Ralph Shell @ 2:03 PM, Thursday July 01 2010
Economic data continues to disappoint those who have labeled this, the summer of recovery. Weekly unemployment claims were 472k higher than the expected 454k and 459k in the previous period. The ISM Manufacturing PMI was worse than expected at 56.2 less than the expected 58.9 and under the previous period's 59.7. Pending home sales were expected to be lower, down 7.4% but the 30% plunge was much worse than anticipated. On a positive note, June car sales are better, up 13% for Ford, 11% for GM 35% for Chrysler and 20% for Daimler. These comparisons, however, are going against uncertain times last year as GM and Chrysler were going through bankruptcy.
The weak US data and negative commentary about the Chinese recovery, combined with the euro debt issues have caused global equities to retreat. Sovereign debt worries, with, fear of default is a concern, but this has not stopped investors have been moving money to bonds from stocks. In the US two year notes declined to .62% and 10 year notes are now yielding less than 3%.
The hot money has been flowing to perceived safe havens, such as the yen, the USD, and recently to the Swissie now that the SNB has halted intervention. This morning, the poor US data made traders question the status of the USD, and the dollar took a hit against the yen, euro and the pound. The euro also strengthened against the USD when Spain was able to sell all the €3.5B at a yield of 3.657%.
Yesterday we suggested a long in the pound versus the USD at the 1.49 range. The market accommodated us and the trade has worked nicely. Yes there are big shorts in the pound but we also note that 3-month UK Government paper yields .55%, attractive when our 3 month notes are yielding only .17%.
The Australian Dollar has fallen from favor recently. The tumble started when signs emerged that the Chinese were trying to slow their economy from getting over heated. At about the same time PM Kevin Rudd decided it was time to install a 40% Resources Super Profits Tax, or RSPT. This proposed tax was like a direct hit on the golden goose, in a sector that had been the leader of the Australian Recovery. Mining companies jettisoned expansion plans costing which would have cost well over $1B, and the speculators took sold the A$, took their money and went away.
The unpopular Rudd was dumped and replaced by his Assistant Julia Gillard who is continuing efforts to get an agreement with the mining companies. There are now rumors that the major mining companies will agree to the RSPT kicking in after the profits exceed 7% above the price of the Aussie 10 year bond, currently paying about 5%. If the government also reduced the tax rate from the exorbitant 40% rate, this might renew some interest in the A$.
Currently the A$ is on a minor bounce from a little less than .8350. At one time, the futures open interest in the A$ exceed all other currencies but the euro. Now at about 65,000 contracts, it is not much bigger than the SF. We are going to try to the long side versus the USD in the .8400 area, and see if we can get a return to the .87 handle.
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.