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CFTC trader positioning data
The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that:
• Euro shorts declined from the previous week’s total of 142.2K to 109.7K contracts.
• British pound shorts decreased from 31.3K contracts on February 21 to 23.2K contracts on February 28. Sterling positions are now their best level since September 6 when positions accounted for 13.2K short contracts.
• Japanese yen positions declined from 17.3K net long contracts on February 21 to 1.2K net long contracts on February 28. Yen speculative positions have reached minimum since May 31 when positions totaled 1.6K short contracts. Strategists at Scotia Capital note that yen longs have completely capitulated ever since the shift in stance coming from the Bank of Japan of a far more aggressive monetary policy. In their view, although the gross long position in yen shifted lower this week, the gross short has almost doubled in the last four weeks, highlighting the changing market view on the yen.
• Swiss franc net shorts slightly decreased from 19.8K contracts on February 21 to 19.4K contracts on February 28. Short positions increased surpassing small increase of longs.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
Mizuho, Citigroup on USD/JPY
The greenback declined versus Japanese yen as the market players were taking profits after the pair USD/JPY reached 9-month maximum last week at 81.87 yen. At the same time, the pair’s decline was limited as Japanese importers were buying US currency on the dips.
The most eyed event this week is the release of US February Non-Farm Payrolls on Friday. Analysts at Mizuho Corporate Bank claim that if the data is strong, US dollar may add about 1.5 yen to the levels around 83 yen. However, the specialists warned that the things may not go that smooth as the employment component of the ISM manufacturing survey declined last month (m/m). According to the bank, weak payrolls figures will bring dollar down to 80.00 yen.
Strategists at Brown Brothers Harriman also advise traders to watch Greece’s debt swap deal as it may increase uncertainty and risk aversion encouraging yen this week. Bondholders have until March 8 to sign up to the agreement under which they will exchange their existing Greek government bonds for new paper in a swap deal that will see the nominal value of their holdings cut by 53.5%.
Economists at Citigroup are positive on USD/JPY in the longer term. The specialists point out that the pair closed in February above 21-month MA for the first time since 2007 – very positive technical signal. However, in the short term there’s the high risk of dollar’s correction to 78.00/50 yen. The longer term target is bullish – 98 yen in the coming weeks. The main resistance for USD/JPY is situated at 100-week MA in the 82.10 yen area.
Watch US employment data on Friday
The US nonfarm payrolls report will be released on Friday, March 9.
In January US payroll rose by 243,000 and showed a highest increase during a nine-month period. The expected payroll growth in February is 250,000; however, some specialists forecast even a more significant upturn.
In case if employment increases less than by 200,000, Westpac Institutional Bank analysts recommend selling the dollar against the Japanese yen. However, it is more likely that the payrolls come in better than expected. In this case it will be beneficial to sell the dollar against the Canadian dollar because of the positive impact of the statistics on the Canadian economy. The specialists recommend going short on USD/CAD at 0.9880 stopping at 1.0060 and targeting 0.9400.
Analysts at Deutsche Bank believe that the growth of the Consumer Confidence Index and the labor market expectations point at forthcoming changes in the economy.
Deutsche Bank: pound may strengthen vs. Aussie
Analysts at Deutsche Bank believe that British pound may strengthen versus Australian dollar in the coming months.
The specialists give the following reasons for such assumption:
- Chinese economic growth is slowing down. As Australian economy is tightly connected with the China’s one which is the nation’s major export market, Australian dollar will likely get under pressure.
“To a growing cohort of offshore commentators, China is a classic bubble on the brink of collapse. Its economy is chronically unbalanced, over-reliant on investment and cheap manufacturing exports. Financial repression has spurred speculative overbuilding in real estate, and local governments have gorged on credit to fund stimulus projects of dubious value. Central planning never worked and social pressures are starting to boil over”.
Deutsche Bank doesn’t think that China’s economy is going to collapse, but that it will weaken as its economy gradually restructures.
- Aussie is already overpriced.
