Last summer when the euro bears were celebrating their success, ECB President Mario Draghi boisterously asserted he had the weapons to defend the euro and avert a debt crises. It worked. Sovereign debt interest rates came down. Spain and Italy were both able to sell debt at reasonable rates, and the euro rallied.
There seemed to be less enthusiasm at today's press conference. It is perhaps hard to overcome the gloom of the latest GDP numbers and the forecasts going forward. The revised forecast is for a shrinkage of 0.5% this year, a minus 0.3% in 2013, with growth returning -- positive 1% -- in 2014. If you believe the 2014 estimate, it would not surprise me if you had a long list for Santa Claus.
Draghi also acknowledged that the .75% bank rate had been discussed, which may leave the door open for a reduction in the future.
The market action, a hard down, does not seem to relate to the news, unless there are leaks about the size of the Greek bond buyback. Is it possible Draghi is fearful that the stronger euro trading above 1.30 will be a drag on the German export machine?
There is another possibility for the sell-off. The EURUSD (FXE, UUP) trade above the 1.31 handle has failed to hold for the third time. Yesterday's reversal has been confirmed today.
In the U.S. today, the Initial Jobless Claims came in at 370K, better than expected. The weekly number has not been too reliable, and is usually revised. Tomorrow, the NFP and the U.S. unemployment rate is announced. Should we get a recovery from today's sell-off, we wish to try the short side of the EURUSD at around the 1.3060 area. The target for this trade will be the 1.28 handle.
We note that yesterday at the CME, the open interest in foreign currencies went up 28,376 contracts -- a large daily increase. Of the major currencies, the biggest increase was in the yen, up 16,772 contracts. The yen now has the largest OI at 238K, bigger than the euro at 219K. The OI in the A$ is also quite large, 216K.
This means that the specs are continuing to sell the yen, and they are buying the A$, which helps our long AUDJPY. When the party gets too big, I get nervous, but you make money by keeping the winners and getting ride of the losers. We will reevaluate the trade prior to next week's election in Japan.