The US dollar turned in a mixed performance during the first week of the New Year. It fell against the Antipodeans and yen but rose against the other major currencies. The dollar's performance against emerging market currencies was similarly mixed. It rose against most but fell against the major non-restricted currencies, like the Turkish lira, the Mexican peso, and the South African rand. Most importantly, the dollar finished the week on a soft note, and we expect this to continue into the week ahead.
While US job creation in December, at 252k surpassed consensus expectations, and the October-November rolls were revised higher by a combined 50k, it was the weakest monthly jobs growth since August. The wage data were a major disappointment. Average hourly earnings fell 0.2%. The consensus called for a 0.2% increase. The 0.4% gain in November was halved in the revision. The year-over-year pace slumped to 1.7%, the lowest in two years.
The market's confidence that the Fed's lift-off will take place near mid-year has been shaken. The implied yield of the December 2015 Eurodollar futures contract finished the week at its lowest level in a month, nearly 20 bp below the level seen on Xmas eve. In the week ahead, softer retail sales and inflation gauges will likely favor the doves and weigh on the dollar.
Technically, the euro could climb toward $1.1875-$1.1900 before the bears make a new stand ahead of the January 22 ECB meeting. This kind of gain off the multi-year low set on January 8 near $1.1755 does not likely reflect bottom-pickers and bargain hunters as much as a minor bout of short-covering as the downside momentum appeared to ease. A break of the $1.1750 area could signal another quick cent decline.
The dollar peaked a month ago against the yen (December 8 ~JPY121.85). Since then the BOJ has added another (roughly) 1.4% of GDP to its balance sheet. Over the past month, the dollar appears to be carving out some kind of wedge or triangle pattern, which is typically thought to be a continuation pattern. The downward sloping top line is drawn off that December 8 high and the high from January 2-3. It comes in near JPY120.35 by the end of the week ahead. The upward sloping bottom line is drawn off the December 16 low spike below JPY115.60 and the January 6 low just above JPY118.00. It was closed just above it before the weekend. On a downside break, which looks likely, we initially target JPY117.50 and then JPY116.80.
After a string of disappointing PMI reports, the UK surprised investors with its largest jump in manufacturing output in seven months and the smallest trade deficit since June 2013. Sterling's downside momentum, that had carried to just above $1.50, and the data helped spur a bounce. Those upticks still lack conviction, and the short-covering was only sufficient for it to flirt with $1,5175. Technically, there is potential into the $1.5250-$1.5300 area. Expectations of a rate hike continue to be pushed out, and this is what is being reflected in the latest gains in the short-sterling futures contract. A sub-1% CPI reading is expected on January 13 and will likely push the market more in this direction.
The Australian dollar finished last week above its 20-day moving average for the first time since mid-November. Positive fundamental news from the smaller than expected trade deficit and larger than expected jump in building approvals seemed to stall the downside momentum. It took the broader US dollar weakness to push it higher. The $0.8200 area was probed, and the next level of resistance is seen near $0.8250. From a technical perspective, the Australian dollar looks the most constructive of the foreign currencies we look at here. The RSI and MACDs have turned up, the 5-day moving average is poised to cross above the 20-day average, and it closed at three-week highs before the weekend. It also closed above the downtrend line drawn off the mid-November and late-November highs and the high seen at the start of the year.
The technical tone of the Canadian dollar is not nearly as constructive as it is for the Australian dollar. The Canadian dollar is being treated more like a petro-currency. This allowed the drop in oil prices to overshadow the 53.5k jump in full-time jobs reported before the weekend. The US dollar extended its advancing streak against the Canadian dollar to six consecutive weeks. It approached CAD1.19 before pulling back a little. Above there, the CAD1.1975-CAD1.2000 offers psychological resistance. The lower level is equivalent to $0.8350 for Canadian businesses.
Oil prices have fallen for seven consecutive weeks. The risk is still on the downside, even though the February WTI futures contract spent most of the week bouncing along the recent trough. Saudi Arabia's last move, to cut the discounts offered in the US and Europe, demonstrate its resolve to preserve market share. At the same time, the apparent liberalization of US rules on condensate exports could boost US exports by another mln barrels a day by the end of the year, according to some industry estimates. This will intensify the competition in third markets. Over time, the decline in prices will boost demand. There are already preliminary signs that the decline in gasoline prices in the US is boosting demand.
The drop in oil prices, the absence of earnings growth in the jobs report, and the increased jitters in the equity market, ahead of Q4 earnings season pushed U.S. 10-Year bond yields below 2.0%. This is beginning to look like the upper end of yields. Yields recorded a low near 1.86% in the mid-October flash crash and 1.88% on January 6. A break could extend the range another 10 bp or so initially, but there is increasing talk of a move toward 1.50%.
The S&P 500 filled the gap from the higher opening on December 18 that we anticipated. The recovery off the January 6 low was sharp. In some ways, it looks similar to the lows from the middle of October and the middle of December. However, the technical indicators, like the RSI and MACDs are not as constructive, A break of the 2030-2065 range will likely suggest the direction of the near-term trend. Even though the weekly close was above the 50-day moving average, on balance we have a slight near-term bias to the downside.
Observations based on the speculative positioning in the futures market:
1. There were two significant changes in gross speculative position in the futures markets in the Commitment of Traders for the week ending January 6. The gross short euro position increased by 11.6k contracts to 207.1k. The gross short sterling position grew by 10.4k to 64.7k contracts. There was only one other gross position adjustment more than 5k contracts. It was the 7.7k contract cut of gross long Australian dollar positions to leave 17k.
2. There was a clear pattern. Speculators added to the gross short position of all the currency futures we track. The longs were more mixed but were added to in the euro, yen, sterling and peso.
3. It seems as if there was some pre-holiday position squaring, and those positions are being re-established. The gross short euro position peaked in early November near 239k contract and fell to 183k in the middle of December. There are a few exceptions. The gross long and short yen positions are smaller now than mid-December, but the net position is little changed at 90.1k contracts short. Before Xmas, it stood at 87k. The market has been building a larger net short sterling position, which is now about 20% bigger than it was on before Xmas. At 64.5k contracts, the net short peso position is about twice the size of the position at the end of November.
4. The net short 10-year Treasury note futures position slipped to 243k contracts from 261k the prior week. However, this is still a large increase from the 163k net short position in early December. The gross long position rose almost 30k contracts over the past week to 311.5k. In late October, the gross long position was 457k contacts and fell to 273k contracts in the middle of December. It has risen for the past three weeks. The gross short position increased by almost 12k contracts to 554.7k. This is the largest gross short speculative position since 2006. It has grown by about 90k contracts since the end of November.
