Ralph Shell @ 2:22 PM, Monday May 24 2010
The Brits new coalition government over the week announced a reduction of £5.75B in cuts to this years government programs. This token reduction, by George Osbourne the new chancellor of the exchequer, is mostly symbolic, and puts only a minor dent in the big deficit. According to Market Watch:
" Urgent action is needed "to show the world we can live within our means," said George Osborne, the Conservative chancellor of the exchequer, or finance minister, in a joint news conference with David Laws, his Liberal Democrat deputy at the U.K. Treasury.........
'We inherited an economic mess, but we can come out of it stronger.'"
So far sterling has had a bounce up from the yearly low of 1.4227, currently trading at 1.4445 down from the recovery high at 1.4526. Clearly the markets want to see more of the Tory Budgetary plans before it get too excited.
The specs remain big participants on the short side of the pound. The
large spec is short 45,419 contracts or 47.4% of the total OI. The
small specs are also short, but only a modest 3,016 futures contracts. While the Brits do share some of the problems with their neighbors, budgetary deficits, excessive spending on social programs, and tepid economic growth, they do have the advantage of one government and one currency.
The pound has not, however been spared during the recent flight to risk adverse investments. As global equities took a recent swoon the pound suffered as much as the euro. Versus the yen, the euro sold off about 1700 pips while the pound was down over 1850. The sell off versus the USD at 1320 pips was less than the euro's plunge. Going back to March, the euro had weakened on the pound but found support in the .85 area, and mounted a rally back to .8750. Weekend news that a regional Spanish bank in Cordoba had to be bailed out by the Spanish government weighted on the euro today.
Who will be quicker to resolve some of the issues, the new chancellor for the Brits, or a reluctant Angela Merkel and her cadre of euro bankers. Intentionally or not, the large specs now have a bigger short bet (as a percentage of the total market) in the pound rather than the euro. Our inclination is to look for a spot to be long the pound versus the USD if we get retracement to the 1.4360 area with a stop in the 1.4220 area.
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.