Ralph Shell @ 1:08 PM, Monday June 14 2010
Could it be that the bearish economic news has been drowned out by those obnoxious vuvuzelas at the world cup. Maybe the South African government should follow Washington's lead and get vuvuzela manufactures to set up an escrow fund for damages caused by noise pollution. The Obama administration has set up an escrow fund, hopeful that BP will contribute $45B into it, for disbursement to those financially damaged by the record oil spill as determined by the administration.
What may have been more important to this mornings market action, than the absence of bad news, was the data in the Commitment of Traders report issued Friday. This report showed that the popularity of the USD had grown to where those long the DI, or short any other currency and, by default long the dollar had grown to almost 209,000 contracts. Most of the big shorts versus the dollar are in the euro and the pound. As a percentage of the open interest the spec is a bigger short in the pound than the euro.. The small spec, often considered the unsophisticated trader, flipped his position to the long side in the euro and the Australian Dollar This trade does not look too shabby this morning.
There was a report, bearish on the euro banks this morning. Market Watch had a London story that the Bank for International Settlements reported the French and German banks had almost €1T loaned to risky countries, or 2/3s of the total loans to Spain, Portugal, Greece, and Ireland. It is interesting to note most of the debt was to the private sector, with only €174B loaned to governments. The euro bank purchase program, transferring shaky debt to their books, is an indirect bail out of their banks and an effort to keep credit markets from locking up. Their commitment to the expansion of this program may have shaken the confidence of the euro bear.
We were successful last week trading the euro and the pound from the long side, but failed to stay with the positions. When a market finally turns after an extended move, they can often carry a lot farther than you expect, especially when specs are still committed to the primary trend. Switching allegiance from the bear to the bull camp is like getting a divorce, not an easy decision. The euro market has rallied this morning to 1.2296 after gaping higher form the Friday close. We are going to try to reestablish longs on a pull back to the 1.2150 level, risking a sell off to the 1.2090 level. A 38.2% bounce off the bottom would take us back to the 1.26 level, quite possible if we get a short squeeze going.
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.