Ralph Shell @ 1:46 PM, Tuesday March 09 2010
One of the financial papers this morning features a survey of currency preferences by hedge fund managers. Since this survey was taken between Feb. 11 and Feb.22, the opinions seem more like recent history than hot news. The dollar was the most favored currency by hedge fund managers, at that time, but why should this be a featured story 20 to 30 days later? We have the echoes of past preferences making headlines today.
The latest commitment of traders report gives us data through March the 6th. In that report the large specs traders, probably almost all funds, had cast a decisive vote against the pound. Large specs were long 14,218 contracts, and short 85,008 contracts, for a total net short of 70,790 contracts. Each futures contract is £62,500, not exactly chump change. On Friday the pound had a decent rally, making it all the way back to 1.5164, and then selling off into the close to 1.5132. The open interest of Friday went down 7500 contracts on a little short covering rally. Monday gave us a rally that failed. We printed 1.5193 and then sold off, closing lower. What is interesting, however, is that the open interest soared 21.023 contracts higher on Monday, 14% of the total open interest.
It is our conjecture that yesterdays soaring open interest increase was the hedge fund adding to his hefty short position. Recent market action has not given the pound sterling bears a reason to exit the market. A current analysis of the changes in the open interest where funds are casting their vote with real money is more meaningful than a 20 day old survey of fund managers.
With the heavy selling yesterday, and bearish news this morning it is perplexing why the market is not weaker. Last week's Monday purge of the market was in large part prompted by the forecast of a tight election. This morning the Times of London said:
"Labour and the Conservatives are neck and neck in the marginal seats that will determine the outcome of the general election, raising doubts over David Cameron’s ability to win a clear overall majority, according to a special poll for The Times."
This confirms last Monday's poll result, and the economic news was not helpful. Real estate prices in Britain did not appreciate as anticipated, and the lower currency did not improve the balance of payment deficit. The British deficit was £8B, the most since August 2008, caused in large part by a drop in exports of £1.4B.
The pound has been a solid downtrend since the high printed at 1.6455 on Jan. 19, but we are not enthused shorting the market under 1.50. The 14 day RSI is close to 30 and the MACD is at the very bottom of the screen. This, combined with a market that has absorbed some heavy selling without breaking hard, and a market that has shrugged off some poor economic news, does not make us bearish. We are going to watch, waiting to see if this market can make a move.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.