Currency markets are resting, after the recent rout of the europhiles. We had eight hard down days in the EURUSD, interrupted by only one day that was unchanged. Seven days in one direction, for any market, is unusual, generally a reason for a reversal day. An eight day run is exceptionally rare, and is followed by a change in direction.
After Friday's hard down in the euro for the 8th out of nine days, and followed by a lower opening and a higher close on Monday, we are due for a rally. The Tuesday rally, so far is feeble, but we do have a Monday Tuesday rally, and a rally 230 points from yesterday's low. Years ago, some veteran traders told me that a higher market, the first two days of a week often resulted in a weekly advance, with only one down day. We will see how this works in currencies.
Late Monday, the euro got a boost after a story that the Italians were trying to interest the Chinese banks in buying more of their debt. The Chinese, with $3T in accumulated currency reserves, are always looking for investments. Since the Italian five year auction went poorly, yields up to 5.6%, the bid to cover ratio only 1.28 on a small €3.9B auction, it looks like the Chinese took a pass on the Italian debt, maybe to buy US.
The US auction was $21B of ten year paper. The yield was a record low 2%, and the bid to cover ratio was a robust 3.03. Indirect bids, often foreign central banks were 48.5% of the total. Even at a 2% yield, someone wants the ten year. Is this a safety or is it a deflation play?
So far the euro seems oblivious to any bear news, and we are trading a little above 1.3730. Contrast this to the trade in the pound. Like the euro the pound had a big sell off from 1.6617 on 08 19, to a low today of 1.5761. As with the euro, the open interest in the pound futures increased on the down market, from about 103K on the high day to 134K yesterday. Unlike the euro, we have a Monday down, albeit with a rally late, followed by a lower low today.
The divergent action had given us a turn around in the EURGBP as that pair has rallied from a low of .8528 to .8681. A further euro rally might take this pair back to the .8760 area.
So what are the problems with the pound? Could it be that the Independent Commission on Banking (ICB), seeking to separate domestic and investment functions at banks by putting a "ring fence" around the domestic banks, is too much regulation? Or perhaps, the Brits, like the French have too many bad loans in the olive zone. And what about PM Cameron's claim that the jobless can no longer get money for nothing. How will the entitlement generation deal with this change? Whatever it is, the pound looks like a short versus either the USD or the euro. Pick your spot and manage your funds.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
