Sunday, 3 November 2013

A Look Beyond the Trick or Treat FX

Ralph Shell, Excel Analyst

Halloween turned out to be a day of tricks for the majority of euro traders who were long. 

The most recent COT report dated October 22nd 2013 showed specs long 56,603 contracts, up from 52,991 contracts in the previous week.  This is the total of both the large and small specs for futures and delta adjusted option positions.  Thursday, which was Halloween, the CME summary of only the futures trade was down 12,350 contracts.  The lower open interest went down; this means the specs were liquidating some of their position.

The sell-off in the EURUSD (FXE, UUP, UDN) was decisive.  The market opened close to the high for the day near 1.3738 and then sold off for the balance of the day, closing near the bottom at 1.3583.  Weak Thursdays often lead to even weaker Fridays especially when the specs are wrong-footed in the market.  Indeed that was the case, and the pair continued down Friday.  This gave us a weekly engulfing candle that covers the last four weeks of advances, and is currently trading about 1.3480.

Click to Enlarge EURUSD Daily 01 November 2013

The sharp sell-off in the euro is a consequence of better than expected US data, and comments from the FOMC report.  The market had assumed there would be no slowdown in the Fed's bond purchases until after the first of the year.  The government shut-down was bound to have negative US growth, the experts told us.  

This view was not shared by all the Fed FOMC Members. Some of the analysts, after parsing the Fed comments carefully, were now suggesting the they might commence tapering in December should the US numbers improve.  

The market was not properly positioned, and the Euroland news was negative. Zerohedge summarized some of Europe's problems earlier in the week:

"We recently noted that, despite all the hot money flows and self-congratulatory extrapolation, European macro data is collapsing (as opposed to supporting ideas of recovery). In fact, it is falling at the fastest pace in over a year as the prospect of the euro area falling into deflation may be increasing; as Bloomberg's Niraj Shah notes the single currency rises, growth loses momentum, money-supply expansion slows and bank lending stagnates. As Shah fears, that may push the region into a debt spiral as the real value of debt increases, marking a new phase in the crisis."

There were some negative reports coming from Europe this week that hurt the euro.  Yesterday it was reported the Y/Y CPI for all of Europe was only 0.7%.  This comes after last week's M-3 money supply report  of  2.1% was less than the 2.3 expected.  

 Click to Enlarge EURUSD Weekly 01 November 2013

An increase in the CPI of only 0.7% for the year means some European nations are starting to go into a Japanese like deflation.  Once started it is exceptionally hard to reverse.  For countries heavily in debt, like Italy and Spain, it will be increasingly difficult to service, let alone pay off the debt.  A former ECB governor told the Telegraph:

"...the bank’s (ECB) passive stance over the past few months was a “disaster” for Italy and Spain. The time-lag effects mean that serious damage has already been done. “It is incredible that they have missed their 2pc target by so much. This risks driving the periphery into protracted depression and could destroy the eurozone. Credit conditions are far too tight. The ECB should cut rates to zero, extend thee-year financing for banks and relax collateral rules,”

It looks like all the happy talk about the European economic recovery has ended.  

Friday 1st November we also received  news the euro zone unemployment jumped to a record high of 12.2% in September.  Seventy-four thousand people lost their jobs.  Youth unemployment, for those under 25, of 57.6% in Greece, 56.6% in Spain and 40.2% in Italy, is especially disgraceful - this is in contrast to German unemployment of slightly less than 7%.

We have some major flows in the European recovery.  There is no quick fix, but we do know the German austerity prescription is only working for Germany, and getting the Bundesbank and Frau Merkel to change policies is not even being discussed.

Despite this Draghi needs to loosen the money supply.  The markets partial awareness of this problem may be responsible for this week's weakness.

If the US numbers stay strongish the USD may look good compared to the euro.  There will be some meaningful numbers coming in the US this week.  The US PMI - ISM Non-Manufactured comes Tuesday, expected to be down slightly at 54.  

On Thursday, we get the US GDP Annualized expected to come in at 2% down from 2.5%.  My guess they are taking too much out of the GDP because the impact of the Washington shut down was limited.  Friday we may get the NFP Report for October.  Guesses are running at 125K, down from 148K. Should the US numbers be positive, this should mean a stronger USD.  

Also Thursday, we get  the European Economic Forecast, followed by an ECB Rate statement, and then a Draghi Press Conference.  It looks like we have the set up more volatile trading sessions next week.  Often markets that close weak on a Friday have more down side work next week.  

It looks like we are closing at about 1.3490, a level where there should be support.  Should we move down 30 pips from here, it looks like the next support is around 1.33.

It should be a busy week.
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