As the holiday season approaches trading in the forex market should slow but will the size of the moves decrease? Yesterday at the CME, with the expiration of the December contract, there was a sharp reduction in the open interest. In the euro, the largest futures contract, the OI dropped 57,000 contracts to only 150k. Daily volume remained high, 338K but a big reduction from +500k contracts on recent days. The OI in the pound is down to a mere 71K contracts. It is certainly possible with the smaller participation we can have bigger moves should events prompt a change in market attitudes.
Earlier this week the USD swooned after the administration reached a compromise which extended the Bush era tax rates for all, and extended the unemployment benefits for another year. Fears this would expand the ballooning deficit prompted chatter about a down grade of US debt, and was also a factor in the higher US rates. Another concern is the $1T US government's continuing resolution, prepared by a dysfunctional US Congress which contains massive gifts and treats for the friends and contributors to the congressmen. Like recent spending bills in Washington, few are permitted to read the bill prior to a vote.
Frightening as these spending plans are to US Treasury investors, there is a new congress coming in January, and they claim they will reduce spending. This is an age old Washington fable and we will see how long the new group in Washington can take the ridicule they will encounter from the toadies at the New York Times, the Washington Post and major TV networks, who all front for the big spenders in the current administration.
Left out of the new compromise tax bill is the availability of Build America Bonds. These federally subsidized bonds will no longer be available to the state governments who had borrowed massive amounts of money to countervail their budget shortfalls during the past two years. For the big spending states like California and Illinois, this has saved jobs and is postponing their day of financial atonement.
The California budget crises is looming and it will be bigger than Greece or Ireland. There were some interesting observations in the National Review online, by Victor David Hanson:
"The last three weeks I have traveled about, taking the pulse of the more forgotten areas of central California. I wanted to witness, even if superficially, what is happening to a state that has the highest sales and income taxes, the most lavish entitlements, the near-worst public schools (based on federal test scores), and the largest number of illegal aliens in the nation, along with an overregulated private sector, a stagnant and shrinking manufacturing base, and an elite environmental ethos that restricts commerce and productivity without curbing consumption.
Here are some general observations about what I saw (other than that the rural roads of California are fast turning into rubble, poorly maintained and reverting to what I remember seeing long ago in the rural South).
Many of the rural trailer-house compounds I saw appear to the naked eye no different from what I have seen in the Third World. There is a Caribbean look to the junked cars, electric wires crisscrossing between various outbuildings, plastic tarps substituting for replacement shingles, lean-tos cobbled together as auxiliary housing, pit bulls unleashed, and geese, goats, and chickens roaming around the yards.
How odd — to paraphrase what Critias once said of ancient Sparta — that California is at once both the nation’s most unfree and most free state, the most repressed and the wildest.
Hundreds of thousands sense all that and vote accordingly with their feet, both into and out of California — and the result is a sort of social, cultural, economic, and political time-bomb, whose ticks are getting louder."
California has long been regarded as the leader of trends in the US. With the recently re-elected Governor Moonbeam replacing the Terminator, this is going to be fun to watch. Which will be worse, Greek or California debt? Will the Californians, if austerity measures are tried, riot like the Greeks?
In the EUR/USD trade, the week began with a sharp EUR rally close to 1.35 only to be followed by a Tuesday reversal. Currently the euro finance ministers are meeting in Brussels, and if the advance analysis is correct, the Germans do not appear willing to provide additional funds should the Spanish appear at the bail out window. So far the Spanish debt auctions this week was not well received with €1.732B one year notes yielding 5.485% up from 4.632% in the last auction. Borrowing costs have soared to a ten year high. The issuance of new Spanish debt, though not large during December, will increase in the first quarter of next year.
The euro is now trading a little above the 1.32. If tomorrow, the euro remains around this level, the weekly price action will be a gravestone doji candle, an ominous formation. Perhaps some good news will come from the economic summit in Brussels to negate the trend or bad news from the Washington big spenders, but the chart looks to be lower unless this happens.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.