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Euro's Inability to Continue the Rally Makes for Caution

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

Although we did have a German consumer climate report that was a little negative this morning, the early week fundamental news is light.  A Chinese opinion expressed in the Chinese Financial News gave the yen and the Euro a boost, when they suggested it would be wise to increase the amount of yen and Euro's that would be held as a currency reserve.

There was speculation in the US financial press, today, about how and when the Fed would start tightening the money supply.  This talk may have boosted the dollar this morning, but with the unemployment in the 10% area , this is probably only wishful thinking by fiscal conservatives.

The Treasury has announced that they intend to auction of 600B of 10 and 30 year notes and bonds next year, a 40 % increase from 2009.  This means the average debt issued next year would go from 49 to 72 months, and would probably make the yield curve steeper.  Ten year notes are now about 3.5%, and perhaps a higher yield would make these issues more attractive to foreign investors.  This would be a factor that helps the dollar, but at what point will the higher rates squeeze out the private sector debt needs?

The Euro is currently on a small break.

The market did again make a new high in the Asian session after the Chinese report, but failed to carry on.  In our trading room this morning we suggested selling the Euro above 1.5020.  The market did again make a new high but failed to carry on.  The inability of a market to work higher made us feel that a sell off was a good possibility.  The early surge in the US equities market failed, probably another reason for the weaker Euro, now trading in the 1.4960 area.   If not already short, look to sell the pair in the 1.4985 area risking 100 points.  A target in the 1.4800 area is our current goal.