Ralph Shell @ 2:17 PM, Thursday July 08 2010
Following the May election in the UK, there was uncertainty when and how power was to be shared by the Conservatives and the Liberal Democrats. During this period, the large spec in the futures market was, as reported in data from the COT report of May 18, net short 45,419 contracts, and 47.4% of the total futures market. As the details of the power sharing were resolved, and the new government commenced with a fiscally conservative plan, the pound gradually rallied.
From the low of 1.4227, the pound rallied over 1000 points to 1.5238. Usually a rally of this size is big enough to chase some of the traders with losing positions out of the market, but such was not the case. In the latest COT report, the large specs still held a big net short, 34,913 contracts, or 37.6% of the open interest. Small specs also cast their vote, emerging as a net short of 18,766 contracts, or 24.1% of the total market. Increased spec shorting a market that has been rallying is perplexing.
The pound bears contend there is no new source of British wealth. The fortune from the North Sea oil is being depleted, and the profitable revival of the London bankers is unlikely. The conservative fiscal route of reduced spending, and modest tax increases will impede the economic recovery, contend the Washington Keynesians. While this may be a better approach than passing out hundreds of millions of borrowed money to your friends, supporters, and their causes, wrongfully calling it a stimulus program, time will prove the Brits way is also ineffective.
Recently the IMF has been praising the fiscally conservative efforts of different countries, and warning others to move in that direction. However, to recover from a heavy sovereign debt load, countries need economic growth. If a frugal fiscal policy is combined with higher taxes, and subjects the small business job creators to ever increasing regulations, rapid growth will not happen.
While we are unsure of the reason for the bears enthusiasm, we are inclined to join them. Despite the big short positions the market's advance has been orderly. Recently the pair appears to be losing some momentum, with the 1.51/52 area, a potential resistance area. Let's try the short side on a retrace to the 1.5180 area with a stop above the 1.53 handle. The attached 4H chart show a market that is coiling sideways, and is perhaps setting up for a little sell off back to the 1.49 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.