The market's initial reaction from last week's European Summit was a victory for the debit nations as they stood up to Merkel and her diminishing band of creditors. Well perhaps victory is an overreach, implying a decisive change which is not the case. Remember, these bail out mechanisms are largely unfunded, a promise of money forthcoming at a later date, once approved by the Germans. The Germans may have given the Italians a victory on the football field, but there are more battles looming in the future.
Today we will get a clue how effective the effort has been to reduce interest rates for the borrowers. France and Spain both intend to auction 10 year bonds. Later in the day the ECB will hold a conference where it is expected they will reduce the central bank rate .25% to .75%.
These reports would be enough to jolt the market but the data flow continues the balance of the week, primarily from the US. In addition to the Thursday US unemployment numbers which have been creeping higher, we also get the ADP Non-Farm Employment Change, and the ISM Non-Manufacturing PMI. These reports will be followed Friday by the US Unemployment Rate and the unpredictable Non-Farm Payroll Report.
Recently there has been a revival of economic pessimism in the US, however, the late week projections do not reflect this. An increase in 92K on the NFP and 8.2% unemployment does not imply we are on the cusp of a consumer led recovery, but they are not terrible. The USD market action might prove bearish should the number be poor. There would be expectations Helicopter Ben Bernanke, with co-pilot Yellen would be starting the engine to disperse the newly printed money.
Is there a trade here? Well, as our latest COT Currency analysis reveals, it is a very popular position to be short the euro. Should you get a bearish euro number on Thursday, selling the euro lower seems very risky in front of the pending US reports. Further, I am very apprehensive about politically sensitive labor numbers coming from Washington prior to the pending election.
The euro bears are having a party, as we are currently flirting with the 1.25 handle. Should we get some bear news and a further break, it is tempting to take a small contrarian buy in the euro, but what do you sell?
The USD is a very popular long in the futures markets. Perhaps this is the sell. We calculated the total dollar longs in our report was a massive 312.5K contracts. Still, In the same report we noted the specs in the Australian dollar, who had been big shorts four weeks ago, had covered most of those shorts. During this time frame the A$ ran from .97 up to the 1.03 handle.
The EURAUD chart is also interesting. During the period from May 18, 2012 until today, the EUR sold off from 1.3029 to 1.2170. The pair is revisiting the area where it traded earlier this year in February. The 14 day RSI is currently oversold at around 25. We are inclined to take a minor long position in the EUR versus the AUD around current levels.
The economy of Australia has been vibrant over the past several years, supplying commodities to China and the booming Far East markets. However, there are some who think the Chinese boom is over, perhaps due for a hard landing, as their export markets contract.
This will hurt the Australians, and they are imposing self inflicted economic wounds with their new taxes. Effective July 1 Australia has imposed a mineral resources rent tax (MRRT) and a new carbon tax. The MRRT will impose a 30% tax on iron ore and coal profits exceeding A$ 50M per year. This is on top of the existing taxes and royalties already paid. In 2010/11 the industry paid A$20B.
The Australians have also imposed a A$23/t carbon tax. When running for election in 2010, PM Julia Gillard vowed she would never sign a carbon tax law. She did and the new tax is steep. The Minerals Council of Australia estimates the carbon tax will generate A$77.3M per week. This compares to the European carbon scheme which generates A$23M per week for the entire 30 countries.
Granted, the impact on the economy and the currency is longer term, but meanwhile solicitors are thriving and politicians are trying to better their situation once the unpopular PM Gillard is booted from office.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.