In what appeared to be a quiet trade, the EURUSD was sliding lower this morning, when in the apparent absence of news, promptly rallied about 70 pips. Later, we then learn Goldman was touting a new trade, long EURGBP, targeting .91 up from the current trade of about .8750. The pound has lost 750 pips to the euro and 1200 to the USD. Certainly, the trend in the pound is obviously down, but we wonder if they may not be a little late joining the pounds bear party.
One of the reasons given for this trade is the: "Option markets and IMM data suggest speculative short GBP positioning remains close to neutral."
For more years that I wish to confess, I have been doing studies of open interest and the COT, and do weekly studies of the currency markets. The statement the pound positioning in futures and options close to neutral is flat out, blatantly wrong.
Instead, we have near record open interest in the CME futures, and our most recent COT report shows speculators are short a recent record of 72,900 contracts of British pound futures and delta adjusted options. Further, the open interest (OI) in pound futures is up more than 20K in the last three days, and the total futures open interest in the pound at 264K far exceeds the OI of 207K the euro. Parties, when they get too large, generally end ugly.
The case can be made that the euro is less ugly than the pound, but by how much, and is the euro really that pretty? Problems abound in euroland. Unemployment is at a record 11.9%. over 25% in Spain and Greece and over 50% in those under 24 seeking first time jobs in both Spain and Greece. Then there is the little problem when Frau Merkel, the EU or the IMF calls Rome, no one answers the phone. Italy, the third largest economy in the single currency, has over a trillion euros in loans, and the rate has been moving higher.
Not to worry, though, wealthy Germany is still a wonder of bustling economic activity, and Merkel remains committed to the euro project. Well, Germany does have some problems, and Frau Merkel has the ability to be flexible and change positions.
There is a major problem with German Banks that has received little attention. These banks are big lenders to the ship owners, who expanded the size of the fleet during the boom years. Now the industry is burdened with over capacity, the rates are down and there is an abundance of non-performing loans.
"The top 10 banks in Germany have 98 billion euros ($128 billion) of shipping loans outstanding, Moody's Investors Service said in a report in October. That compares with German banks' $75.3 billion in bonds and loans to the public sectors of Portugal, Italy, Ireland, Greece and Spain as of the third quarter, according to Bank for International Settlements data compiled by Bloomberg Industries. .......An unprecedented $80 billion out of $125 billion of German loans to the industry aren't performing as they should, estimates Paul Slater, chairman of Naples, Florida-based ship- finance consultant First International Corp."
Is there a possibility the German Banks, in addition to the Italian and Spanish banks, will need a bailout from the ECB?
Then who will champion the euro if Merkel fails in her reelection bid? While September is a long six months away, in politics, it can be a lifetime. According to Ambrose Evans-Pritchard in the Telegraph today, there is a new political party advocating a break up of the euro experiment:
"An end to this euro," is the first line on the webpage of Alternative für Deutschland (AfD). "The introduction of the euro has proved to be a fatal mistake, that threatens the welfare of us all. The old parties are used up. They stubbornly refuse to admit their mistakes."
They propose German withdrawal from EMU and return to the D-Mark, or a breakaway currency with the Dutch, Austrians, Finns, and like-minded nations. The French are not among them. The borders run along the ancient line of cleavage dividing Latins from Germanic tribes."
Traditionally, start up single issue parties fare poorly but the "latest ZDF poll shows that 65pc of Germans think the euro is damaging, and 49pc think Germany would be better outside the EU."
Speculators have recently flipped to the short side of the euro in the futures market, however their 28.9K position is far less than the short position in the pound. The pair (EURUSD, FXE) has found support in the 1.30 area. It is our preference to sell strength with a target in the 1.2850 area. There seem to be too many places in Europe where too many things might go wrong.