- Such currencies as Australian, Canadian dollars and Japanese yen have outperformed those like sterling and Mexican peso during the Third Phase of Chinese growth. According to the bank, shorting the outperformers could be expensive, but buying the laggards or constructing relative value crosses seems quite sensible. Judging by the strength of past correlations and dislocation since 2008 Deutsche choose to be long at GBP/AUD.
BBH: buy USD/CHF
Analysts at Brown Brothers Harriman believe that euro’s decline versus the greenback which started last week is likely to continue. In their view, when Europe finalizes the amount of private sector participation in the Greek bailout, euro will likely take a blow, especially if participation is low and credit default swaps are triggered.
The specialists think that in would be wiser to stay away from euro this week. As EUR/CHF is close to 1.20, the minimal level set by the Swiss National Bank, “if euro is going to weaken sharply, Swiss franc is going to weaken faster.”
Making such assumption, BBH recommends buying US dollar versus Swiss franc. According to the bank, one should go long on USD/CHF at 0.9150 stopping at 0.8950 and targeting 0.9500.
Banks' forecasts for FX majors
The following forecasts were updated on March 2.
Data from FX Week
Commerzbank: comments on EUR/JPY
Last week the single currency fell versus Japanese yen sliding From February 27 maximum at 109.94 to close at 108 yen on Friday.
However, technical analysts at Commerzbank note that EUR/JPY has managed to hold above the 200-day MA at 106.88 yen. The specialists believe that the pair will be able to push a bit higher. In their view, resistance for euro lies at 108.85, 109.38/58 (55-day MA, July minimum) and 110.18 (50% Fibonacci retracement of the decline from April to January). According to Commerzbank, the pair’s move up will wear off in the 110.18/111.57 area.
The bank notes that support for EUR/JPY is situated at 106.78 (November 14 maximum).
Fiscal Compact's signed, but crisis is not over
An important «Fiscal Treaty» was signed on the EU summit, held on Friday, March 1-2. According to this document the budget deficit will be limited to 0, 5 % of GDP; the breakers may be penalized.
The pact was signed by 25 EU members, excluding Great Britain and Czech Republic, which are not ready to let the European Commission intervene in its economy. The Fscal Compact is mandatory only for 17 euro-zone countries.
Germany forced the conclusion of the treaty: otherwise she would refuse to finance the European Stability Mechanism. It is important to note that the document requires ratification.
Besides, the EU leaders tried to persuade everyone that the financial euro-zone crisis is over. «EU shifts from austerity measures to economic growth, » said José Manuel Barroso, the President of the European Commission.
However, some analysts find these statements groundless and forecast the situation go from bad to worse.
J.P.Morgan: trading EUR/USD this week
There are several central banks’ meetings this week. Today the RBA left rates unchanged at 4.25%. Wednesday is the day of the RBNZ, while on Thursday we’ll hear from the Bank of England, the ECB and the Bank of Canada.
Analysts at J.P. Morgan are focusing on the European Central Bank. In their view, Europe’s monetary authorities won’t change the interest rates. However, the specialists advise investors to pay great attention to what the ECB’s President Mario Draghi will say at the press conference the same day. If the central banker sounds more positive (according to J.P. Morgan, this seems quite likely), euro will get support as the risk aversion will subside. In addition, the European currency will be helped by the high oil prices.
As a result, the analysts recommends going long on EUR/USD at $1.3150 stopping above $1.3000 and targeting $1.3500. The bank warns, however, that one should get out of the trade even of the single currency keeps sliding below $1.3500 as the private sector involvement creates dangerous uncertainty.
Scotiabank: comments on USD/CAD
Analysts at Scotiabank note that there are risks for loonie coming from potential slowdown of China’s economic growth – remember that Canadian dollar is a growth-linked currency.
“The most significant development is China’s announcement of a 7.5% growth expectation this year, below last year’s 8% and sending shivers down the spines of commodity currency traders. We are medium term CAD bulls, but view the outlook for China’s growth as one of the keys to CAD strength.”
“Technically, a USD/CAD close above 0.9953 would be bullish for short‐term traders, with the 200‐day MA of 0.9993 serving as the first level of resistance.”