IMM Positioning - Speculative Investors Turned Net Long In GBP

April 28, 2008

Speculative investors turned net long in GBP

Overall speculative positions were increased in the week from 15 April to 22 April, as net short USD positions rose by USD 3.1bn to USD 16.9bn, driven mainly by increased positions in GBP, AUD and CAD.
Speculative investors once again turned net long in GBP, which has regained some of its losses against EUR and USD in recent weeks. Net long GBP positions stand at USD 0.6bn.
Net long EUR positions were reduced slightly by USD 0.2bn to USD 3.8bn.
Also net positions in the traditional funding currencies were scaled back, as net long JPY positions were reduced by USD 1.6bn to USD 4.3bn, and net long CHF positions by USD 0.3bn to USD 0.4bn.
Meanwhile, net long positions in the $-block currencies were built further. Net long positions in AUD and CAD both saw large increases, while net long NZD positions were close to unchanged. This mirrors the latest increase in AUD/NZD.
On the bond market, speculative investors went net long in 2-year notes, while net short 10-year note positions were increased slightly.

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Candlesticks Mixed On Further Dollar Strength

Last week our analysis yielded a net profit of 351 pips. Our long-term Canadian dollar range trade bounced back to stop us out at break even, but our Yen position rose in our favor for 151 pips. Most notably, we picked the top on Euro as the pair hit our target at 1.60 for 200 pips in profit, only to collapse immediately after. Our stop-loss on the New Zealand Dollar was hit for a loss of 77 pips, a set-back easily countered by our other trades. Looking at the week ahead, we see notable changes in EURUSD, USDCAD and NZDUSD while GBPUSD looks to have found a bias.

EUR/USD

Euro crumbles following 1.60 Test

Last week, we concluded that EURUSD was positioned well at 1.5800 for a test of the psychological level at 1.60. Our analysis proved correct, yielding 200 pips in profit. Euro bulls lost all momentum following the test at the all time high, with EURUSD dropping sharply lower to break through the upward sloping trend line we have been following since February.

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We have changed our bias to bearish. The pair is currently showing a decisive Three Black Crows pattern to further validate the bearish view. The decline has stalled ahead of 1.5560, offering poor risk-reward parameters to enter short at the current price. Rather, we will wait for a retrace to just below 1.5800 amid past price congestion to sell the pair with an eye on downside to just above 1.5340.

EUR/USD Trading Strategy

1. Short EURUSD on retrace to 1.5800
2. Set stop-loss just above all-time high near 1.6022
3. Set target above swing low at 1.5340, risking 222 pips to gain 460.

GBP/USD

Sterling Looks to Attempt a Another Rally

Last week, we did not see a clear signal on GBPUSD and opted to remain on the sidelines. We identified the pair as trading near an established pivot level at 1.9970. This had acted as support or resistance at various points in recent price action. GBPUSD has now cemented the level as significant resistance, oscillating between this and a downward sloping trend line (see chart below).

Currently, the GBPUSD has shown a Bullish Engulfing pattern. Adding further to the upside argument, we are seeing an upward-sloping support line intersecting with the previous resistance line, suggesting last week to have been a break-out from a triangle pattern. That said, current positioning does not offer attractive risk-reward parameters for an entry. We will look for a pull back to 1.9760, a multiple support/resistance level, to enter long. The most recent top at 1.9970 was largely symmetrical with the 04/04 Inverted Hammer top. We will look for the next bullish run to test resistance in a similarly symmetrical fashion with the top on 03/27.

GBP/USD Strategy

1. Long GBPUSD on a retrace near 1.9760
2. Set stop-loss below 1.9650 past recent wick lows
3. Set profit target near 2.0090, aiming for a symmetrical test of the 03/27 top, risking 110 pips to gain 330.

USD/JPY

Yen continues to retreat, but event threatens the rally

Last week, we advocated buying USDJPY on a retrace from 103.69 to 102.90, citing a confirmed Hammer candlestick. Our analysis proved correct, as the pair pulled back to the entry point and then proceeded to rally, closing at 104.41 for the week and yielding 151 pips in profit.

USDJPY is currently showing a bullish Three White Soldiers candlestick pattern, suggesting further upside. That said, we must be cognizant of the barrage of US data due this week. With USDJPY closely correlated to risk trends, the pair may see significant volatility in the coming days. We will revise our target to a more modest 105.19 and continue holding long. Conservative traders may opt to take profit here and wait for event risk to pass, or move their stop-loss to break-even at 102.90.

USD/JPY Strategy

1. Hold Long USDJPY from last week’s entry at 102.90.
2. Based on individual risk tolerance, either retain stop-loss at 101.40 or move to break-even at 102.90
3. Revise profit target to 105.19 near the 01/23 wick low.

USD/CAD

Long term trend line back in play

Last week, we opted to continue holding USDCAD short from below 1.0250 looking for a test of the range bottom. We moved our stop to break-even to contain the risk of an upside reversal. This proved wise, as USDCAD rallied to hit our stop-loss. We left the trade with no gains, but suffered no losses.

