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Speculators Flock to the Dollar

The shift on the attitude and USD positions during the last several months has been amazing.  There were several weeks when the speculators futures positions, short the dollar and long something else were in the 300,000 contract range.  In the latest report, data through February 2nd, the speculators are now long 44,858 contracts.  Speculators do remain long the commodity currencies but they are liquidating those positions in an orderly manner and the long dollar positions now exceeds those short positions in the commodity currencies.  The speculators long dollar index positions has grown to over 46,000 contracts while the speculative short pound, (long dollar) open interest is almost 44,000 contracts and the euro position is short 40,500 contracts.

To what extent has the flow of funds from a short to a long dollar position been self fulfilling?  Has the market gone down because of the selling or have changing market conditions produced the selling?  In the case of the pound it looks like the aggressive selling by the large spec may have been the market mover.  During last weeks plunge to new lows, the open interest in the pound was sharply higher....implying new shorts.  In the pound the large spec is now short almost 50% of the total market, while in the euro, the spec is short only 29.7%.  Since most of the speculative position increase  in the Euro happened after the break, this would imply that the specs were following market action and the market was not responding to their activity alone, to move the market lower.

Friday's market action in equities was not reassuring to the recovery bulls, and the Monday market continues to be sloppy.  There appears to be some skepticism related to the unemployment numbers from last week.  Last year they under counted the number of people who lost jobs by almost 600,000, so the reported drop to 9.7% in the unemployment rate by the same people who were so far off the mark last year is questionable.

The expansion of the US money supply with the Fed's purchase of $1.25T will wrap it up at the end of March.  Some have been worried that rates would work higher after the program stops.  Not to worry says the Obama administration.  They are now going to auction fewer notes and bonds, so a smaller supply of paper will let rates come down and the yield curve will flatten.  Don't try to follow the logic on this one.  It sounds like a Yogi Berra commercial.  With a record $1.6T deficit we are going to borrow less?  Well maybe next week, but this week you can bid on $81B in 3, 10 and 30 year obligations.

Concern for the sovereign debt issues of some of the weaker countries in the Eurozone abated over the weekend.  Though there is nothing on the horizon,  maybe people are tired of talking about the same issues.  With the daily 14 day RSI well under the oversold threshold at 30, it seems like a relief rally might be in order.  There does not appear to be much on the calendar until later in the week.  It interesting to note that the open interest went down over 13,000 contracts on Friday, so there are some new longs that might  bail out if the markets gets a little upside momentum for a change.  Try the long side at 1.3655 and risk 100 pips on the trade with a target of 1.3840.

Disclosure: no positions