European Union and IMF Propose a Relief Fund

May 10, 2010 1:59 PM ETFXB, FXC, FXE, FXF, FXY, UDN
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Currencies, Commodities

Contributor Since 2009

Ralph Shell began his career as a grain trader for a large international grain trading firm. This involved negotiation of export contracts and moving grain and soy beans from the US to the export markets of the world. For a period, he also handled the companies hedging and trading activity in the pit of the Kansas City Board of Trade. After a short stint as a commodity analyst with Merrill Lynch in Chicago Shell began a career as analyst and trader on the floor of the Chicago Board of Trade. After trading on the floor for almost 20 years. the career continued as a broker trader away from the harsh Chicago climate. Commodity trading continued in the grains and other commodities, but the focus in recent years had been on the Forex markets.

With the contagion now threatening to engulf the world, the IMF and the euro bankers developed a grand plan to defend markets from the pesky speculators.  Equities this morning, quickly recovered with gains of 2 to 5% common.  Did a few of the speculators have to cover some shorts this morning?

Recovery was not confined to stocks as commodities and currencies joined the party.  There was fear last week that the euro inter bank market was beginning to lock up, and the issuance of corporate bonds contracted dramatically.  Bloomberg reported that corporate bond debt was down to $9.4B, the smallest of the year and down from $47.9B two weeks ago.

The fear of a lock up in the capital markets combined with feared unbalanced demand for currencies caused the US to reinstate credit swap lines for the balance of 2010.  These swaps made available to the Euro Bank, as well as the Swiss National Bank, the Bank of England, and the Bank of Canada, will allow these central bankers to 'spot the board' when pricing currency trades, rather than disturbing the market with big interbank trades.  Accounting adjustments to account for differences in the currency rates will be worked out later.

The combined fire power of the the IMF and the EU has sent the shorts running for cover today but what has really been resolved?  In an article by Robert Samuelson today in Newsweek entitled The Welfare State's Death Spiral, he says:

"What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.

The strength in the euro today is not surprise, since the speculator, despite a reduction of the OI in the futures by 29,645 contracts on Friday, was loaded with new shorts.  The market gaped higher to 1.3092, and is currently at 1.2784 having returned the fill the gap.  It would not be surprising to see a rally from this level.

The neighboring pound seems to be the beneficiary of better prospects in the area despite an election that has left that country without a leader.  True to form, Klegg is trying to prolong his time in the spotlight, leaving the country, and David Cameron dangling in the wind.  Gordon Brown will no longer remain a squatter in 10 Downing Street, having just recently resigned as leader of the Labour Party.  Considering the political uncertainty, the pound does act fairly well.  Considering the big short spec interest, would the resolution of leadership give us a rally in the pound?

Disclosure: no positions

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