Ralph Shell @ 1:06 PM, Wednesday October 20 2010
The reversal of the dollar yesterday when it showed strength proved to be short lived. Comments by Fed Governors expressed concern for a weakening economy, and, in their opinion, a need for additional stimulation. It is expected that this afternoon's release of the Fed's Beige Book will confirm the weakness, taking us closer to QE II which will begin after the next FOMC Meeting in two weeks. There are skeptics who doubt additional liquidity will provide the economy with much of a boost. There is no current shortage of liquidity either in the banking business or in the industrial sector. Banks, however, with free spot money, will be lending to the Treasury further down the yield curve making the 10 and 30 year Treasury yields contract further.
Assurance by the Fed the spot interest is going to remain near zero for a lengthy period, combined with an assault on the USD by the Fed makes the dollar an ideal carry currency. The prospect of lower rates and the selling of dollars to finance more appealing investments overseas has put pressure on the USD.
The dollar's downward spiral was arrested yesterday. One of the reasons was China's increase in the bank rate by 25 basis points. This move was unexpected and seemed to produce some liquidation of short USD positions. At the CME there was liquidation of almost 20,000 futures contracts in the major currencies with the exception of the euro. In the euro, it was reported there was a monster trade, 486,000 contracts, and more than twice the open interest of 219,761. The open interest in the euro increased 2647 contracts. Strong markets today probably means money is flowing back into currencies today.
This evening the Chinese National Bureau of Statistics released monthly economic data. It is estimated that the CPI y/y will be 3.6% up from the previous period's 3.5%. The GDP q/y is estimated up 9.5% compared to 10.3% in the previous period. The increase in the bank rate probably means strong numbers can be expected in tonight's reports.
The numbers released in Britain this morning gave us economic numbers and details of the Conservative agenda. First the MPC meeting of the BOE revealed a three way split. Adam Poses wanted to stir things up with an additional £50 "money printing program" Andrew Sentance renewed his call for a rate increase, and the remaining seven chose to stay the course. The UK Public sector borrowing came in at £16.166B, a record for September, and above last year's £15,461 deficit.
With the UK expenditures continuing to out strip tax receipts Chancellor George Osborne revealed his plan to balance the budget. According to BBC news:
He told MPs: "Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt.
"It is a hard road, but it leads to a better future."
Welfare payments will be cut, the retirement age will be increased to 66, higher education expenses will be cut by 40%, 400,000 public sector jobs will be cut over the next four years, expensive defense programs such as the Harrier jump jets, and the Ark Royal aircraft carrier. The list goes on with cuts of about £81B in total spending. Unlike France where a proposal to raise the retirement to 62 is causing nationwide strikes, England remains calm in response to the new cuts.
The GBP/USD pair's response to the British data was subdued. The pair did stage a rally from 1.5650 to 1.5750, with the higher numbers achieved after the Brit's numbers came out. The rally up above the 1.5850 seemed to be bearish dollar news views. We have sold the pair above the 1.5850 area, and have a stop at 1.5980. For the moment we are going to keep a tp open. Considering the many reasons to be short the USD as mentioned above, why buy the dollar against pound? Well most of the dollar's bear news may be in the market, and we are not sure that is the case for the pound. The MACD, has given us a sell signal but we will be quick to run if the trade goes against us.
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.