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Fundamentals Foil Euro's First 1.50 Assault

|Includes: CurrencyShares British Pound Sterling Trust ETF (FXB), FXC, FXE, FXF, FXY, UDN

The bull's assault of the psychological 1.50 barrier came within a freckle of achieving that goal.  Retreat from this level appeared to correspond with some negative fundamental news.  The Germain PPI came in at -0.5% less than the 0.00 anticipated and far less than the +0.5% in the previous period.  Later the US PPI and CPI numbers came in at less than expected, and US housing starts likewise were shy of the experts projections.   With over 18 million vacant housing units in this country, it is doubtful  there is a big demand for the new units, but builders like to build.

The negative reports may have injected a bit of realism into the equity markets.  There has been some positive earnings reports, many from companies that contracted their operations and or controlled expenses.  The reports from both sides of the Atlantic confirmed that the economy is not as strong as the stock market portrays. The hoards of cash that has emerged from safe keeping, after it was confirmed the world was not ending, is being redeployed to higher yielding assets, and the creation of new bubbles.  This morning Brazilian President Lula da Silva, imposed a new tax on the inflow of investment funds into Brazil.  The Brazilian real and the Bovespa Stock Index have been among the best performers of the year.

In the US, it looks like there is a massive flow of funds into the Commodity Index funds.  Despite indifferent fundamentals, crude oil had traded higher eight consecutive days as the money pours in.  Normally commodity prices are dynamic, responding to changed prices by demand adjustments, sometimes immediately, and sometimes over a period of time.  Not so when the funds accumulate, as the ownership is locked up by money managers and hedge fund operators over a period of time.  It does not matter if user demand is going down, because the inflow of cash overwhelms the markets.

It looks like the failure to take the Euro above the 1.50, is discouraging some bulls.  The pair is currently trading at 1.4890.

 

We sold the Euro yesterday, a little too soon at 1.4940.  The market did give us some heat this morning but the real psychological test came from the comments by pundits who are almost unanimously bullish on the Euro.  They claim they want to buy more on a break, such as we currently have to the 4H trend line, but we wonder how much new money is there to buy this story.  The 4H MACD is turning down, and the small spec was long 32% of the total open interest in the futures market.  We will keep our stop well above the market to avoid random volatility.  New converts to the bear dollar story may be hard to find.