Look For Volatility as Month Ends

With US Memorial Day on May the 31th, will a shortage of traders result in some volatile moves on the month's last day?  Though it is not a quarterly closing, a day when traders paint the tape to enhance the value of their positions, end of the month trades often have some significance.  Also in the futures markets, we now approach the period when the Sept is going to be the leading contract, so there may be wrap up trading there also.

Global fear European sovereign debt problems would cause credit markets, especially interbank loans to freeze bringing back memories of the Lehman cruses and frightened currency and equity markets.  A flight to safety followed, boosting the USD and the yen, and causing a renewed demand for US Treasuries.   Early in the month the euro traded as high as 1.3347 prior to plunging to 1.2142.  That level brought out the super bears, talking 115 to 118, but the pair is now showing some stability in the 1.22/1.2350 area.  Market stability returned this morning when the head of China's administration denied he is selling the euro from his $2T+ stash of currencies. But can the parent of a very large family say, 'I don't like one of my kids?'  It looks like there has been some short covering in the euro, but the market seems to lack any vigor.

The pound seems to be suffering, in part, because it is in the same neighborhood as the euro.  Greece, whose problems refinancing existing debt sent rates over 10%, was the initial introduction to the euro problems.  And, Greece has about one million well paid public servants.  Britain, with about six times the Greek population, has the same number of bureaucrats.  It is reported that the new Tory government wants to shed 300,000 public sector workers which would save over £150B yearly.  With Europe trying to bail out Greece and their bankers from the prior spending binge, and Britain, making fiscally sound future plans, we wonder if the market has not wrongly tarnished the Brits with the same brush.  The big specs have been short a large percentage of the open interest, so a short squeeze is a possibility.  The long side of the pound versus the yen also looks interesting.

The month of May has also been an ugly one for the Aussie dollar.  With a 4.5% short term bank rate the A$ had been a favorite of the carry trade, and was loaded with longs.  This market was ripe for a sell off when politicians, who always assume we live in a static economy, where a change in the tax rates will not alter economic activity, announced their plan.  Early in May PM Rudd decided he would propose an additional 40% levy on commodity profits, the growth segment of the Australian economy.   This increase in taxation and state royalties has caused companies to defer or cancel $108B of pending investments according to businessinsider.com/australian.  There may now be some second thoughts about this tax increase, coming at a time when the A$ has been oversold.  A better attitude about the Asian economic recovery could see the A$ trade higher.

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.