Ralph Shell @ 1:19 PM, Tuesday November 09 2010
The euro remains on the defensive as analyst turned their attention to sovereign debt issues. Briefly the market was encouraged by the "success" of the Greek auction, but when it was confirmed that the sale was only for €399M euros, ($417.2M) for 26 week maturities, the enthusiasm waned. Contrast this with yesterday'soday's US Treasury sale of $32B 3 year notes and the Greek feat, despite their lousy credit, is not such a big deal.
The agenda on the euro worry wall is cluttered with concerns this week. Tomorrow we have a Portugal auction for €1.25 billion of up to 10 year notes. Later in the week, there are GDP reports for most of the larger Euro-Zone members, another cause for concern. Ireland remains a problem child for the euro bankers, and CDS prices have been soaring. New problems do arise in the US. For example, the California unemployment fund has a deficit of $10.3B, a problem for the newly re-elected California Governor Moonbeam, but euro issues remain under the microscope today.
The ease with which the euro has fallen since last week's QEII announcement has been quite a surprise. Looking at last week's COT report, however reveals that the specs collectively were long 130.000 contracts, so some of these longs no doubt have exited the market. We had felt that the 1.3850 might be the bottom side of the range. It was if you consider the hourly charts, but the market acts like it wants to dig a little deeper into the support.
This afternoon the US Treasury reported another successful auction, this time $24B 10 year notes at a yield of 2.636%. The bid to cover ratio was 2.8 times the auction size, not bad since the average of the last four auctions was 2.87 to 1. Indirect bidders, the group that includes foreign central banks, bought a sizable 56.6% of the total compared with 42.6 on average. Can this imply that the central bankers favor the long side of the USD at current levels?
Last week the WSJ reported that the advanced nations will need to borrow $10.2T next year. They said:
"Next year, fifteen major developed-country governments, including the
U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2
trillion to repay maturing bonds and finance their budget deficits,
according to estimates from the International Monetary Fund.
That’s up 7% from this year, and equals 27% of their combined annual
economic output.
Aside from Japan, which has a huge debt hangover from decades of
anemic growth, the U.S. is the most extreme case. Next year, the U.S.
government will have to find $4.2 trillion. That’s 27.8% of its annual
economic output, up from 26.5% this year. By comparison, crisis-addled
Greece needs $69 billion, or 23.8% of its annual GDP."
If today's auction interest represents residual global liquidity from QEI, then perhaps the US economy will be able to bumble through and raise the $4.2T to keep the so called Ponzi scheme alive. Stretching maturity length at these rates might be an added bonus.
If the USD is turning, we may have too many USD shorts in these markets. The one pair that seems to be loaded short the USD is the C$. Specs in the futures market last week were very large net longs and seem to have made large lonnie purchases since. There may be nothing wrong with the loonie except the long side of this trade is very crowded. Besides is there really a lot of upside in the C$ when you at parity with the USD?
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.