Sunday, 10 November 2013

Trading Places - Excel Markets Week Review and Preview

Ralph Shell, Excel Analyst

The sell-off in the euro continues. As we anticipated in a recent analysis, following a tricky week for the euro bulls, the market continued down last week.

The sell-off was not as severe, and the price action differed from that in the week ending the 27th of October.  During that week, we opened on the high and closed on the low, the sign of a very bearish trade.  The weekly high was 1.3817 and we closed at 1.3484 very near the weekly low.

The initial softness in the EURUSD seemed to have been caused by comments from the Fed's FOMC notes.  The market for the euro had run up to the yearly high of 1.38 on rumors that the reduction of the Fed's bond purchase programme would be delayed until next year; it subsequently emerged that this was not the unanimous opinion of FOMC members, making the euro bulls wary.

The euro economic numbers then weighed on the market.  The yearly increase in the CPI, only 0.7%, following the previous week's poor 2.1% in the M3 growth, made it obvious the money supply was too tight. 

As 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."

This advice was bound to go against the advice of the Bundesbank, however.  Italy, with, over a trillion dollars in sovereign debt, cannot continue with negative growth and service the existing debt.  How will this play out with the future relationship between the ECB and the German Bank?  Frau Merkel and friends are foolish to think their austerity program is going to sell much longer in Rome.

Trade this past week was a bit different.  We opened unchanged, but we were then able to muster a small rally, before another late week sell-off occurred.  The Thursday sell-off was prompted by the unanticipated reduction in the ECB bank rate to .25%, which took the pair down to 1.3295.   The market bounced off this low, and managed to bounce up to 1.3420.  On Friday, the US news was positive, but the market was unable to print a new weekly low, and climbed back to 1.3364 for the close.

Anticipation of negative numbers, the consequence of the government shut-down in the US, appears to have been over-hyped.  The GDP number gave the USD a boost on Thursday, and the NFP number on Friday was a surprise for the bears anticipating negativity from the shut-down.

How do we trade this week? 

There does not seem to be an abundance of data to influence the trade.  On Thursday November 14th, we get the German GDP, and later that day the European Q/Q and the Y/Y GDP.  Bearish numbers would hurt the euro. 

This is followed on Friday with European CPI numbers.  The US will have the initial jobless claims number, the US Trade Balance and the US Fed Governor Nomination all on Thursday. 

If there is a big market driver here, I fail to see it.

Does this mean we are headed for an inside week, trading with in last week's range? 

Obviously we are at the bottom of the BBs, well under the 20-day which comes in just above 1.36.  This, however, is quite a rally from the 1.3365 close.  My preference would be to try the short side on a rally back to the 1.35 handle.

There seems to be a big variance of opinion where the EURUSD will be at year's end. 

Several big brokerage firms still think the pair can trade at 139/40.  This was based on the assumption the US would continue with their aggressive QE3.  Others are in the opposite camp with a 1.31 target.  I believe their argument is based on the assumption the numbers in the US will remain positive, and there will be conversation about the forthcoming taper, the US reduction in the money supply.

The US has been losing global popularity.  The taper would certainly have a negative effect on many nations especially the BRIC's and their friends.  Would this spill over into currency valuation?

On Friday last, the rate on the US ten-year was up to 2.75%, about the same as British gilts, 2.76%.  With German 10-year bonds yielding 1.76%, does this mean Germany and the euro, along with Japan, will be the carry currencies?

The CFTC finally has their COT report up to date through November 5th.  This report show the total spec long in the euro is down to 37,966 from 64,168 in the previous week.  Large specs are long so there may be periods of selling by this group.

Still, my inclination is to try the short side on a rally but it is best to stay nimble and watch your use of leverage.
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