Ralph Shell @ 12:59 PM, Monday September 27 2010
Last week's rally in the EURUSD has been quelled, at least temporarily, by Moody's Investor Services downgrading the ratings of the Anglo Irish Bank. The market had been alerted last week about the possibility some of the investors in that bank would take a 'haircut' but Bernanke's QE- II proposal dominated the news.
Friday, the WSJ had a lengthy investigative report about the secret committee that was set up to save the euro. They said that "Deep differences on economic policy between Europe's frugal north and
laxer south, between Germany and France, and between national
governments and central EU institutions hindered an effective early
response to the crisis. Only when faced with calamity—the collapse of
the euro zone—did leaders put aside their differences and reach a
compromise."
The details of the negotiations revealed that the euro community is anything but one big happy family. The €750B funds consisted of €250B from the IMF, €60B from an existing European fund and €440B from European bonds sales which would be guaranteed by the euro community, and flow directly to the countries in need.
So far the €750B rescue fund has failed to be the panacea for sovereign debt woes in Euroland as advertised. Interest rates one new borrowings, both short and long term debt, in Ireland, Portugal and Greece are above the levels achieved during the spring time panic. The 4% premium above the prime German rates, investors are receiving on new loans, suggests the problems have been deferred, not solved. Part of the problem may be the European Financial Stability Facility (EFSF) set up to administer the €440B rescue account has yet to be funded.
The EURUSD has favored the euro for the past few weeks as the commodity futures speculators have moved from a short to a long euro position. At the end of August they specs were short 27,460 contracts. In the latest COT data through 09 21, 2010 the spec is now long 1,485 euro contracts. In the past week the large spec, usually funds, flipped to a long euro position as he liquidated 14,934 contracts of his short contracts. Commercials also flipped their position from long to a short euro position. The futures OI has climbed over 10,000 contracts since the end of the report, suggesting more new euro longs.
Bernanke's statements last week suggesting the QE-II program will commence on confirmation of negative economic news was more effective devaluing the USD than Japanese intervention as a means to devalue the yen. But when might this QE-II happen? You can rest assured it will not happen prior to the November election. Republicans would loudly proclaim the new program was merely more evidence of failed Democrat economic programs. Much of Main Street America, already seething at their perception of out of control spending and incompetence of this administration, would become even more highly motivated to throw the bums out.
Where do we go from here. In election years, there is often an October surprise. Is it possible that this year's October surprise could be some good US economic news?
The past two weeks have given us an 850 pip run from 1.2645 to 1.3503. True the funds did flip to the long side of the euro, and often this is followed by more buying. This time it was different, as they got to a net long by buying in their shorts, not an aggressive statement. We want to try the short side of the EURUSD but we do not have an ideal entry. Perhaps a scale short from 1.35 up to 1.36 is worth a try.
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.