What Happened To The 'Global USD Short Position?' At this time last year there was a lot of talk in the financial press about the huge US$ short position that was associated with the dollar-denominated debts racked up over many years in emerging-market countries. This debt-related short position supposedly guaranteed additional large gains for the Dollar Index over the ensuing 12 months. But now, with the Dollar Index having drifted sideways for 12 months and having had a downward bias for the past 5 months it is difficult to find any mention of the problematic US$ short position. Did the problem magically disappear? Did the problem never exist in the first place?

Fans of the US$ short position argument needn’t fret, because the argument will certainly make a comeback if the Dollar Index eventually breaks above the top of its drawn-out horizontal trading range. It will make a comeback regardless of whether or not it is valid, because it will have a ring of plausibility as long as the Dollar Index is rising.

I’m not saying that the argument for a stronger US$ driven by the foreign-debt-related US$ short position is invalid. I’m not saying it yet, anyway. The point I’m trying to make above is that if the argument was correct a year ago then it is just as correct today (since debt levels haven’t fallen) and should therefore be just as popular today. It is nowhere near as popular, though, because most fundamentals-based analysis is concocted to match the price action.

I actually view the “global US$ short position” as more of an effect than a cause of exchange-rate trends. Major currency-market trends are caused by differences in stock-market performance, real interest rates and monetary inflation rates. When these factors conspire to create a downward trend in the US dollar’s foreign exchange value it becomes increasingly attractive for people outside the US to borrow dollars. And when these factors subsequently conspire to create an upward trend in the US dollar’s foreign exchange value, debt repayment becomes more costly for anyone with US$-denominated debt outside the US.

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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY

EUR/USD: Shift from bullish to neutral:

Pull-back has room to extend lower to 1.1300. We highlighted the rapid loss of momentum in recent updates and the break below 1.1400 was not exactly surprising. The recent high of 1.1614 is the extent of the bullish phase and the outlook has shifted to neutral from here. That said, the pull-back from the top appears to have scope to extend lower to 1.1300 but at this stage, a sustained move below this level is not expected. Overall, this pair is expected to remain under pressure unless it can reclaim 1.1495.

GBP/USD: Neutral: Corrective pull-back has scope to extend lower to 1.4400.

There is no change to our view wherein we expect the current pull-back in GBP to extend lower towards 1.4400. However, as mentioned previously, a sustained move below this level is not expected at this stage. Resistance is at 1.4570 but only a move back above 1.4660 would indicate that a short-term low is in place.

AUD/USD: Bearish: To take partial profit at 0.7340. 

The 0.7410 target first indicated two days ago was met as AUD dropped sharply after RBA revised its inflation forecast lower. While we are still bearish on this pair, the recent sharp drop appears to be running ahead of itself and those who are short should consider taking partial profit near the major 0.7340 support. 

NZD/USD: Neutral: In a broad 0.6800/0.7000 range.

We just shifted to a neutral stance yesterday and there is no change to the view. We continue to expect this pair to trade in a broad 0.6800/0.7000 range.

USD/JPY: Neutral: In a 106.00/108.00 range now.

We turned neutral USD yesterday and there is no change to the view. We continue to expect this pair to trade between 106.00 and 108.00 for now.

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Tech Targets: EUR/USD, GBP/USD, AUD/USD, USD/JPY

EUR/USD: Neutral: Pull-back has room to extend lower to 1.1300. 

We just shifted to a neutral stance last Friday and there is no change to the view. The current movement is viewed as corrective pull-back which has scope to extend lower to 1.1300 but at this stage, a sustained move below this level is not expected. Overall, this pair is expected to remain under pressure unless it can reclaim 1.1495.

GBP/USD: Neutral: Daily close below 1.4400 could lead to a sustained down-move to 1.4300.

As highlighted yesterday, a daily closing below 1.4400 would indicate the start of a sustained down-move with an immediate target of 1.4300. This appears to be a likely scenario unless GBP can reclaim 1.4500/05 within this couple of days.

AUD/USD: Bearish: Expect slow grind lower, below 0.7300 targets 0.7240.

While a move below 0.7300 would not be surprising, we are still of the view that the current AUD weakness is overextended and a sharp drop from here is unlikely. In other words, this pair could continue to grind lower and a breach of 0.7300 would target 0.7240 next. Stop-loss is adjusted lower to 0.7440 from 0.7480.

USD/JPY: Shift from neutral to bullish: Rebound to extend higher to 109.70.

The unexpected break above 108.00 is a good indication that the current rebound has scope to extend higher to 109.70. Support is at 107.60 but only a move below 107.20 would indicate that our bullish expectation is wrong.

