It has been a week when the USD has come under pressure. The September DI had a high of about 82.15, slipped to 81 and then recovered to 81.18. Rather than view this as a major shift against the USD, I see this as some long overdue spec liquidation. According to our COT studies, for the report of July 30th, specs were long 361K contracts of USD's versus shorts in every major currency.
The biggest spec short positions were in the yen, the Australian dollar and the pound. Looking at the weekly price action, all three of these currencies worked higher. This had to put pressure on the USD as the shorts liquidated, selling the dollar. Once USD selling of futures and options begins, it often lasts for more than a week.
Not all the USD news was negative. The US Treasury held an auction for $72B of 3, 10 and 30 year paper. There was an increase in demand by indirect bidders to 41.45 of the three year notes, 46.3% of the 10 year and 40.2% of the long bonds. In the totality of the daily forex trade this might seem small, but still, foreign demand for over $30B of US bonds is not small change.
The euro, for the fifth straight week, continued to work higher. The pair rallied to the 1.34 handle and then retreated. Part of this was buying by specs who had been short as much as 65K of futures contracts five weeks ago. In the latest report out this afternoon, the euro short is now down to 12.9K. Perhaps because of this short covering, the market is more responsive to constructive numbers from the EU.
We had the French Industrial Production (M/M) released this morning. It was expected the number would be a plus 0.3%, but was a negative 1.4%. France is the second largest economy in the EU, so this report is important.
Today zerohedge had these cynical but amusing comments about France:
"In June, the number of unemployed in France rose to a record of 3.28 million, marking an 11.2-percent leap year-on-year and the 26th monthly increase in a row. The unemployment rate in France is now at a record high level. Of course, like so many other statistics, it is never the people who are counted but the people that make the count who are important so I fear that this statistic is woefully low and will remain so until after the German elections. No need to upset those is Berlin unnecessarily when soon they will be called upon to provide money for the bon vivant lifestyle to which every Frenchman is entitled. I wait for the newest wisdom from Monsieur Hollande, 'Let them eat duck.'"
The euro will be confronted with some challenging numbers for the bulls next week. Sometime early Monday, we get a reminder that still all is not well in Greece. They are reporting their Y/Y GDP rate. Expectations are for an improvement to -4.8%. On the following day, the EU Industrial Production SA (M/M) is reported. This is expected to be up 0.9% after a -0.3 in the last period.
On Wednesday, the GDP number for all of Europe is announced. For the quarter, the number is expected to improve to 0.2% from -0.2% last time. The yearly number is expected to improve to -0.8 from -1.1 on the last report.
Of the majors, the pound had the biggest move last week. The GBPUSD rallied from 1.52 to about 1.5570. For a trading approach we have little to add from yesterday's comments. This afternoon's COT report show the specs did not liquidate much of their short position.
Looking ahead to next week, on Tuesday we get the monthly and yearly CPI, with the monthly scheduled to be unchanged and the yearly up 2.8%. The following day, we get the BOE notes and the UK Unemployment Change. That is expected to be down 15 from last period's -21.2. Unemployment is expected to remain at 7.8%. This will be followed Thursday with the UK retail sales numbers.
Contrasting numbers in the EU versus the UK may cause the EUR to lose further to the pound. Should that happen, a return to .84 (EURGBP) might be possible.
This was a big week for the Australian dollar. The RBA reduced the bank rate to 2.5%, but this proved no surprise for the market. Prior to the announcement, specs had shorted the market down to under .89. Monday then proved to be a reversal day. Once the market took out the .90 handle, some of the shorts covered. The volume and open interest report from the CME for Thursday, August 8th showed a 9000 contract reduction in the open interest.
This afternoon, the newly released COT report shows the specs short a record 104,269 contracts of the A$. The cut-off date for the report was the close Tuesday, so it has probably been reduced since then. Should all of the remaining 100K shorts want out at one time, it could be a blood bath that would take the pair (AUDUSD, FXA) much higher than expected.
A reason given for the Australian turnaround was better Chinese numbers. As the largest importer of Australian commodities, China is important over the longer term. As a market mover, relying on Chinese statistics is of dubious reliability, in my opinion. Next week is a light one for Australian reports.