Ralph Shell @ 12:55 PM, Thursday January 13 2011
Just when the euro and pound bears were getting complacent in the wake of the early year sell off, we get a weekly reversal. In retrospect it now looks like all the nervous hand wringing in front of the debt offerings by Portugal, Spain and Italy was all show and the auctions were pre-arranged debt placement to banks and other institutions. They collectively bid for more than they knew they would be buying, making the auction look well received.
Bill Gross of Pimco in a Bloomberg interview said the Portugal auction, for the most part was really a pre-arranged sale designed to give the appearance of success. Hopefully this might create demand from the bond funds such as Pimco, but he says they are not going to participate. Continuing, when asked about Spain and Italy, he responded:
"They’ll come successfully if success is defined by
selling bonds. Portugal did sell at 10-year but slightly under 7%. To
me that is not a successful yield. It speaks in the long term to
Portugal not being able to service its debt simply because its primary
deficit is increasing based upon those high yields. Something has to
be done. It is being done at least in terms of the talking stage by
Merkel and others in terms of extending the blanket that the EU so to
speak in terms of EU bonds ahead. It helps to spread the benefit from
Germany outward, but I am not optimistic in terms of the peripheral
countries, and we would not invest in them at the moment."
The good news was enough to send the euro screaming to the upside. The weekly bullish candle total engulfs the previous weeks sell off. On Tuesday we noted in our observations, we felt that the euro was finding support after the New Year's sell off, and was perhaps due for a rally, but the ability of this market to stage the quick reversal surprised us and is very impressive.
One of the intriguing aspects of the euro trade has been the build up in the futures open interest. At the beginning of the year the open interest in the euro futures was around 164k but in less than 10 days, it has climbed to over 206k contracts. Large specs had been the big shorts in the euro, but under the 1.30 handle buying appeared. It looks like the return above 1.30 caused shorts to cover.
This morning the US Initial Unemployment Claims report was higher than expected, 445K versus the previous week's 410K and an expected 405K. Since this was the first full week after the holidays, the bigger number should not be a surprise, but the market was in no mood for some bear USD input, and the rally continued, no doubt chasing in more shorts.
Trade in the pound is also interesting. Like the euro the pound was also loaded with spec shorts in the latest COT report, exceed 20K contracts. Unlike the euro, the open interest in the pound futures market is little changed since the beginning of the year. The pound failed to break with the euro, but did stage a very impressive rally versus the USD, trading all the way back to the December high close to 1.59.
The euro versus the pound sold off from .8659 to a little less than .8300, and is currently trading at.8423. This morning reports from the Bank of England produced no surprises. The inflation rate is too high, but the economic growth is too fragile to raise the rates, so rates will stay unchanged until events change. We are inclined to try the long side of the euro versus the pound in the .84 area, risking 100 pips. and looking for a return to the .86 area. Euro problems remain but with Germany Japan and China all giving lip service to a stronger euro, perhaps concentration about the debt problems in Euro land will abate.
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.