Ralph Shell @ 1:50 PM, Tuesday July 06 2010
Refreshing it is, for a change, to see the global equities market trading higher. Among the strongest world indexes was the Spanish IBEX 35, up over 3%. Last weeks successful sale of Spanish 10 year paper was cited as one of the reasons for the euro's recovery, but the COT report released late Friday additional insight.
This report showed that the large spec remains enamored with the short side of the euro, with the combined futures and delta adjusted options totaling short 66,809 contracts. Despite a market that was firm during the period covered, the large spec increased his short position. Further, when considering the futures only position, the large spec is short 51.8% of the total market. The open interest at the CME was down over 8300 contracts Friday, and today's market action suggests there is further short covering.
The policy fissure that has developed between the European and American fiscal policies seems to have resulted in a changing attitude toward the USD. The effects US $1T stimulus are waning, and the massive spending has failed to spark economic revival. For the moment the poor US economic news is now bearish the dollar, as it is no longer the ultimate safe haven, that destination being subject to debate.
The pedantic pleas from Paul Krugman and other US officials that the Europeans risk causing a global slowdown if their austerity plans are implemented seem to have little impact on the Germans. Chancellor Merkel, failing to heed the Washington warnings, yesterday increased health insurance premiums to 15.5% of the gross pay, up from 14.9%. The move is to help with Germany's deficit, and the soaring health care costs.
So far the market action seems to be favoring the savers and the austerity planners, rather than the big spenders. Part of the move is no doubt short covering in the pound and the euro, but how far is this going to take us? Do we really have a massive speculative interest, flipping from a short to a long euro position? Yes, the threat of Bernanke increasing the money supply is real, and making some moves to reduce longer term US yields is a threat, but the euro's sovereign debt problems remain. Nevertheless it looks like the feel to this market is changing.
The recent price action has turned the MACD higher as we have crossed the zero line, a potential warning sign for the bears. Should this market give us a little pull back to the 1.2550 area, let's try the long side of the euro, risking down to the 1.24 handle. For the moment we will wait to establish a target for this trade.
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.