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USD Pressure Continues Versus Pound and the Euro

Jan. 31, 2011 2:38 PM ETFXB, FXC, FXE, FXF, FXY, UDN
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Ralph Shell's Blog
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Conclusion of the bankers meeting in Davos brought congratulatory assessments from the Euro bankers, for their success in dealing with the euro debt crises.  French and German spokesman alluded to the deft actions that has instilled market confidence in the single currency, and they pledged to always be there to support the euro.  Overlooked perhaps, by the publicity and glitter from the Davos meetings, may be the lower quality debt that was stuffed into the portfolio's of Central Banks and their nominees.

Popular as these solutions to the euro debt problems have been to bankers and the trading community, it remains to be seen how voters will react.  In Ireland, where the business contraction has been severe, and austerity imposed by the Euro Community in return for bail out funds, has caused hardship, the Irish Central Bank today revised the GDP down to a positive 1% for 2011.  Forthcoming shortly is an election in Ireland.  How much chaos would rejection of the current leadership cause?   If new leaders reject the previous governments guarantee of the banks loans, this decision would resound through both Britain and Europe.

In March there will be elections in Saxony-Anhalt, Baden-Wurttemberg, and Rhineland-Palatine.   The German voters have been told by Finance Minister Schaeuble that it is  Germany's best interest to bail out the slackers in the periphery.  This results in more work because of greater export demand, in part caused by a weaker euro.  It remains to be seen if industrious German workers will support the early retirement of the Greek bureaucrats, and the bad bets made by the Irish Bankers.  This reasoning seems more than a little obtuse.

This morning the euro also got a boost from the European CPI Flash Estimate.  On a y/y basis this was up 2.4%, as estimated but above the target of 2.%.  The response from the Bankers was concern that a rate increase might happen some time in 2011.  Really?  European unemployment will be report tomorrow, and is expected to be 10.1%.  Last week Spanish unemployment was reported at a record 20.33%.  What may be good for the bankers may not be such a hot deal for the workers.

This morning the US Core PCE Price Index of consumer goods was reported unchanged at 0.0%, however this index excludes food and energy.  The Canadian Raw Material Price Index also reported today, showed an monthly increase of 4.2%.   Real US price increases are probably closer to the Canadian numbers.

The Friday markets may have resulted in some liquidation of currency positions, as traders were fearful of the chaos in Egypt.  Markets seem to have made a recovery today as the political situation has not deteriorated further.  The Suez Canal remains open, but the West Texas and Brent crude markets have come racing back.  Dollar weakness may be part of the story, but there has to more working here.

The latest COT report showed the USD is a very popular short.  Speculators are long something else and short the USD in the CME futures market by 214,727 contracts of futures and delta adjusted options.  The commodity currencies are still very popular with the spec, but the new spec money is flowing into the long side of euro, pound, and the yen.  As has often been noted, commodities are a zero sum game.  Markets go up when the spec puts his long position on and it goes down when he takes it off.  At the moment it looks like the spec money is active on the buy side.  Markets run to far, and they can stay over bought or over sold way too long.  The market feels like we are now getting too long in some of these currencies but we are inclined to be patient and wait for a selling opportunity.  Should the pound hold the 1.60 handle, there may be some further strength from a short squeeze perhaps testing the 1.62 area.  It will probably take more than one member of the BOE's policy committee talking about a rate hike to stay in the 1.62 area, so that might be a rally to be sold.

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