Ralph Shell @ 1:09 PM, Wednesday October 27 2010
Some of the definitions of caper are; a playful leap, a prank or trick, harebrained escapade, a frivolous, carefree episode or activity. Is this a more appropriate definition of Helicopter Ben's policies?
Traders have been exceptionally busy buying something else and selling the USD ever since Fed Chairman began his public musings for the need for QEII. At one point the total spec short positions in the USD exceeded 300,000 contracts. The open interest in the euro climbed above 220,000 contracts. Even more indicative of the speculative fever was the daily trading volume, especially in the euro. Yesterday the futures volume in the euro was still large, 341,070 contracts, but down from 400,000 to almost 500,000 contracts traded in recent days. Did Leo Melamed, when he founded the International Monetary Market in 1972, ever dream the market would get this big?
Trade in the euro remains quite active but the open interest is declining somewhat. Likewise the OI in the pound decreased yesterday by 3, 357 contracts, as the market rallied on good economic news, chasing some shorts out. Similarly in the yen, the OI also went down by 4,781 contracts. Large specs have been very big longs in the yen and may have taken some of their bets off the table.
Trade in the euro this week has been interesting. For weeks the market has traded rumors about the size and timing of Bernanke's QEII caper. On Monday, when the threat of any market making announcement coming from the G-20 meetings had passed, the currency traders once again focused on the proposed QEII. Rumors by Goldman, that the increased money supply would be as much as $2T gave us another probe above the 1.40 handle, but again the market failed. We are suspicious that the high ball estimates were released so some one big could get some euros sold well.
Yesterday, the WSJ had some subdued estimates about the size of Bernanke's QEII, claiming, the increase in the money supply would be gradual, perhaps only $500B total. This seemed to calm the currency markets, but today there was another voice in Market Watch, as reported by Jonathan Burton who said:
"The easy-money policies of Federal Reserve chairmen Ben Bernanke and Alan Greenspan have rarely impressed veteran fund manager Jeremy Grantham, but now the chief investment strategist at GMO, a Boston investment firm, is likening Fed actions to an economic horror show.
“Adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment,” Grantham wrote in his latest quarterly commentary, “Night of the Living Fed.”
Despite mounting domestic and international opposition to the Fed's monetary plans, there is no evidence that Bernanke will change. The euro, however, may be due for a retracement. A trade under the 1.37 area might give us the appearance of a head and shoulders top. Note the MACD has already given us a sell signal, and there is the possibility of a cross over in the moving averages. A 23.6% sell off would take the pair down to the 1.36 area, and 38% looks to be around 1.33.
It looks like the short side might have some appeal, but after a 250 pip break we are going to see if we can get it sold a little better. It is probable best to scale into the trade with smaller lots because there is a lot of random moves in the EUR/USD. Further I find that it is best to get the first lot on well because I always have a hard time adding even a small lot when the first one is in the red. With the uncertainty ahead of the FOMC meeting in early November, there may be several trading opportunities, so try to let the market come to you.
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.