Ralph Shell @ 1:46 PM, Monday December 06 2010
The euro-zone finance ministers meet in Brussels early this week to organize and plan financing for anticipated future bail outs. Last week's purchase of dubious quality sovereign debt was cheered by those indebted nations who have been paying usurious rates for the privilege of deferring their default date. These debtor countries are in favor of proposals to issue E-bonds. The IMF also wants the euro bankers to increase the size of their rescue fund, anticipating Spain may be the next country going to the borrowers window.
Germany, the chief beneficiary from the single currency, is unwilling to share their treasure. Requests for an increase in bail out funds by the the euro-bankers and the IMF receive a consistent nein, nein, from the Germans. The lack of unity today has been a negative for the euro. After again revisiting the 1.34.20 level today, the euro retreated to 1.3245, and is currently trading around 1.3280. Since the German exporters are the biggest winners because of the weaker euro, their objections to an increased bail out fund, serve their interest, as it weakens the euro.
In our weekly COT futures analysis, we noted that there was a sizable 13.1% increase in the total open interest of the euro for the latest period. This was a period when the the market was selling off. New longs and shorts were entering the market. The end of the week rally made money for the euro bulls and chased some shorts from the market. On Friday the euro futures trading volume was 421K contracts, and the open interest declined 9,598 contracts. We now have a double bottom at 1.2980 and a double top at 13420.
Over the week end Fed Chairman Bernanke had some interesting comments in a live interview. The current 2.5% growth rate, is insufficient, he claims, and will fail to create enough jobs to lower the unemployment rate. Bernanke advised he would increase the asset purchase plan beyond the $600B if he felt it were needed. It seems the mood of the market has changed, since this pronouncement did not weaken the USD as it had in the past.
It is hard to trade ahead of finance ministers who, with their meeting results, can propel the market either way. The Germans do need the single currency because it helps the flow of their exports within the common market. Likewise they benefit from the lower euro which facilitates the exports beyond the euro market. Though a lower euro is a short term economic boost, longer term the fragmentation of the euro would be harmful. If the objection to the expanded help with the sovereign debt issues is merely political posturing by Merkel for the home voters, the euro may fool a lot of people, and continue the unexpected rally.
Carefully watch the news for the market direction. If the news breaks in support of the IMF proposals a rally back to 1.36/37 is possible.
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.