Recent price action has suggested an upward-sloping trend line from the 11/07/07 low. The pair now finds itself back at this support level having given back about half of last week’s gains. Our bias has shifted to bullish, but we will wait for confirmation with a close above support and a bullish reversal candle prior to entering a trade.

USD/CAD Strategy

1. Long USDCAD above trend line support on confirmation of a reversal.
2. Set stop-loss near 0.9983 below recent wick lows
3. Target a return to the range top at 1.0250, risking 97 pips to gain 170.

AUD/USD

Reversing Lower From 0.9500 Double Top

Last week we identified a downward-sloping resistance line connecting recent highs for a triple top. This looks to be a significant hurdle to further upside, and we opted to remain flat. AUDUSD broke past this point temporarily to hit the 0.9500 psychological resistance level, only to crash lower and stabilize above the 0.9300 level.

The pair is showing to consecutive Long Black Candles, a strong indication of a bearish bias. As we mentioned last week, we see AUDUSD retracing lower near 0.9200 again. Still, we will opt to take a short position. AUDUSD has been trading along an established bullish trend since August of last year. The yield differential is also resoundingly in favor of the Australian dollar. With those considerations in mind, we would rather wait for a long entry to present itself rather than trade counter-trend.

AUD/USD Strategy

We remain flat as we wait for an entry point to present itself.

NZD/USD

Trend Line Broken, Further Downside Looms

Last week, NZDUSD decisively broke through significant support marked by an upward-sloping trend line established in August of last year, hitting our stop loss above 0.7773 for a loss of 75 pips.

The pair is now showing two consecutive Long Black Candles, a strongly bearish signal. We will look to go short from here, targeting past price congestion near the 01/07 low of 0.7604.

NZD/USD Strategy

1. Short NZDUSD below 0.7850.
2. Set stop loss at 0.7950 above trend line support-turned resistance.
3. Set target near 0.7604, risking 100 pips to gain 246.

DailyFX

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U.S. Weekly Wrap-Up

Equity markets have managed to consolidate last week’s rebound despite another week chock full of soft economic data. Housing remains a sore spot, a fact highlighted by Tuesday’s March existing home sales figure coming in below 5M units and driven home by the lowest new home sales reading since 1991 on Thursday. Friday’s University of Michigan confidence reading indicated the slowdown that began in housing is trickling down to the consumer outlook when the reading hit lows not seen in a quarter century.

First quarter earnings continued to drive equity trading as a wide swath of companies reported results, with many providing their outlook for the rest of the year. UNH set an early negative tone for healthcare when the company guided lower on rising costs and softer enrollments. Managed care names were able to rebound later in the week following results from WCG and AET. The XLF financial index dipped through the first two sessions after BAC reported a Q1 provision for credit losses of more than $6B. Merrill Lynch gave the group a shot in the arm late in the week, announcing it would maintain its current dividend rate, while the CEO highlighted the company’s success in raising $11B in financing over the past week. Tech has been digesting another full plate of earnings, starting with the bad taste of Microsoft’s discouraging outlook. Strong results from BRCM AAPL QCOM and BIDU have been offset by weakness in shares of TXN YHOO AMZN and the aforementioned MSFT. Regardless the QQQQ’s are looking to close the week within striking distance of the 200-day EMA. Mid-week, the resolve of Dow theorists was tested when UPS guided lower and a plethora of airline and rail road earnings reports magnified the stiff headwinds faced by these industries. The transports managed to work back towards eight-month highs late in the week following a strong report from trucking company YRCW, keeping hope alive that the recent strength is an indicator of building momentum in equities and that the bottom may have been found.

Despite a mixed picture for equities, Treasury yields continued to run higher with notable flattening seen in the US curve. Before the open of floor trade on Friday, the two-year yield was approaching 2.5% for the first time since the end of 2007. The 10-year yield has worked back above 3.85%, pulling within reach of Feb tops. Expectations of a less aggressive Fed have been working their way into the fed fund futures market for more than two weeks, and by mid-week mainstream media outlets were starting to pick up on the trend. Reports circulated that the Fed was likely to go on hold after next week’s FOMC meeting, citing mounting inflation pressures and the belief liquidity has finally found its way into dislocated credit markets as evidenced by the ability of financial institutions to successfully raise capital. The May Fed fund future sees roughly a 75% chance of a 25bp cut while for the first time the summer contracts are not fully pricing in a 2% Fed funds rate. Just a few weeks ago these contracts saw as high as a 50% chance the Fed funds rate would fall below 2%.

Geopolitical events kept crude oil near record levels this week. Attacks on Nigerian oil facilities and the shutdown of most of BP’s North Sea oil flow caused by an impending strike at a key UK refinery kept crude oil up near $120/barrel. Jittery energy traders drove crude up on Friday after a report that a US Navy contract ship fired warning shots at two Iranian vessels that got too close. Not even a rebound in the dollar, whose weakness has been a key driver of higher oil prices, helped dampen oil.

