On the 24th of December, the good economic news from the US continued as we approach the end of 2013. The core US durable goods report showed an increase of 1.2%, better than last month's 0.7% and the expected 0.7% increase. The total durable goods number was even more robust, up 3.5%, better than the expected 2.0% and the negative 0.7% last month. The headline numbers are positive, but one of the analysts suggests the number is the product of abnormal seasonal adjustments.
At issue here is the rate of the US recovery. Will future revisions diminish the recently reported gains? There is nothing better for the consumer than a healthy dose of optimism as we come to the end of 2013, but is this merely a mirage from the Washington number creators. According to retailers, average holiday sales are expected to show the first sales decline since 2008, and new mortgage applications are down to a thirteen year low. Continuation of the pace of the US recovery may require blind faith. Rationally it does not calculate.
Something else that does not calculate is the new French quarterly GDP rate. In the latest period the GDP contracted -0.1%, as expected and unchanged from the prior period. The surprise here is not the number, but rather, how long will France continue to allow the destructive German monetary policies to stunt their growth? Actually the docility of the French, Italians and the Spanish, refraining from confronting the German monetary plan, which harms their future, remains a mystery.
Going into the high holiday season markets are most likely subdued as the trading ranks are depleted. However, should some traders decide to make a move, the thinness of the trade can result in exaggerated price action. We pointed out the risk in carrying a trade over the New Year last week. If you live in a mark to market tax jurisdiction the risk is quite high. In the yen, (FXY, AUDJPY) if you have big profits you may be required to pay taxes on money that will never be earned. Specs are short the yen and long the USD.(UUP, USDJP) Perhaps the trend will continue, but this does not rule out a temporary short squeeze.
Looking at the composition of the Australian dollar (FXA, AUDUSD) and the pound from the latest COT reports portrays are two interesting set ups. In the A$, there has recently been a big bear move. To a degree we anticipated this. We are not suggesting the bear market in the Aussie is about to end but we do think the bulk of the move might be over, or at least there is some risk on the bear side.
In the Aussie futures contract, during the three months from expiration of to Sept contract to the end of the Dec contract, the total futures open interest has gone down from 131K contracts to 116K contracts. In this smaller market, the latest COT report showed specs to be short over 70% of the market. Large spec traders are short the A$ by better than a 4 to 1 ratio. For the market to continue lower, there is a need for new sellers. The market may to too overloaded on the short side.
In the pound (FXB, GBPUSD) the set up provides few clues. The only issue may be the large open interest. In the most recent quarter the OI went from 154, to 199, a big increase. The spec trade is long the pound but not by an out of balance number. What happens if the UK sentiment turns negative? This market needs to be monitored closely.
Just a few pairs to watch. Enjoy the holiday season.