The big move in the euro happened last week, and this week's trade has been a consolidation, trying to hold above the 1.30 handle. The high for the last two weeks' trade is a twin top at 1.3170. Anticipated support at the 1.30 level was violated briefly, only to come back when rumors emerged Spain will be seeking a bailout next week. This has been the usual trading pattern for the euro. Rumors of action to be approved or taken supports the market until details become known, and then the market retreats.
Today's Spanish rumors -- perhaps acknowledging that the Greek austerity formula has been a recipe for a depression -- seems to allow for gradual reductions in spending, and more time to achieve a reduced debt to GDP ratio. It is rumored part of the bailout terms include a freeze of pension payments, and an increase in the retirement age to 67.
Spain has many problems. The providence of Catalonia, which includes Barcelona, is nearly insolvent. They have threatened to become an autonomous nation unless Madrid gives them bailout money, but the bailout money, so far, is for the banks that need to be recapitalized.
Part of the recent strength in the euro can be attributed to lower rates for Spanish debt. Yesterday, Spain sold €4.8B of 3- and 10-year notes. Rates have dropped since ECB President Mario Draghi promised help would be available if it were requested. Some think neither Spain or Italy will request help as long as rates for 10-year bonds -- currently 5.75%, for Spain, and 4.98% for Italy -- stay around these levels.
Yesterday's analysis of the CME futures trade revealed there has been a sizable reduction in the open interest as the big spec short has been liquidated. Continuing yesterday in the futures market, the OI dropped another 4,875 contracts to only 221K.
The Canadian dollar has emerged as the speculators' favorite long bet to ride the anticipated stimulant money coming from the Fed, the ECB, and possibly China. In the last COT report, the large specs, probably funds, had accumulated a 103K net long, and were a 9 to 1 long in the C$. The OI had climbed to 206K contracts, probably twice what it was three months ago, and almost as big as the euro OI.
As a favorite investment destination because of the expanding energy production and various commodities, the loonie has benefited. The commodity boom is coming with a minor dose of the Dutch disease, causing manufacturers in Ontario to lose the edge they enjoyed when their currency traded at a discount for decades.
For the moment, Canada seems to benefit if the U.S. economy is slow because of the perception QE 3 will help them, and it rallies when Europe moves toward a debt solution. How much longer will all news be bullish for the loonie?
The downtrend in the USDCAD started in early June, close to the 1.04 handle. The sell-off has been severe to a low of .9630 for the USD versus the CAD. This is one of the few weekly periods where the USD is gaining from last week's close. The catalyst was the sharp oil break, but will this continue?
This has been an impressive bull move for the CAD, but bull markets need bull news every week, or they tire and reverse (FXC).
We note the money has been flowing into the pound. The quarterly summary of open futures positions shows the open positions had increased from 118K to 153K. There was an additional increase of 10K contracts yesterday.
Looking at the weekly chart, we have seven consecutive white candles, an unusual pattern. The increasing open interest, combined with the higher markets, tells us there is money flowing into this market. It will be worth exploring further next week. The odds of eight bull weeks in a row is high (FXB).
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