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EUR/USD extends 6-day losing streak amid strong U.S. GDP, jobs data

EUR/USD inched down on Tuesday, extending losses from the last several sessions, as upbeat labor and GDP data in the U.S. bolstered the greenback, slightly increasing expectations for multiple interest rate hikes from the Federal Reserve this year.

The currency pair traded between 1.1359 and 1.1408, before settling at 1.1372, down 0.10% on the session. The euro has now closed down against the dollar in sixth consecutive sessions, retreating from multi-month highs last week when it posted a six-day winning streak. Though the euro is down fractionally against its American counterpart over the last month, it is still up nearly 5% since the start of the year.

EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1713, the high from Aug. 24.

On Tuesday morning, the U.S. Department of Labor said Tuesday that job openings in March rose by 149,000 on a seasonally-adjusted basis, lifting the job opening rate by 0.1% to 3.9%. Hiring rates, though, fell slightly by 0.1% to 3.7%, providing indications that employers experienced difficulty finding qualified workers. The report came in the wake of a relatively soft monthly employment report last week, which showed that nonfarm payrolls rose in April by the lowest level in seven months. Separately, the Federal Reserve Bank of Atlanta said Tuesday that its GDPNow Forecast model now sees an increase of 2.2% in second quarter GDP, up from estimates of 1.7% on May 4.

The Federal Reserve has continually reiterated that it is taking a data-driven approach to the timing of its first interest rate hike in 2016. Any rate hikes by the Fed this year are viewed as bullish for the dollar, as investors pile into the greenback in an effort to capitalize on higher yields.

Earlier, New York Fed president William Dudley noted in a closely-watched speech in Zurich that he doesn't believe the dollar would falter if other top currencies materialized as alternatives to the greenback as the world's reserve currency. Last Friday, Dudley emphasized that the U.S. central bank could still raise interest rates as much as twice this year in spite of soft employment figures in the Labor Department's April jobs report. The dollar has lost approximately 6% against its main rivals over the last five months.

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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY

EUR/USD: Neutral: Short-term downward pressure has eased.

In a 1.1350/1.1500 range now. Short-term downward pressure has clearly eased and the odds for an extension lower to 1.1300 are rather slim now. That said, the outlook for this pair is still viewed as neutral but it seems more likely that EUR will trade sideways between 1.1350 and 1.1500 from here.

GBP/USD: Neutral: In a 1.4360/1.4550 range. [No change in view]

The pull-back from the 1.4770 peak last week appears to be basing out. The odds for extension below 1.4400 have diminished and the current movement is viewed as the start of a consolidation phase. In other words, GBP is expected to trade sideways from here, likely between 1.4360 and 1.4550.

AUD/USD: Bearish: Low odds for extension below 0.7300. [No change in view]

As mentioned yesterday, the recent AUD weakness is overextended and a sharp drop below 0.7300 is unlikely. That said, as long as 0.7440 is not taken out, we could see a slow drift lower to test the next support at 0.7240 even though the odds for such a move are not high.

NZD/USD: Bearish: Downside risk has diminished considerably.

The sharp rebound from the low of 0.6717 clearly does not bode well for our bearish view. That said, unless the 0.6860 is taken out, NZD could still stage another leg lower but the odds for such a move have clearly diminished.

USD/JPY: Bullish: Rebound to extend higher to 109.70.

Despite the sharp pull-back yesterday, there is no change to our bullish USD view. Both target and stop-loss remain unchanged at 109.70 and 107.50 respectively.

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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY

EUR/USD: Neutral: In a 1.1350/1.1500 range now.

There is not much to add as EUR eased of quickly from a high of 1.1432. On balance, the bias appears to be tilted on the downside but even if EUR were to move below the strong 1.1350 support, the next level of 1.1300 would not be easy to crack. On the upside, strong resistance is at 1.1450 ahead of 1.1500.

GBP/USD: Neutral: In a 1.4360/1.4550 range.

As mentioned in recent updates, the current movement is viewed as the early stages of a consolidation phase. The choppy trading yesterday reinforces our view and we continue to expect sideway trading within a broad 1.4360/1.4550 range for now.

AUD/USD: Bearish: Expect drift lower to 0.7240.

The strong support at 0.7300 was finally breached at the time of writing (low of 0.7286). As indicated previously, downward momentum is not strong and from here, we expect to see a slow drift lower to 0.7240. Only a move back above 0.7410 would indicate that the current bearish phase has ended.

NZD/USD: Bearish: Downside risk has diminished considerably. [No change in view].

The sharp rebound from the low of 0.6717 clearly does not bode well for our bearish view. That said, unless the 0.6860 stop-loss is taken out, NZD could still stage another leg lower but the odds for such a move have clearly diminished

USD/JPY: Bullish: Rebound to extend higher to 109.70. [No change in view].

