WHY THE SHIFT IN USD POSITIONING IS VERY SIGNIFICANT
The price action in the currency and equity markets suggests that investor sentiment has improved. However considering the magnitude of the news that Citigroup plans to repay TARP funds, Abu Dhabi’s $10 billion support to Dubai World and Exxon Mobile’s $31 billion stock deal to acquire XTO Energy, we would have expected a more significant reaction in the financial markets. Instead, U.S. stocks ended the day virtually unchanged while the dollar gave back a small portion of its recent gains. The consolidation in the forex markets reflects the lack of U.S. economic data and hesitancy of currency traders to add to their long dollar positions ahead of the Federal Reserve’s monetary policy announcement on Wednesday.
Reining in Inflation Week
Based upon the latest labor market and consumer spending reports, there has been enough improvements in the U.S. economy to warrant a more hawkish stance from the Federal Reserve. However as recently as December 7th , comments Fed Chairman Ben Bernanke suggests he is not convinced that the improvements are here to stay. Although we are also skeptical about whether the U.S. economy has really taken a turn and question the possibility of positive job growth next month, at bare minimum, FOMC members will need to acknowledge the improvements. Their degree of hawkishness will also be partially contingent about the upcoming inflation numbers. It is inflation week across the globe with producer and consumer price figures due for release from many of the G20 nations. Tomorrow’s producer price report will provide an updated look at the latest inflationary conditions in the U.S. With import prices rising by the strongest amount in 5 months, inflationary pressures have accelerated and we expect this trend to be reflected in the upcoming PPI and CPI releases. Higher inflationary pressures should encourage more hawkish comments from the Fed but knowing that once they turn optimistic, they cannot pare back as readily they will try to stick to their cautious optimism as much as possible. How the Fed sways should determine how the dollar trades for the rest of the year.
Significance of Turn in Dollar Positioning
On Friday, the CFTC released their weekly Commitment of Traders Report, which measures positioning in the commodity markets. According to data from the Chicago Mercantile Exchange, future traders have reduced their short dollar positions across the board. In fact, speculative positioning in the EUR/USD turned net short for the first time since May. This shift from net short to net long dollars against euros is extremely significant. Since 2005, there has only been approximately 4 times (not including this time) that EUR/USD positioning has flipped to net short after being net long by more than 20k contracts. Each time, this shift in dollar positioning was a precursor to a more significant rally in the U.S. dollar. According to the following chart, the last time that speculative EUR/USD positioning (white line) flipped from net long to net short was in the first week of August 2008 and interestingly enough, that was the very week that the breakdown in the EUR/USD began, with the currency falling more than 3,000 pips or 20 percent over the next 3 months. W are certainly not saying that the EUR/USD will fall 20 percent from current levels because the move in the EUR/USD following each shift in dollar positioning has varied in terms of magnitude. However, the yellow vertical lines on the chart show that a flip consistently foreshadows a sell-off in the EUR/USD. If the Fed grows more hawkish on Wednesday, we could have a fundamental trigger for a more meaningful decline in the EUR/USD.
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Abu Dhabi bailed out Dubai World, US Nov retail sales were nearly double expectations and the SP500 has yet to regain the 1,120 level. And as oil prices no longer responding to improved risk appetite, USD strength and GBP weakness remain the name of the game. The fact that Abu Dhabi waited until the last minute (before the 2-week grace period) to help DW meet its short-term sukuk bond suggests that the bare minimum is being done to avert a new crisis. Cable looks to retest $1.6180 on the slightest downturn in appetite and EURUSD risks retesting $1.4590 from the current $1.4650s. Still difficult for cable to hit new highs after the London close.
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Since the beginning of the year, forex traders have grown accustomed to the U.S. dollar trading against U.S. fundamentals. In other words, the dollar would sell off on positive U.S. data and rally on weak data. The counterintuitive price action was driven by the dollar's safe haven status and when bad news would spell trouble for the U.S. economy, investors would flock into the safety of the low yielding currency. In contrast, when economic prospects brightened, investors would plow out of dollars into higher yielding and riskier currencies. However since the beginning of the month, this dynamic appears to have changed. On the heels of a dramatic improvement in non-farm payrolls, the dollar began to strengthen as the outlook for the U.S. economy brightened. Last Friday's retail sales report indicated that the moderation in job growth has translated into stronger consumer spending, supporting the fundamentally driven rally in the dollar.
Is This Just a Phase?
The next obvious question to ask is whether this is just a phase for the dollar. In the short term, we believe that good data should continue to help and not hurt the dollar as traders readjust their expectations for Fed tightening. If the U.S. economy continues to improve at its current pace and global economic risks stabilize, even the ever skeptical Federal Reserve may have to recognize the need for tighter monetary policy. Although there was no U.S. economic data release this morning, news that Citigroup reached a deal to repay $20 billion in government aid, Abu Dhabi's $10 billion support to Dubai World and Exxon Mobil's $31 billion stock deal ($41B including $10B in debt) to acquire XTO Energy Inc. has helped the dollar hold onto its gains. However at the same time, we do not see further gains in the dollar until the FOMC rate decision on Wednesday. Dollar bulls are still relatively insecure and therefore need confirmation that the Fed has been swayed by the recent improvements in U.S. economy. Based upon last week's comments from Fed Chairman Ben Bernanke, it is not clear whether or not the Fed is convinced that the improvements are here to stay.
Capacity Utilization in Canada Retreats
Meanwhile the only piece of North American data released this morning was capacity utilization from Canada which dropped from 67.7% to 67.5% in the third quarter. Production capacity fell to a record low on declines at mining companies. For the second trading day in a row, the Canadian dollar weakened against the greenback despite the overall improvements in the Canadian economy. The consolidation in USD/CAD suggests that a breakout is imminent. The levels to watch are 1.07 on the topside and 1.04 on the downside. TEST
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By Ali Khalil (AFP) – 14 hours ago
DUBAI — The Dubai stock market strengthened on Sunday, building on a 7.0 surge it made before its weekend on Thursday, lifted by property giant Emaar's decision to abandon a merger with state-owned entities.
By midday, the Dubai Financial Market index was trading 3.76 percent up at 1,702.45 points, after it had opened 0.9 percent up.
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Cable has managed to close below 16270 level for the week. For me with the 50% Fib level just above I am looking for short entries. I expect a retest but the daily chart has ben capped around 16825 level. We have moved sideways on this level for 3 days so i expect a change of direction soon. 16242 is the lower level to take out first then 16155 is 61.8% fib level. I will be looking on 1H and 15M for entry/exit. Typically i look for pin bar rejections of these levels and divergence. I have also put up a 1H chart with a great entry from Thursday. Not a typical pin bar but very negative candle rejecting 16333-40 level and Bearish DivergenceEntry 16310 stop is 16350 if you took the full move it's 2-1.
