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Has The Euro Rally Attracted More Sellers?

|Includes: CurrencyShares Euro Trust ETF (FXE), UUP

The rally in the EURUSD, long anticipated and welcomed by many, lacks vigor. In the days of trading on an exchange floor where I spent many years, short covering rallies were frantic, noisy affairs as the trapped shorts scrambled to get out.

This rally is different. On-line trading is quiet, a solitary affair, much calmer than being in the middle of the floor where a bunch of screaming brokers are trying to cover shorts for themselves and their customers. Does this mean the quiet solitude of the trader and the quote screen, result in markets less exposed to the emotion of the moment?

There is another anomaly in this rally. We know from the last COT report shorts in the CME futures had a record position, 187,876 contracts of futures and delta adjusted options, up from the previous week's record. Others in the trade are quite aware of this big short position, and have been attributing the rally to short covering.

There is a problem with this theory. The open interest in the futures market, until today, had not been going down. There was a small 5.1K contract reduction down to 310K contracts total, but until today the open interest had still been climbing. This means the bears who were in the market at the low on Jan 16th are still short, and they have been joined by a few new players. Perhaps the composition of the trade in the cash markets is different, we don't know, but there has been no short covering rally to date, in the euro.

There are some meaningful reports coming later this week. At 4:00am tomorrow we get the German Ifo Business Climate Report, followed later in the day by Pending home sales in the US, and then the press conference announcing the results of the Fed's two days of meetings. Obviously any big deviations from average guesses have the capability of jolting the markets.

The strength of the US economy has been a surprise to many. Thursday US numbers on m/m Core Durable Goods Orders, expected up 1%, Unemployment Claims, estimated to be 371K, and New Home Sales, estimated 322K will all be meaningful, but the most important number should be the q/q Advance GDP on Friday.

The average guess for the GDP is a surprising 3.1%, up from the previous quarter's 1.8%. Some of the pundits think this number reflects, in part, some inventory building, which will hurt next quarters performance, therefor of less importance.

So the US we has the possibility of some positive numbers. In Europe, we have an assemblage of politicians, finance ministers, bankers, economists, and well connected business leaders meeting in Davos Switzerland. Considering the current concerns expressed by the IMF and the World Bank, will there not be a lot of concern and angst about the future of the euro and the European economy. And, is it possible such a large group can offer some meaningful solutions to what appears to be an increasingly dysfunctional group, drowning in debt?

It is beginning to look to me like the euro bulls have had a chance to rally the EURUSD, and have failed to turn in a very convincing performance. We are inclined to watch the data, and the news and pick spots above the 1.30 handle to try the short side of this pair.
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Has the Euro Rally Attracted More Sellers?

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