Ralph Shell's  Instablog

Concern that the pair would break out during a holiday shortened trading week proved well founded.  The Euro moved with ease, through the old resistance level above the 1.50 handle, and the pair shows little signs of retreating.  In the November 4th meeting Fed meeting, officials acknowledged that the interest rate would remain near zero for a lengthy period of time.   Some negative side effects, such as a weak dollar, are bound to arise from the short term free money policy, but it is pretty obvious that the unemployed have far more votes than the holders of dollars.  Clearly next years mid term elections are a concern of the administration.  These comments from the Fed give assurance to the speculators that the dollar carry trade is a go, and the repayment of loans with cheaper dollars will be a bonus.

This week the US Treasury has been raising money with another record breaking auction, 118B in total.  Today 32B of 7 year notes  is being sold.  The current budgetary deficit, plus the refinancing of maturing debt issues has put the government in a position where they have practically an insatiable demand for more money.   With the Fed's callous disregard for the future of the dollar, how much longer will foreign investors be willing to invest in our notes and bonds?  Today's yield on the 7 year notes is forecast to be about 2.83%, hardly enough to compensate for a 10% yearly devaluation of the dollar.  There is a lot at stake here, and it is hard to know how this is going to play out.  Higher rates will dramatically increase the interest bill needed to finance the trillions of debt, derail the economic recovery, and cause unforeseen chaos. 

While the Fed's deliberations dominated the news cycle, we did have some fundamental reports.  US durable goods orders came in a little on the short side of expectations.  Personal spending was 0.1% better than expected, and the initial unemployment claims were also better than expected, showing the rate of terminations slowed down.  A little later in the morning, new home sales showed an increase as buyers took advantage of the government tax credit that had been scheduled to expire at the end of November.  The University of Michigan consumer sentiment came in at 67.4, ahead of the 67.1 forecast and the 66.0 in the previous period.

These reports are interesting but not the reason for the solid advance of the Euro.

Clearly the pair has broken to the upside with the resistance around the old high at 1.5055, and again at 1.50.  Perhaps there will be some central bank selling to contain the rally, but it looks like the bear's defense of their positions is weak.

Despite numerous fundamental economic reports, this pair continues to trade in an orderly fashion within the defined trading range, of 1.48 to 1.50.  The preliminary US GDP report came in at a positive 2.8% one tick less that the anticipated 2.9, but less than the initial high ball report of 3.5%.  The US Conference Board Survey of consumer confidence showed increasing optimism, 49.5% versus anticipated 47.6 and the previous period's 48.7, but did remain at historic lows.

Optimism was not confined to the US.  A respected German business survey rated the business conditions at 93.9 versus 92.6, and 91.3 in the previous period.  These rating were a 13 month high.  Offsetting this report, however, were renewed concerns of difficulties in the banking industries.
A regional German bank was reported to have too many "toxic" assets and would either fail or be reorganized.  There were stories about UBS difficulties, and Chinese regulators were concerned that some of their banks were getting to loose with loans. In England, Lloyds was trying to raise billions to stay solvent without help from the Bank of England.  So banking difficulties are neither new or isolated to a few countries.

The US equities market failed to follow through today after making new highs yesterday.  There were numerous concerns as outlined by Market Watch: "Data on home prices, economic expansion and confidence factor in as stocks slide, led by the energy and financial sectors as crude-oil futures fall and worries about the financial sector rise."   For months stronger equities has meant a weaker dollar but recently there has been a tendency to decouple.

The euro is currently trading at 1.4950, after having once more fail in an attempt to conquer the 1.50 level.

We have analyzed and digested reports, watched the US stocks make new highs, heard rumors about banking difficulties, and listened reverently as the Central Bankers have spoken, but we are still stuck in neutral.  Perhaps this week, with the US Thanksgiving holiday depleting the ranks of traders,  the market will break out of the existing range.  In recent excursions above the 1.50 level there appears to be more selling than buying.  Will this trend continue?

Was this the week we finally were able to get a glimpse of the real pound?  The failure to follow through to the up, after printing the 1.6875 trade on the 16th, was a warning.  If that is the best there is, then it is time to get out.  There did not appear to be much in the way of daily news to cite as the reason for today's wash out.  The rehash of complaints about the Brit's economy, the increased money supply, the health of the big banks, and the suspicion that home values may not hold their value, all seemed to weigh on the market's physic. The down momentum reinforced the bulls angst as we went crashing through the previous support levels of 1.66, and 1.6510.

Richard Lambert, a former Bank of England MPC member, and the director general of the Confederation of British Industry, warned yesterday that the government had to make aggressive changes to reduce the current deficit, reported yesterday as a record 13.9B sterling for the latest month.  Among his suggestions; reduce spending and do not increase taxes, and get more productivity from employees in the public sector.   Since this seems logical to every one but politicians, their inability to make decisive changes may be reasons for long term negativity toward the pound.

We are currently trading a little under 1.65.

The decent has been rapid and the oscillators are now deeply oversold so a price bounce should be expected, perhaps to the 1.66 area.  It looks like the price action is breaking down, suggesting a possible sell off to the 1.63 area is possible.   We have also been closely monitoring the EUR/GBP pair

 

When the pair sold off under .8850 this past week, we suggested trying the long side of this market.  Should the pound continue south next week, a rally out to the .9150/.92 level looks possible.  Initiate or add to positions on a slide back to the .8950 area with a stop in the vicinity of .88.

