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Week's Event Fail to Provide Guidance to Forex Markets

May 16, 2011 3:29 PM ET
Ralph Shell profile picture
Ralph Shell's Blog
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The accusations of illicit behavior and subsequent arrest of IMF President Strauss-Kahn in New York have bankers wondering if there is a managerial void at the IMF.  Founded in 1944, at Bretton Woods, New Hampshire, the IMF was created to provide guidelines for central banks, and to provide assistance to those countries unable to cope with their commitments. 

Strauss-Kahn"s troubles may not be exclusive to the new allegation, as other  ladies claiming sexual abuse are coming forward.  The latest call him "a rutting chimpanzee," according to an article in the guardian.co.uk.  SK's presence was also forceful among the finance ministers, who were often reluctant to give their funds to bail out weaker Euro members.   With another round of donations on the immediate agenda for Greece, and finalization of the Portuguese agreement pending, the IMF is in need of a new leader.

There had been a scheduled meeting between S-K and Germany's Merkel, were resistance is mounting against further bail outs.  It was reported in Der Spiegle over the weekend:

"After three bailout plans since the euro first wobbled -- and hundreds of billions of euros in loans and support for Greece, Ireland and Portugal --Merkel's opponents fear that Berlin will become the paymaster for an increasingly hopeless euro zone.

The threat is real for Merkel. A total of 19 members of parliament from the chancellor's coalition -- which consists of the conservative Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU) and
the business-friendly Free Democratic Party (FDP) -- have supposedly said they are no longer prepared to support Merkel's plans to save the euro. But the ruling coalition has only a 20-seat lead over the combined caucuses of Social
Democrats, Greens and Left Party members. If more politicians from the CDU, CSU or FDP decide to defect, Merkel's domestic majority for measures to save the euro will crumble, and she would be dependent on opposition votes to get legislation passed.

Which, of course, would be dangerous. "Germany is the most important anchor for Europe," says Friedrich Heinemann at the Centre for European Economic Research. "The whole crisis mechanism (for the euro) stands or falls on German
support for EU bailout policies." Complications with the crisis mechanism would send shock waves through financial markets."

Following last week's late sell off the EURUSD traded lower early today, down to 1.4050 before staging a rally back to 1.4240.  The poor US economic news may have caused part of the rally.  The Empire State Manufacturing Index was well below expectations at 11.9, and down from the previous period at 21.7.  TIC Long-Term Purchases were down, only $24B, less than the previous month's $27.2B  The report showed that, while the Japanese continued to buy our Treasuries, the Chinese took a pass for the fifth straight month.

News that the US had exceeded their debt ceiling may have been another negative for the USD.  The Democrats want the debt ceiling increased with no restrictions on spending, while the Republicans are trying to get spending reductions to trim the massive deficit.  Don't look for an early resolution of this problem.

When the market in the EURUSD sold off late Friday, we assumed stale longs with a loss were bailing.  Surprise!  The Friday summary of OI changes tell a different story.  The OI in the euro futures went up 12,033 contracts for that day meaning we had some new shorts, and new longs.  Normally new shorts in a down market is bearish.  Also, the latest COT report showed the specs are still long 79,485 contracts of euro's.  With the market this long we doubt the rally can carry too far, especially considering the euro debt problems.  Should this rally continue, we want to try selling the EURUSD starting at 1.4290.

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