Dollar / Pound: Are the Bears Taking Charge?

Just when it seemed the trading world was unanimously bearish on the USD versus everything else, the pound broke ranks, sinking to the downside. Recent British economic reports have been constructive, and yesterday's batch continued that trend. Initial unemployment claims, which they quaintly call the Claimant Count Change was 12.9k, down from an expected 20.2 and 20.6k in the previous period. This increase of 12.9k was the smallest since April 2008. Total unemployment retreated to 7.8% less than the expected 8.0%, but the average earnings was up only 1.2%

Despite some dovish talk by a couple of US Fed governors, the Bank of England's Gov. King seemed to nudge the pound to the downside. He said the decline in the pound's value was beneficial, and that they may further increase the money supply should the economy fail to grow in the fourth quarter. These comments were enough to deflate the pound's value which had been on a 1100 point run since October 13th.

This is not to say that the British economy has eluded all potential pot holes and land mines on the recovery road. Marc Chandler, in a Seeking Alpha article, notes that the total assets of the five largest banks was 4.8T sterling, compared to a UK GDP of only 2.6T. Talk about big positions, these are not meek stodgy bankers, but bold aggressive players. Congratulations if they are successful, but what are these assets, and how are they valued? It is no wonder the Bank of England aggressively expands the money supply, fearing deflation far more than inflation. If in the process the pound weakens, this too is helpful. Many of the bank loans are foreign and it is a lot easier to pay them off with a cheaper pound.

The pair is currently trading at 1.6560 well below today's high of 1.6795.

This week's trade , the lack of follow through above 1.68, suggests the bulls' party is over. For the past two days the open interest in the futures market has gone up almost 5000 contracts, so we attracting some new players. Specs had been big on the short side of the pound but many were blown out on the recent rally. Perhaps some bears are reestablishing their shorts. We would like to join them but are not quite sure where to enter. A long euro short pound also looks appealing.