The debate continues over the direction the Euro will take when it finally breaks out of the current pennant formation.  After edging close to the 1.50 level in the European session, the pair has now sold off to the 1.4860 area.  There were no significant European economic reports overnight, but we did have the US initial jobless claims report which came in about unchanged, and as expected. 

Later, we had the index of leading indicators and which was reported by Market Watch:  "The index of leading economic indicators rose for the seventh consecutive month in October, showing that a recovery is "unfolding" in the U.S. economy, the private Conference Board said Thursday.

The leading indicators rose 0.3% in October after a 1% gain in September, the private research group said. Six of the 10 indicators were positive. " 

Despite this positive report, US equities markets followed the lead of the lower Asian and the European markets with the S & P 500 now trading under 1100.  Commodities, one of the funds managers current favorites themes, are lower today with oil down close to $3 per barrel, and even gold is a little lower for a change.  The so called commodity currencies, the AUD, the NZD and the CAD are all under pressure today.  Weaker stocks is probably the reason for the dollar's modest recovery today, but there are some astute observers beginning to wonder if the short dollar trade is too popular.

We remain stuck in the 1.4860 area.

How often do we see the 14 day RSI setting on 50?  The bullish and bearish vote on the Euro is so close we need a recount.

The 4H chart fails to provide much help either.

The RSI is quite neutral in this chart, coming in at 45.  The recent 1.48 to 1.50 range continues, and we have the feeling that most traders are positioned for a breakout to the upside.  On previous visits above the 1.50 level, the market acted like there was some large stealth selling causing the market to retreat.  We chose to be observers, awaiting developments.

Once again the Euro is attempting to muster the strength to attack the 1.50 handle.  An early morning report of the Euro trade balance, which showed a -5.4B Euro deficit, compared to an expected +0.6B, and a positive 0.6B in the previous period caused the market to pause.  Perhaps the strong Euro which seemed to have hurt the trade balance may also be hindering Euro recovery progress.  With pairs, however, we are trading relative beauty, and the ensuing report of US home permits and building starts gave the dollar bears courage.  The building starts were down 10.6%, the lowest since April, which hurt stocks and was probably one of the causes of the weakened dollar.

A Bank of America survey revealed that fund managers prefer to be over weight in commodities, and 54% are over over weight in emerging markets.  Market Watch reports the survey of European investors was interesting:   "In Europe, meanwhile, regional investors are still wary of their own markets, while a net 22% of global asset allocators view it as the most undervalued global market. European survey respondents made substantial moves out of cyclical stocks and into defensive sectors such as health care and pharmaceuticals over the past month.

Merrill Lynch said currencies was a notable factor within Europe, with a net 49% of the global panel viewing the euro as overvalued and a net 36% viewing the dollar as undervalued."  With such a large percentage of professionals thinking the euro is overvalued versus the dollar, big time selling can be expected above the 1.50 handle.

The euro continues to advance in an orderly fashion, and is now trading at 1.4875.

US equities continue to trade lower today.  Perhaps if we get a late day rally in stocks, this will enable the Euro to again check out the 1.50 level.  It will be interesting to see how the pair trades there, but we are more inclined to be sellers rather than buyer.  It is interesting to note that the open interest at the CME futures market was up more than 8500 contracts yesterday so we have some new votes being cast.

Yesterday while the securities markets were forging ahead to new high ground the Euro faltered, perhaps signaling a decoupling of the tidy relationship between the S&P and the dollar.  For months now, the strong stocks had meant a weaker dollar, as those previously fearful of the financial melt down, moved their money out of safety instruments such as US Treasuries, back into equities.   Again the Euro balked, as it worked it's way back to the 1.50 handle.  It now looks like we are confined to a trading range between 1.47 and 1.5050.

This morning it was announced that the Euro trade balance was a +6.8B versus an expected -0.9B, and +2.2B in the previous period. These trade balance numbers dispute the claims of those that the strong Euro is hurting the recovery.  In the US the PPI was 0.3% lass than the expected 0.6% and -0.6% in the year ago period.  Later, the US  factory out put numbers came in worse than expected at 0.1% versus and anticipated 0.4%, perhaps confirming comments by the IMF managing director that the recovery may be sluggish.

We next had a Treasury International Report, or TIC report which measure capital money flows.  Surprisingly, this report showed a larger than expected inflow of investments into the US, 40.7B versus 27.3B expected and 34.2B in the previous period.  Total inflow was 133.5B during September, the reporting month.  With all the conversation about the dollar being the lender for the carry trade, these numbers dispute that theory as inflows of capital far exceed the outflows.  We do know that the huge Treasury auctions of notes and bonds has attracted large off shore participation, so a combination of a discounted dollar and attractive rates may have stimulated the capital inflow.

Despite equities retreating only minor amounts so far, the Euro acts like it wants to test the bottom part of the range.

We have felt that the 1.50 level has been something of a lid on the market, and markets that cannot go up often go down.  Perhaps the pair has gotten a little ahead of itself, as the RSI on the 4H chart has plunged, and the MACD has headed south.  Try sell a minor recovery to the 1.4850 level or so and see if we can trade under 1.48.