Friday, 17 May 2013

Are We Close to Selling the USD?

Ralph Shell, Excel Analyst

It has been a great week for the USD as it gained against all the majors.  The New Zealand Dollar was the last market where the futures traders were long.  Early in the week, the kiwi bought .8316 cents per USD, but by the end of the week it was down under the 81 handle.  Should the weekly chart close around this level, it looks like there will be some more to the downside. 

 Click to Enlarge NZDUSD Weekly Forex Chart

Remember one of the tricks of The Turtles, as taught by Ritch Dennis, was to hammer a weak Friday close, or, if the market is soaring, buy some more.  Their theory was: markets will continue their momentum.  Speculators, according to last week's COT report, were big longs in this very small market.  This could get ugly.

We doubt, however, it will get as ugly as has the AUD versus the USD. (AUDUSD, FXA). 

 Click to Enlarge AUDUSD Weekly 17 May 2013

Two weeks ago this pair traded at the top side of 1.03. The low this week is near the .97 handle. Two weeks ago, the COT report showed the specs were long 33K contracts.  As this long was liquidated, open interest in the CME futures slipped to only 154K contracts on May the 7th.  As the A$ sold off, I suspect the specs continued selling, though we will not find out until the COT report later today.  Open interest in the A$ CME futures contract has gone up fifty thousand contracts to 204K. 

The most important fundamental in currencies is the flow of money.  Specs apparently have put their money on the short side of the Aussie. 

The rate cut by the Reserve Bank is what got the A$ started to the downside.  On Tuesday, we get the RBA Policy Meeting Minutes.  My guess is the market fully expects further rate cuts.

The USD seems to be firmer, in part, because rumors persist the Fed is getting ready to taper off their $85B per month.  Chairman Bernanke speaks on Saturday, and again Wednesday.  Personally, I think the USD bulls are making a mistake if the taper off is all they have working.  The fundamental US economic data this week was mixed.  Retail sales and home building permits were friendly, but the CPI, US Initial Jobless Claims and the Philadelphia were all bearish.  I doubt this will cause Bernanke to change policies.

The yen continues to lose to the USD, although the yield on their bonds has reversed, and stopped going up.  We have moved above the 103 handle as we work toward the weekly finale. 

Click to Enlarge USDJPY Forex Weekly Chart

Today, released an interesting survey.  They report:

"Some 60% of investors at home and abroad expect the dollar to rise to 105-110 yen at the end of the year, according to a survey released Friday by Nomura Securities Co.

The largest number of respondents said the greenback would appreciate from 110 yen to about 115 yen at the end of 2014.

About 30% of investors who are based overseas expect the dollar to strengthen to 110-115 yen at the end of 2013, while only 6% of Japanese investors expect the same.

Roughly 33% of surveyed investors answered that they considered hedge funds to be the key factor prompting the dollar to rise against the yen. Only 15% of investors see the yen's downtrend as mainly caused by life insurers investing overseas."

This Wednesday, the new BOJ Governor Kuroda will speak.  There have been some good numbers coming from Japan, perhaps attributable to the new policies.  Do not look for any major changes.  It has been a long run, but the yen bears are still in control.

The euro has been weakening versus the USD and is approaching the 1.28 handle.  We seem to be getting support on the way down as the market works lower. While there is some buying, there has been nothing to frighten the bears.  Some of this support may be the movement of yen bond money into the higher yields in European bonds and notes. 

Click to Enlarge EURUSD Weekly Forex Chart

Are we approaching the level where all the bear news is in the market?  Perhaps, but remember the EU remains a dysfunctional group whose advocates are losing the battle for the minds of many. If the COT report shows there has been a big increase in euro shorts, perhaps we are coming close to a short squeeze.  But if the shorts have not added positions then expect the EURUSD (FXE UUP UDN) to continue lower.

The Dollar Index DXY has traded at levels not seen since July 2010.  The question then, is this a break out to the up side, or is this a sell as we are into a resistance area.  Currency trends often last longer than we initially project.  Further, the average trader exits his winners too quickly.  In my opinion, best to keep some USD longs.
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