Ralph Shell @ 1:10 PM, Friday September 24 2010
The economic news failed to confirm the global economies were back sliding into another recession. The highly regarded measure of Euro confidence as measured by the Ifo Institute for Economic Research was 106.7, better the the expected 105.8 and the previous month's 106.2. In the US, the Core Durable Goods orders were up 2.0%, better than the anticipated +0.9, and the previous months -2.0. US new home sales on an annualized basis were unchanged at 288k unchanged from last weeks revised number of 288k.
The absence of bear news seems to be all the bulls need in the equities to rumble ahead. This will make the fourth straight week the market has advanced. The Dow is currently up 170 points, following the strength of the European markets that forged ahead 2% in Germany and France. The dollar's value, contrarily has continued to wilt. Against the euro, the early week low was 1.3027 and has since rallied to 134.80.
This EURUSD acts like it is attracting a lot of new longs, but it is hard to know since the spot trade is practically invisible. The trading volume has picked up at the CME futures market this week. On September 23rd, the trading volume was 342,519 contracts, twice the size of the open interest which was 171,130. Despite the big trade and the advancing market the OI actually went down a couple thousand contracts that trading day. The A$ is the contract with the second largest open interest at 130,937, and their were only 63,002 contracts traded that day. It will be interesting to see in this afternoons COT report how aggressively the specs have moved to the long side of the euro.
The USD was already declining when the Fed's Bernanke said QE II is coming following any further evidence of a slowdown. The threat of an increase in the dollar supply combined with low US rates well down the yield curve is bearish on the USD, and makes the dollar an ideal carry currency. Three month bills in the US yield only .14% while a German 2 year note yields .73. Combine the yield differential with US actions that will weight on the USD, this makes the carry trade look attractive.
The Fed has vowed to keep the money supply ample, and reinvest the cash from maturing agency debt. In that vein the Federal Reserve Bank of New York bought 3.89B bonds maturing from 2014 to to 2016 this week. Is this a warm up for the pending QE II?
Last week the Japanese intervened in the forex markets, trying to weaken their yen. It is beginning to look like they had best get ready to sell some more yen because the market is going to test their resolve. Bernanke was more successful weakening the USD by making threats that an ample supply of dollars would be forthcoming, but where does Europe fit in to this scenario? Will Germany, with years of experience in currency markets, really remain passive as the euro appreciates and their export markets contract? We suspect more stories will be forthcoming about euro countries and banks in trouble.
Where do you allocate money? Do you still want to own $1300/ounce gold? The US Treasury will need to sell at least $2T notes and bonds in the next 2 years. This does not make 10 year US Notes yielding 2.6% look very attractive. Perhaps stocks, especially those with the multinational exposure do have some merit.
No trades or charts today. Have a great weekend.
Ralph
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.