Despite the sharp pull-back yesterday, there is no change to our bullish USD view (see Chart of the Day update yesterday). Both target and stop-loss remain unchanged at 109.70 and 107.50 respectively.

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USD, EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook

USD: Fed Supports USD. Bullish.

The Fed minutes have supported our bullish USD view, and we see scope for further gains. As long as the Fed wants optionality on a June rate hike, rate hike expectations are likely to increase and higher yields should support USD. At the same time, the global economic backdrop has worsened, with China data weakening, and risk appetite has weakened. We are watching core PCE and payrolls this week closely for evidence of improving economic data. We like buying USD against commodity currencies and EM.

EUR: ECB Watching. Neutral.

We expect EURUSD to remain fairly range-bound. This week's CPI and ECB rates decision will be watched, but we do not think they will impact EUR significantly. Our economists are not expecting any policy change from the ECB, though inflation and growth projections could be revised upwards due to higher oil prices. We think this will not impact EUR meaningfully as the markets are only pricing a 5bp rate cut for this year, and the ECB has made it clear that further rate cuts are unlikely, implying yield differentials affecting EUR will continue to be driven by the Fed.

JPY: Tactically Bearish, Structurally Bullish. Bullish.

Our long-term view on JPY remains unchanged, though there is scope for USDJPY to rise on the back of broad USD strength, higher US yields and strong risk appetite. Nonetheless, this is a rally we would sell into, given our structurally bullish JPY view. FX hedging and repatriation flows will continue to dominate, and we ultimately expect USDJPY to fall through 100.

GBP: Asymmetric Risk Profile. Bearish.

GBP has outperformed in recent weeks due to markets reducing the probability of Brexit. We think the markets may have become a little too complacent and the risk profile is now asymmetric, with the risks skewed to the downside. Any turn in the survey data should put GBP under renewed selling pressure. In the longer term, we are also bearish on GBP due to its weakening economy and triple deficit. This week, we watch to see if manufacturing PMI confirms our view of a faltering UK economy.

CAD: Fade CAD Strength. Bearish.

We maintain our bearish view on CAD following the BoC meeting as we believe it was not as hawkish as the market took it and expect further economic weakness will cause markets to price a higher chance of rate cuts. The BoC did not have a large shift in tone but some dovish changes, on capex and the wildfires, open the door for a larger shift at the July meeting (which is accompanied by an MPR). Canada's rotation away from the resource sector is in doubt, with weak March trade showing non-commodity export volumes falling an additional 2% after their nearly 5% fall in February. 

AUD: RBA Easing to Push AUD Lower. Bearish.

 We remain bearish AUD and expect the RBA easing to push AUD lower. We believe the market overreacted to the RBA minutes and the SMP makes clear that the RBA stands ready to act further, given the very weak inflation trend. Given the worrying inflation trend, falling house price growth and iron ore prices resuming their downward trend, our economists are now expecting 75bp more rate cuts. RBA Governor Stevens' comments this week echo our view that the RBA will gladly watch AUD depreciate in order to help the difficult adjustment. We continue to like holding AUD short positions.*

NZD: Looking to Sell. Bearish.

We like selling NZD in this current USD rally as we expect high-carry commodity currencies to underperform. NZD has benefited in recent days as the RBNZ's financial stability report pointed to rising house prices as a risk and pointed to the possibility of more macroprudential policies. While this, along with some better-than-expected data, has caused the market to price out the probability of RBNZ cuts, we expect this to reverse. However, we don't think macroprudential policies will preclude the RBNZ from cutting, given New Zealand's pressing inflation problem and that the elevated NZD TWI remains too high. With our expectation for commodity prices to fall as well as the RBA's recent dovish turn, we believe the RBNZ will stay dovish and limit currency strength.

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Tech Targets: EUR/USD, GBP/USD, USD/JPY

EUR/USD: Bearish: To take partial profit at 1.1055.

The short-term rebound was stronger than expected and has clearly diminished the odds for a move to our partial profittaking level of 1.1055. However, only a break above 1.1200 would indicate that a short-term low in place. In the meanwhile, those who are shorts should continue to look to take partial profit at 1.1050.

GBP/USD: Bullish: Anticipating a break above 1.4770.

As long as 1.4550 is intact, further GBP strength towards 1.4770 in the coming days cannot be ruled out just yet.

USD/JPY: Shift from neutral to bullish.

Target 111.85/90. As indicated yesterday, a daily closing above 110.60 would indicate that the bullish phase in USD has resumed. From here, the immediate target is for a move to the late April high of 111.85/90. Stop-loss is at 110.00.

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