Dollar Consolidates, Specs Flip to EUR Shorts

The furious dollar rally late last week unwound a classic day of consolidation. The antipodean currencies were the top performers while the dollar lagged. Weekly CFTC positioning data showed speculators back in euro shorts. The lone long in EURGBP hit its final target at 0.8640 after USDJPY filled the final limit at 101.20. EURUSD shorts await fill, while USDCHF and USDCAD longs await. Full details are found in the latest Premium Insights.

A light calendar led to a lack of focus on Monday so traders took profits on US dollar longs. EUR/USD rose close to the 38.2% retracement of the post-ECB decline. That level comes in at 1.2887 and is the primary resistance on the short term chart. Cable posted a similar bounce while AUD/USD rebounded strongly from 0.9000 once again, hitting as high as 0.9144.

Ultimately, different stances from central banks in the US and the rest of the developed world will promote further US dollar gains so it's a matter of determining when the bounces will stall. We could be close to that point already but the extended weakness recently in AUD/USD and cable could fuel a further retracement.

It's especially impressive that the Australian dollar rallied Monday because Chinese stock markets were hit hard after officials announced more measures to tighten credit. When a currency doesn't respond negatively to bad news, beware of a bounce.

The focus remains on China in Asian trading with CPI figures to be released at 0230 GMT. Prices are expected to rise 2.5% y/y compared to 2.1% previously.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -16K vs +17K prior JPY -70K vs -61K prior GBP -31K vs -19K prior AUD -70K vs -61K prior CAD -16K vs -11K prior NZD -1K vs -1K prior CHF 0K vs +2K prior US Dollar Index longs at 15K vs 31K prior

Normally, a flip in positioning from long to short is a sell signal but the speculative market has been repeatedly whipsawed in euro trading this year so we're cautious. Also note the extremely one-sided AUD market, which is another reason to be fearful of a bounce.