Ralph Shell @ 1:36 PM, Tuesday April 13 2010
The pound yesterday, had a rally with the euro, in conjunction with the perceived resolution of the Greek sovereign debt issues. As we pointed out yesterday the guaranteed availability of money for the Greek's will enable them to repay loans to bankers who had made previous loans to Greece. Considering the ubiquitous presence of British bankers, they too, are certain to have some shaky loans, that responsibility for repayment has been slyly shifted to the tax payers. The pounds sympathy rally quickly fizzled yesterday, closing down to 1.5366.
This morning the pound got a boost from a trade balance report that showed the Brit's trade balance at £-6.2B, was less than the expected £-7.3B, and the £-8.1B in the previous period. Exports surged the most in seven years, which some have attributed to the weaker pound. The US trade balance came in a little later, a negative $39.7B, less than the expected $ 38.5B, and the previous periods $37B. The good news for the pound was not enough to hold the rally, and we have since drifted lower on the day to 1.5358.
There has been recent observations by the pundits that the euro is loaded with a big short interest, hence vulnerable at some point, to a short covering rally. Curiously, they have failed to reveal the speculators short interest in the pound, far exceeds that in the euro. For COT purposes speculators are broken into two groups, the large spec thought to be the hedge funds, and the small spec which can be funds with small positions or small retail speculators that chose futures rather than forex. Combine these two groups and specs are short 73,813 euros (options and futures combines) and 77017 contracts of the pound. The pound absolute short is bigger despite the fact that the total euro contract is 1.85 times the size of the pound. Percentage wise, specs are much bigger shorts in the pound.
A big reason for recent pound weakness has been the pending election. Recent polls have forecast a tight elections and the possibility of an impotent hung parliament which might be unable to aggressively address the nations financial problems. Today David Cameron the Tory leader issued a 'call to arms' and demanded politicians become accountable, returning 'power to the people.' It remains to be seen how this pitch from the former public relations specialist will appeal to voters for the upcoming May 6 elections.
This morning, there was a report from Alen Mattich on the Dow Jones News Wire which may be disturbing to Gordon Brown and those with the big short positions in the pound. Mr Mattich said the polls could be wrong. He mentions the betting markets are saying that the Tories have a solid majority. In his opinion such an outcome to the election would strengthen the pound.
We have long contended that polls are not accurate until the very week of an election. Early polls are designed to make news, influence public opinion, and are often purposefully inaccurate samples of the public. With 635 separate districts, and some fringe parties involved, accurate projections are difficult for pollsters, so it might be better to follow the bookies.
The recent action may give the bears some solace, but it may prove temporary. We prefer to use weakness to buy the pound. The MACD has moved over the zero line, a positive signal. With 23 days until the election we can expect some volatility, so it is best to be nimble and alert.
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.