Anticipating Next Week's Currency Drivers

Includes: FXE, UDN, UUP
by: Ralph Shell

Currency markets this Friday continued to digest yesterday's statement from ECB President Draghi, trying to glean how markets will be influenced by such changes. No doubt rumors will continue to swirl until we get confirmation of the ECB intentions, which will probably be finalized at the press conference scheduled in Frankfurt at 2:30 on Thursday August the 2nd.

During most of the euro debt crises, having been with us now for several years, the euro has strengthened in anticipation of the newest pending solution, only to fail once the details of the plan are announced. We don't know if this will again be the pattern, but what we do know is that the euro market was overloaded with bears, vulnerable to a short squeeze.

Initially we felt that the 1.23 handle would contain the rally, but the ease the market has moved through that resistance suggests there is more upside. We don't know if Draghi has any new tricks in his monetary bag, but we do suspect that another .25% rate reduction will occur.

The catalyst for the crises was the run up in the financing rates for the Spanish and the Italians. Italian ten year bonds are now back to a yield of 5.91%, and the Spanish ten year is in the 6.70 vicinity. The bond markets are anticipating the ECB will resume their version of QE, buying bonds in the secondary market, paying for them with shiny new euros.

Looking at the weekly EURUSD chart, the low was 1.2042, followed by an engulfing candle which has carried the market over the 1.2340 highs for the two previous weeks. It now looks like the 1.2300 to 1.2340 is the new support level.

All the right people are showing their solidarity and devotion to the future of the euro. Merkel and Hollande joined in a verbal defense of the euro today. Longer term it will take more than words to fix the future of the eurozone when economic growth is slow to non existent, debt excessive, and public sectors too enlarged and intrusive to foster private sector growth.

Today we received the US Advance GDP estimate. This came in at a positive 1.5%, down from the previous quarters 1.9% but slightly better than anticipated.

On Monday we get a glimpse of the austerity results on the Spanish economy. It is anticipated second quarter flash GDP on a Q/Q basis will be a negative 0.4%, contracting for the third quarter in a row. With Spanish unemployment now 24.6%, a bigger drop would not be a surprise. Remember three years of Greek austerity has reduced that economy by over 20%.

Unemployment numbers will be forthcoming next week. Tuesday we get the European unemployment rate, forecast to increase to 11.2% from the current 11.1%. On Friday the US unemployment rate will be released as will the always interesting Non-Farm Payroll Report. US unemployment is supposed to remain unchanged, at 8.2%. Estimates for the NFP report show the creation of 101K jobs, far less than the amount needed to reduce the unemployment rate in the US.

With Draghi apparently about to expand the portfolio of the ECB, and the consequent increase in the euro supply, will Bernanke not feel the pressure to follow? The economic news in the US gives Bernanke the cover to take such action now, but does he not open the Fed to later criticism? The US drought is reducing the crop size in the US, prices have risen at the wholesale level, and ultimately they are going to be passed along.

In addition to a plethora of economic numbers next week, we also commence the month of August. Can we anticipate some late summer surprises this year?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.