Ralph Shell @ 12:12 PM, Wednesday January 05 2011
Today's improved US employment report proved a disappointment for the USD bears, who were betting that commencement of 2011 would mark quick depreciation of the greenback. The popularity of the short USD position was reported in the latest Forexrazor analysis of the Commitment of Trader Currency Report. Total futures and delta adjusted option positions in the major currencies plus the Dollar Index showed a total short USD position of 153,539 contracts, up from 133,713 contracts in the previous week.
Speculators were betting heavily on the commodity currencies, and the perceived safe haven yen and SF versus the USD, but this was only part of the picture. Specs favored the long side of the USD versus the euro and the pound by over 43,000 combined contracts. The cut off date for this report was 12 28 2010, and both the euro and the pound rallied from there into year end. The pound had a 12 29 low of 153.49, and moved up to 1.5664 on 12 31. The euro's rally carried it from a 12 28 low of 1.3083 to a 12 31 high of 1.3423.
It now appears that the year end rally in those two currencies was of a position squaring, short covering rally, which has proven to be short lived. This is not to say that the money made or lost is not real, but it is sure proof thin markets are for nimble and well financed accounts.
Going forward, how do you trade the euro? The quick retreat from the 1.34 handle this week, to the low 1.31's gives the market a heavy feel but, having been punished too many times by selling weakness, I think it is best to wait. We have some meaningful and unpredictable numbers coming on Thursday and Friday. Tomorrow the US unemployment claims number, expected to be 400K, is released, going against the previous week's 388K. A holiday week, combined with the heavy snows, makes this number unpredictable. On Friday we get the US unemployment rate report, and the Non-Farm Payroll report, which always seems to be worth some random volatility. We do not wish to guess what these numbers might be, but rather, look for a trading opportunity after the report.
These reports are important, and, on a short term basis do keep the market makers and scalpers busy, but the interest rate trends and differentials between the US and euro rates is also meaningful. Interest rates are a barometer that assimilates economic trends in conjunction with monetary policy. Since late November the US rate on 2 year notes has been gaining on German two year paper. At the widest, the spread was about 60 basis points. Since then, the US rate has gone up, despite the QEII effort to keep rates low, and, the German rates have come down. Currently the US rate is a 20 basis point discount to the German rate. The US yield curve is a lot steeper than the German. US five year notes yield 2.12%, a 26 basis premium to the German rate of 1.86% for 5 year paper.
The higher trend of the US rates versus the German rates is a plus for the USD versus the euro. Continuing travails of the peripheral euro members as they refinance existing debt is another euro negative. Earlier today Portugal sold €500M of six month notes at a lofty 3.686%. In Greece the 10 year government bond is trading at a record 974 basis points over the German benchmark 10 year note, or 12.68%. The issue here is not weather the Greeks default, but when.
We do prefer the short side of the EUR/USD, but this pair has been hit pretty hard, so we would like to see a swing rally to establish shorts. A rally back to about 1.3275 looks like a good entry, and perhaps the late week reports will give us the opportunity. Use appropriate money management stops, and target a return to the 1.31 area.
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.