After hitting another record low against the euro on Wednesday, moving above 1.60, the dollar regained some ground thanks to a smattering of economic reports that showed a glimmer of improvement in the US economy and some weakness in the EU. In the US, weekly jobless claims came in at a surprisingly low 342K, which will bring down the closely followed three-month average after jobless claims spiked to an unsettling level above 400K just three weeks ago. Also in the positive column for the US economy this week, March durable goods orders (ex-transports) arrived well above expectations at 1.5%, versus the expected 0.5%. Meanwhile in Europe, the German April IFO Business Climate index hit a fresh two-year low, raising some concerns the European economic slowdown may be sharper than expected. The dollar ended the week at about 1.56 to the euro, 2.5% off of its lows, which in turn helped push gold futures below $900 for the first time in three weeks.

For the week, the DJIA was up 0.3%, the Nasdaq composite rose 0.8% and the S&P 500 gained 0.5%.

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FX Briefing: Beyond 1.60 the Ice Gets Thin

Highlights

Weak ifo dampens growth optimism
Markets are speculating on US rate cut cycle coming to an end

Beyond 1.60 the Ice Gets Thin

After EUR-USD had passed 1.59 for the first time in mid-March, it was just a matter of time before it hit 1.60. In the last fortnight, the European currency has been inching nearer and nearer to that level, and on Tuesday, it finally managed to breach 1.60 for the first time, briefly hitting a high of 1.6020. But the ice gets thin beyond 1.60: subsequently, the single currency plummeted to below 1.56.

Exchange rates are still being driven by interest rate expectations for the eurozone on the one hand and for the US on the other. The fact that 2- year government bonds, for example, have dropped significantly shows that interest rate cut expectations have been priced out, both for the eurozone and for the US. During the last few months, doom and gloom had prevailed in the US, but now some people are starting to voice the opinion that the crisis might have bottomed out. Some Fed representatives have even made cautious references to inflation risks and indicated that the interest rate cut cycle might be coming to an end.

In Europe, market participants have begun to price out the interest rate cuts which had up to now been expected for the second half of the year. This is mainly because inflation has accelerated. Even if food prices slowly stop rising and energy prices stabilize, the inflation rate will still not fall much below 3% this year. Unless one is banking on falling energy prices, the price situation is not likely to ease more significantly until well into 2009.

Because of the prospect of higher inflation rates persisting for somewhat longer, the ECB will probably refrain from cutting interest rates for the time being. This is even more likely to be the case as long as macroeconomic demand remains robust, thus fuelling inflation. Growth prospects, however, were dealt a hefty blow this week: the latest European business climate indicators showed a marked deterioration in April. The German ifo business climate index fell by more than 2 points to 102.4; and companies’ assessment of the business situation, which had been stable up to now, deteriorated particularly. This trend is also evident in France, the Netherlands and Belgium.

The weaker economic indicators in the eurozone were not enough to revive hopes of interest rate cuts in the near future. However, they mitigated the impact from the US, where yields began to increase substantially on Thursday afternoon; yields on 2-year US Treasuries rose from 2.20 to 2.46%, and from 3.72 to 3.90% on T-notes. The economic indicators published on Thursday afternoon are unlikely to have triggered the interest rate movement in the US. The new home sales figures were disastrous: taking February and March together, sales have plummeted again by over 13% to a level last seen during the severe recessions of 1980/81 and 1990/91. Durable goods orders fell for the third time in a row. The fact that durable goods orders ex transportation increased by 1.5% is no consolation either, particularly as the steep drop in transport goods is not so much due to volatile aircraft orders, but rather to demand for automobiles plunging further.

The only more or less positive data were the decline in initial jobless claims by 33,000. Whether, however, one single week’s figures, which might be distorted by seasonal adjustment factors, can be regarded as a reliable sign that the employment market is improving, is doubtful to say the least. Presumably, the figures served more as a catalyst rather than a trigger for the subsequent substantial correction on the US bond market. The actual reason was probably the impending FOMC meeting. Recent remarks made by Fed representatives have reinforced expectations that the US central bank could take one final interest rate step next week and then change to a more neutral stance. The argument is that the Fed funds rate has now reached a very low level, particularly taking accelerating inflation and the expansive effects of the weak dollar into account.

Signs of an economic slowdown in the eurozone and the possible end of the Fed’s monetary policy easing have led to the interest rate spread between the EMU and the US narrowing significantly; by 25 points on 2-year bonds to just over 140 basis points at present. Simultaneously, the dollar firmed noticeably.

In our view, however, the downswing in the US has by no means bottomed out yet. The numerous US economic indicators due to be published next week, could well dim hopes that a cyclical turning point has been reached. The Fed is also likely to take care not to play down the risks posed by the credit and housing market crises prematurely, thus making the yield curve even steeper at the long end. We are therefore only expecting minor modifications to the statement.

Next week’s European data are not likely to alter the overall picture much. The rise in consumer prices could have declined slightly in the EMU, and somewhat more in Germany, but a turnaround is not yet in sight. Other economic indicators are likely to paint a mixed picture: the consumer climate in Germany could have improved, whereas the number of unemployed will have gone up again for the first time.

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