Ralph Shell @ 12:58 PM, Monday February 14 2011
So far the new week has failed to bring a new trend in the euro. The latest sell off started after the euro was unable to muster the strength to trade above the 1.3750 area. Concern for the single currency euro may have been re- awakened because of awareness the peripheral debt problems are not going away. A meeting of finance ministers in Brussels today is not expected to provide a solution or relief for the problems.
Again the euro is confronted with rising interest rate in Portugal. ECB bank purchases gave the market some stability but the rate has climbed back tp to 7.37%. The support given to the market by the Central Bank's addition of the higher risk peripheral debt to their balance sheet has proved to be temporary. It will be very difficult for Portugal to service their existing debt at the high prevailing rates when their growth rate is less than 2%/year, without inflicting grave damage on the Portuguese economy.
Irish elections, scheduled for February 25, may also negatively impact the euro. During the banking crises, the ruling party, Fianna Fial, agreed that the government would guarantee 100% of bank loans gone bad by the private sector banks. With the same party in charge of the parliament, they agreed in November, to borrow from the IMF and the ECB €85B needed to bail out the zombie banks. Irish repayment loans carry a 5.8% loan rate. This results in about $30,000 new debt for every Irish man, woman or child, a very unpopular outcome.
The opposition Fine Gael party and the Labour Party are destined to displace the ruling party later this month, and they both claim there is a "mandate to renegotiate" these agreement. What happens, though, when the electorate chooses new leaders dedicated to over ruling the terms of the bail out?
So far the euro finance ministers have been able to patch up and defer
the problems, kicking the can down the field. The Germans and French ministers have talked about more financial responsibility for the PIIGS, in return for loan guarantees, but what happens when the electorate says no, exposing the core weakness in the single currency. This pending election has the potential to be an unsettling event for the euro.
Since early January the CFTC COT reports shows a consistent trend, specs shorting the USD, against all currencies. Data from 1 -11- 2011 shows the net positions of the specs long another currency and short the USD, was 113,624 contracts. During the ensuing period until 02-08-2011, this position has ballooned to 319,577 contracts. Collectively, this is the largest USD short position in the currency markets for almost two years.
The position shift in the euro has been dynamic. On 01-11 the specs were short the euro and long the USD by 49,870 contracts. By 02-08 the large and small specs combined were now long the euro and short the USD, 48,709 contracts. This collective bullish market epiphany, buying almost 100k of euro contracts in five weeks, created market noise that attracted others, and they too bought.
Bulls need fresh stories every day to keep the market running. This market is loaded with lots of bulls and some may be tiring of their positions. Last Thursday and Friday the open interest in the futures alone markets was down over 10k contracts, so part of the recent sell off has been longs getting out. We think they have more to sell, and prefer the short side for a trip down to about 1.3350. If given the opportunity sell a relief rally back above the 1.35 handle.
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.