Yesterday we were lamenting decisive moves, especially in the euro and the yen, were lacking. What a difference a day makes. In the euro, we did note that trade was becoming congested with triangular trendlines converging. Usually that formation can result in a continuing movement once the trendline has been broken. Such was the case, and the bears quickly took the pair to 1.30 where we had expected some support. A close decisively under the 1.30 handle means that number will be the new resistance.
Since we are now trading at 1.2970, that support has vanished. Perhaps this is because of a bearish virus affecting other markets. Gold has taken another nasty tumble, currently down $47 at $1422 per ounce. Almost all metals are lower, and WTI crude is down $2.47 a barrel to 93.92.
Some of the observers claim it is because of the stronger USD. Possibly, but I am more inclined to think the bullish fever, especially in crude oil and gold, has gone way past critical mass.
Comments coming from the G7 meeting in London today may also be weighing on the euro. With all the participants leaning on the German finance minister to lighten up on this austerity plan, Mr. Schauble did concede there's "enough room to maneuver for euro-area governments to respond to the currency bloc's recession."
It remains to be determined if the German FM, outnumbered, is merely trying to get along with other G7 members.
In the USD versus the JPY (USDJPY, FXY) there was a decisive breakout for the USD. April 2009 was the last time the USD traded above 100 to the yen. Abe is achieving his goal, to weaken the yen. Among the contributing factors to the yen's weakness were reports that overseas investors cut their holdings of Japanese bonds by $39B in March, the most in three years. Another ministry reported Japanese money managers had purchased ¥514.3B ($5.1B) of overseas bonds in the period.
For the past several months, the flow of funds into Japan had been confusing, considering the yen was falling in value. The strength in the Nikkei 225 may have been the reason. Index funds were under weighted in Japanese stocks, and private investors likewise moved money back to play the Japanese stock market.
Another reason for the severely weak yen may have been the debt markets. The Japanese Government bonds had a big move with the yield going from .59% to .69% on the 10 year bonds in one day. It takes more than random market noise to move the bond market this much. Should Abe achieve 2% inflation, how much will the ten year then yield? With Japanese debt 2.4 times the GDP, it will become impossible to refinance their debt. This is the scenario that prompts the super yen bears to talk in terms of 120 or higher to the USD.
Yesterday at the CME, there was an active futures trade. The open interest was up 15,555 contracts and the total OI now exceeds that in the euro. This suggests new spec shorts who will be defending the 100 handle.
The trade in the C$ is also interesting this week. After coming very close to parity the loonie has weakened, and is last trading above the 1.01 level. Specs have been short the C$, hoping it would lose to the USD. In the futures market, the shorts have paid a price as the C$ firmed. Contrary to the specs in the yen, those in the loonie have been on the losing side and have been reducing their positions.
Weakness in the crude market today is weighing on the C$, but the shorts may also be getting some bearish advice. Today The Financial Post has a great picture of a loonie in flight, and a bearish article on the C$ entitled, "The loonie is set to fly south-deep south, says TD Economics." The reasons for the weakened C$ is a weakening of the Canadian economy, lower commodity prices, and a stronger USD.
"Canada has lost much of its economic growth advantage," say economists Francis Fong and Leslie Preston, who expect Canada to lag the United States this year and next......(they add) "OK, fine it has strengthened, but that does not change the fundamental story," Fong told Canadian Press. "If you look at the fundamental factors driving the Canadian dollar, we think the outlook is all down."
Eventually, they think the C$ could trade 10% under to the USD.
As expected, there are some big name bulls in the loonie. What is not mentioned, however, is the softening in their real estate market, and their high level of consumer debt.
We suspect the traders voting for the C$ going to a premium to the U.S. will be disappointed. A return under the 101 handle should probably be sold. Again, make sure to mind your money.