Will this week's euphoria from the European ministers settlement of debt related issues carry over and produce gains next week? The boost this settlement has given to the equities market has been noteworthy. Forcing the private sector banks to take a "voluntary" 50% write down, and then not calling this a default, has saved the day for many of the European bankers. The losing bankers will then be reimbursed by a bailout, either from their respective governments or the expanded EFSF.
Banking stocks and equities in general have embraced this concept. Bailouts that cover business related losses with taxpayer money is always a good thing-for those getting the government largess. The strong finish to the equity markets in October, often a down month, has some experts forecasting the strong equity markets to continue. Time will tell.
The agreement in Brussels resulted in a strong upside move in the euro yesterday, a high close to 1.4250. The pair has relaxed today, trading at 1.4160, but still holding yesterday's gains. In our article "A Brief Review of the Week's Currency Trade" published Oct 21, 2011 we said:
"For the euro bears who are loaded up short the euro, good news might bring about a short squeeze. This is one situation where there is not safety in numbers."
This was indeed the case. There was a modest reduction in the open interest of the CME futures market yesterday, down over 5,400 contracts, but there are probably more shorts getting beat up, tired of the short euro position.
Yesterday there was a 5,832 increase in the euro put open interest and a 2,640 interest in calls. There are more contracts of euro puts open by 61,016 contracts than there are calls. This shows new bets on the short side of the euro are continuing.
While the market is awarding the europhiles, there are numerous doubters. In an editorial in The Economist, they said:
"Yet in the light of day, the holes in the rescue plan are plain to see. The scheme is confused and unconvincing. Confused, because its financial engineering is too clever by half and vulnerable to unintended consequences. Unconvincing, because too many details are missing and the scheme at its core is not up to the job of safeguarding the euro.
This is the eurozone's third comprehensive package this year. It is unlikely to be the last ... words are cheap ... but trust is no where to be found."
There are many more naysayers, observing the recent summit agreement, but it is hard to argue with the market. The weekly chart displays a strong bullish candle, for the fourth week in a row. It looks like there is strong resistance in the 1.42 to 1.44 area. We will see what the week end brings but I suspect the bull run is about to stall.
Trading at month-end can always be a venture, as large traders often make adjustment in their positions. October is ending as a good month for commodity currencies. The soaring equity markets have taken the Canadian dollar back to a slight premium to the USD, rallying after trading earlier in the month as 1.06570. We had favored selling the USD/CAD in the 1.02 area earlier this week but the market ran away without our participation. With the Canadian dollar now trading at a slight premium to the greenback, is this enough?
So often the C$ trades with the oil market, which has been quite firm. Big traders have been increasing their bullish oil bets. With the end of the month coming, what are the chances the hedge funds are going to buy more oil to enhance the value of their position? I am dubious that the global economic recovery will be strong enough to stimulate oil demand but you do not want to fight the bullish big money flow. This might give us a little more rally in the loonie, and a selling opportunity in the .9850 range. We will carefully monitor this next week.
Click to enlarge charts
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.