Wednesday, 1 May 2013

Will the USD Losses to the Euro and the Pound Continue?

Ralph Shell, Excel Analyst

Forex Razor Industry Review Contest, May 2013The trade on the final day of the month should always be judged with suspicion.  For those who have an accounting period coinciding with the end of the month, the trade today can be especially important.  Open positions will be 'marked-to-market' and trading performance will determine the remuneration traders and fund managers receive.

It is always interesting to watch which markets will enjoy exceptional strength or weakness on the close.

Considering this, it is easy to discount volatility yesterday (Tuesday) merely as a market aberration.  Perhaps but this might not be the case in the yen, the euro and the pound.  As we noted in the last COT report, however, the specs are loaded on the short side of those markets.  Speculators were short 118K contracts of the yen, 89.1K contracts of the pound and 51.3K contracts of the euro. 

It is possible that weakness in the USD versus these currencies might be short-covering.  The size of the pound short is exceptionally large in that market.  Considering the pound is now trading above 1.55, there are specs with losing positions in over 50K pound contracts.  (Between February 19th when the pound last traded above 1.5425, specs added close to 50K contracts of shorts.) 

We noted the open interest in the BP futures was down 4.3K contracts (Monday) and we would expect today's report (Wednesday) to show further liquidation.  Should there not be significant liquidation, the short squeeze in the GBPUSD (FXB) may have more to go, perhaps as high as 1.58.

Click to Enlarge EURUSD Daily Chart

The euro turned very firm versus the USD, (FXE) as it quickly ran up to 1.3185, and the run-up did not seem to be in response to any news.  Earlier yesterday, it was reported unemployment in the eurozone set a new record, 12.1%.  Worse still is the under 25  unemployment, which is the highest in Greece 59.1%, but also 57.2% in Spain, Italy 38.4 and France 26.5%.  In Ireland, the young are fleeing: off to Britain, Australia or Canada.

US news was mixed.  The home price indexes showed that US housing prices were continuing to recover.  Also, and on the positive side, was the Consumer Confidence Index, which soared to 68.1.  On the negative side was the Chicago PMI Index, which dropped to 49; this shows their region is contracting.  On this coming Friday, the all important Non Farm Payroll account will be released.  The current guesses are for a 147.5K increase.  Unemployment is forecast to remain at 7.6%.

Central Bankers are also meeting this week, with reports expected on Wednesday in the US and Thursday in the ECB.  Recent soft numbers coming in from the US make market observers think the Fed will be dovish and likely to continue QE at the current pace.

In Europe, it is expected the ECB will reduce their core rate by 25 basis points to a new record low of .50%.  Some of the news services are reporting this will provide a big boost to the European economy; it will take a lot more than just a rate cut.

This should continue to be a volatile trading week.  If the US inputs continue to show the recovery is faltering, there will be more USD liquidation.  However, if the numbers come in better than expected I would look for some USD buying versus the euro, certainly above the 1.31 handle. 

Click to Enlarge GBPUSD Daily Chart

We are not anxious to be a seller against the pound.  Remember, the unemployment rate in Britain is 7.9% compared to 12.1 on the Continent, and Britain's GNP is positive, 0.3% while the GNP in the eurozone negative and contracting. 

We will take a look at the yen later today.
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