sterling: New lows in the pound sterling since September 2013 were recorded before the US jobs data, near $1.5790. Although it managed to recover, it stalled in the lower end of the previous day's range. Initial resistance is seen near $1.5880 and then $1.5920. On the downside, the next objective is near $1.5725, which represents the 61.8% retracement of the rally off the July 2013 low near $1.4815.
Canadian dollar: Strong employment data helped the Canadian dollar recover into the weekend. However, the US dollar pullback to CAD1.1330 fulfilled the minimal retracement objective off the October 29 low near CAD1.1120. A further push could see the greenback test CAD1.1275-95. While the CAD1.15 level was neared, and offers the immediate psychological resistance, when it is overcome, the next major target is near CAD1.1725.
Australian dollar: The Australian dollar staged an impressive recovery before the weekend after making new four-year lows that matched the 50% retracement of the gains recorded off the 2008 low near $0.6000. The RSI and MACD trended higher in October, and the pullback in prices in early November have not been validated. There is near-term scope for the Aussie to test the $0.8660-80 area, which would also offer a new selling opportunity.
Mexican peso: After retreating at the start of the week, the peso traded sideways through the remainder of the week. Technically, the dollar looks poised to slip back toward MXN13.40, which is the low made on October 31. Part of the difficulty in selling dollars for pesos is that it is not clear when a stop ought to be placed. That said, on a relative basis, against the euro, for example, or yen, the peso can outperform.
S&P 500: New record highs were posted after the US employment data. Off the mid-October lows, it has rallied nearly 12% and only once has seen two consecutive losing sessions. A small gap (1990.40-2001.20) was created with the higher opening on October 31. The gap was entered on November 4th but was not closed. This should offer support though initially we suspect support may be seen in the 2015 area.
U.S. 10-Year Treasuries: The yield peaked just shy of the 2.40% level after the US jobs data and dropped nearly 10 bp. This was reflected in the futures market, with an outside up day for the US 10-year note futures. The lack of key data in the early part of the new week could see yields dip a bit lower. The 2.27% area is interesting and then 2.20%.
Light Sweet Crude Oil: The December futures contract recorded higher lows in the second half of last week, but was still unable to resurface above the $80 level. The lows recorded on November 4 near $77.25 were not validated by the RSI and MACDs. Above $80, the next target is $82.
Observations from the speculative positioning in the futures market:
1. There were three significant (more than 10k contract) adjustments in gross positions. The gross long euro position was cut by a little more than 5% or 13.8k contracts to 238.6k. The gross long yen position more than rose by more than 50% or 14k contracts to 37.9k. The gross short yen position rose 20% or 18.3k contracts to 109.3k. This report covered the two days before the BOJ/GPIF announcement (Oct 31) and two days after.
2. The general pattern among the currency futures in the latest CFTC reporting period ending November 4 was for both trend followers and bottom pickers to get more involved. This is reflected in the growth of both gross longs and shorts. Of the seven currencies we track, two were the exception. The euro, which saw a cut in gross shorts, and the Australian dollar which saw gross longs trimmed.
3. Activity was concentrated in the euro and yen. None of the other gross currency positions changed by more than 4k contracts.
4. The net short 10-year US Treasury note futures position increased to 47.3k contracts from 35.8k. This was a function of longs cutting (almost 17k contracts to 414.4k) and a small covering of shorts (nearly 5.4k contracts were covered to leave 461.7k contracts).
