Dollar Bulls Let Down By Data and Fed

It was a disaster for (US) dollar bulls last week. First off, the Fed meeting earlier in the week, struck a dovish tone despite the Fed's attempt to soften rhetoric regarding near-term risks to the (US) economy. The treasury complex, including fed fund futures, sold off immediately after the statement was released, but made a dramatic u-turn after liquidity dried up soon after. This caused the dollar to reverse all of its previous gains and then some, demonstrating once again that market participants do not believe that a hike is imminent.

Expectations for a September move (by the fed) and for a potential (single) hike by year-end have receded once again, enabling the euro (EUR/USD) to cement a well-needed near-term base since consolidating post-Brexit weakness. This shifted momentum on most technical readings for the EUR/USD, paving the way for further dollar weakness.

Large speculators, according to the most recent CFTC report, were also caught wrong-footed going into the Fed decision, as the latest data showed another weekly increase in the net short position. Despite being far from an extreme (from a net short positioning standpoint), bearish sentiment had risen quite substantially since May. In retrospect, it (EUR/USD short positioning) was due for a pause, as it closely resembled the last winter's one-sided move (in terms of length of time and amount of contracts from peak-to-trough) when the euro reached its largest net short position in history.

Later in the week, after the BOJ disappointed market expectations for a increase in additional bond-buying stimulus,  (US) yield differentials tumbled, adding further (downside) pressure for the DXY (Dollar  Index). Then to add insult to injury, Friday's (US) 2nd quarter GDP greatly disappointed investors, causing the dreaded R-word to be mentioned once again.

The end result was a dark cloud-like, outside (down) week for the dollar vs a basket of major currencies, which portends further (dollar) weakness given the size and scope of last week's move. The silver lining, however, is that central banks (including the ECB & BOJ) sound less sanguine, which could limit yields across the globe to further downside. This could enable US treasury yields to form material basing patterns across the curve, which could lend support down-the-road for the greenback. That said, momentum is clearly against the USD and look for the reported near-$15 billion long aggregate position that has been built up by large speculators over the past few months to continue to be trimmed.

US Dollar Positioned to Rally

The EUR/USD cross has been in a tight 10 cent range for roughly a year-and-a-half now and has settled near the midpoint of that range (at 1.10) just ahead of the July FOMC meeting. After last month's Brexit debacle, the single currency has managed to stabilize above 1.09. Subsequently, however, euro bulls have failed to recapture the upper half of the June/July range, which has potential negative (long-term) implications. That said, it has been a tireless sideways grind over the past few weeks as the spotlight in the foreign exchange market has primarily been on the Japanese yen and British pound. According to two of the largest FX brokers, (retail) traders are currently distributed evenly, with roughly half of orders positioned long and short. After a massive reduction in the number of positions (due to the heightened uncertainty of the Brexit vote),  short-term players have slowly built back their positions, but at relatively low levels with respect to the average number of (open) positions.


As of late, it seems that traders are anticipating a bottom in the EUR/USD cross-rate. Since topping-out in the mid-1.11 area recently, (euro) long positioning has rallied from net 40% (positioning of all orders) to hover near the 50% mark. This is occurring while large speculators (who are typically positioned on the right side of the trade), according to the latest CFTC (futures positioning) data, are building a sizeable short position. Also, with both retail traders and short-term speculators no-where near extremes, today's Fed statement  could give the US dollar bulls the push back towards 1.05 (EUR/USD).

Dollar strength could delay stocks breakout, but most likely not for long

While most global equity indices have broken out of recent ranges, the S&P 500 and the Dow (Jones Industrial Avg) are the only two to reach new all-time highs among the developed markets. Those two indexes are so strong that they are reaching overbought territory on weekly charts for the first time in years. The lack of daily chart bearish divergence, however, suggests that more evidence of a top is necessary for investors to even start of thinking of selling shares or even establishing a major short position in equities, especially within the Dow Jones 30 or S&P 500. 

It wouldn't be shocking to see markets pull-back (on risk-taking) given the macro-economic uncertainty and the potential economic impact or fall-out from the recent (UK's) Brexit vote. For now, however, it seems that any dips in equities should attract buyers given the early stage we're in within the latest uptrend and the position of key moving averages with respect to current price-action. Friday's consumer confidence numbers, however, which showed a substantial drop, are an area of concern and serve as a reminder of how fragile consumer psychology is at the moment.  A continuing trend of weakened confidence could turn out to greatly affect future (economic) output and could potentially provide a headwind to a market that is trying to grapple with the fact that two out three of the major stock (US) indices are at all-time record highs.

With the bulk of important key (US) economic behind us this month, the ushering of the (US)earning season could play a much bigger role influencing market psychology. This would greatly impact whether short-covering bond bulls (that were already extremely long going into last week) will cover more of their (long) exposure. That said, it has been well-telegraphed that (US) earnings growth has endured several consecutive quarters of decline, which will put more emphasis on (earnings) guidance. This will be key in deciding whether equities can continue their hot run of late and continue to influence bonds to sell-off.

While the stabilization of global bond yields is a promising sign for markets, a lot of the latest move is fueled by the unwinding of a very crowded (treasury market) long trade. Which means that it will take much more evidence for the bond market to believe that yields globally have found a bottom. The key (US) 10-year yield reached new all-time lows ahead of the nfp (non-farm payrolls number), but were only down at record (low) levels for a brief amount of time ahead of the strong rally (in yields) across the curve. Stronger-than-expected (US) economic data would continue to stimulate expectations of further central bank action and with the Bank of Canada and the Bank of England on hold last week, there is a thought that expectations for further easing by major central banks could be abating. We will of course see this week when the ECB meets and the Fed meet the following week.

As mentioned before, bond yield stabilization on the whole is a net positive for the stock market, the real wild card, however, resides in the foreign exchange markets. The downside to this recent (unexpected) bout of US economic strength and the resulting back-up in yields, is that it boost yield differentials in favor of the US dollar. This was seen heading into the past weekend as the DXY (US Dollar Index) managed to advance  accordingly (along with bond yields) and is now threatening to extend the post-Brexit bounce that has been consolidating since the British pound collapsed to a 30-year low.

The greenback may provide a temporary headwind until the dollar seasonal weakness sets in usually seen in the back-end of  the summer through the end of the year. In the meantime, while many continue to struggle comprehending how the market continues to climb the proverbial wall of worry despite such fundamental uncertainty, the fact remains that the charts don't lie and the (up) trend is your friend. Momentum in stocks around the world is clearly to the upside and until we get evidence of a real top (in stock prices) or show signs of exhausted buyers (which we haven't yet), the bias should continue to favor further upside in equity prices.

2/25 - EUR/USD

SELL @ 1.1118           or    BUY  @  false break of 1.0957
1st TGT - 1.0918                 if an inverted "U" appears to
SL @  1.1168                      have formed...

The EUR/USD has temporarily stalled weakness over the past 24 hours after a tumultuous 2-week span in which the pair suffered a near 400 pip drop. The latest breather, however, highlights a large bull channel and support at the 50-day MA and a key Fibonacci retracement (61.8% of 1.0708/1.1376).

A closer look (4-hourly chart) reveals that the short-term (bearish) structure was beginning to weaken in the form of a wedge pattern.
 The final thrust lower Wednesday was also complimented by diverging
 studies. That said, the recovery has been mild and most likely will have
 to prove itself a bit before attracting demand. In fact over the past two
 weeks, the only counter move rally lasted one day and roughly 80 pips.
 This is roughly where we are now off 1.0957 even though a small
inverse head & shoulders pattern has seemed to have formed.

EUR/USD = 1.1024   21.01 GMT