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Euro and USD News and Views

Currency speculators have long been flocking to the USD, perceived to be one of the best keepers of value during trouble times.  Recent economic data has not been supportive of those who see the US as one the leader's of a global economic recovery.  This data may not be sufficiently weak to demote the dollar's safe haven status, but there is reason for caution.

Yesterday we were given the bleak news about the US housing market.  The number of houses under construction, 475,000, was a record low dropping 17% to the lowest level since the 1990-91 recession.  The Federal Government's housing credit has expired, and builders know how important this has been to their sales.

This government program was designed to again inflate the housing market.  Like military men getting ready to fight the last war, our government was aware, the deflation of home values had reduced the net worth of home owners and banks by trillions, and they foolishly tried to fix this by turning the housing market around.  The problem with the housing market is a surplus of inventory, caused by lax credit standards, overbuilding and inflated prices during the last boom.  Some estimate the oversupply of the 3+ bedroom housing units, many the junior mansion types in the suburbs may be as many as 40 million units, and will take a decade to liquidate, considering the countries changing demography.  The Government tax credits for first time buyers gave us a sugar high, but the creation of more housing units exacerbates the inventory problem.

Shortly after President Obama and Joe Biden announced their travel plans for "RECOVERY SUMMER,"  the weekly unemployment number was announced.  New claims at 472K, up from the estimated 452K and 460K in the previous week, were a disappointment.  Yes, new employment is a laggard in the business cycle but skeptics  are cynical about the term recovery summer.  Small business, the catalyst for new jobs, is fearful of an administration that appears to be hostile to business.  Slower economic growth in 2H looks probable.

The euro got a boost this morning as the Spanish were able to sell €3.5B of 10 and 30 year bonds.  Never mind the 10 year yield was 4.84% and the 30 year was 5.91%, they got their money, and the euro bankers were relieved.  How long, however, can a socialist country with minimal growth, 20% unemployment and crippling labor rules continue to finance their debt at 5%?  More likely today's rally in the euro is merely a continuation of recent short covering, rather than celebration following the Spanish success.

Currency values are determined by their value in relation to something else.  When trading pairs, it is one versus another currency.  Confronted with two poor choices, some specs make decisions according to which currencies troubles are immediate, and which one's problems are deferred, even if only a little.  Other specs give up trying to pick the least ugly and find refuge in gold, as an alternative to a currency.  This may be the case today with gold trading  1250.  

Today we are among the group having difficulty discerning the least ugly.  We has felt the euro was due for a rally, and we got one.  Now, as we approach the 1.2450/.2500 level we plan to retest the short side of the market.

Disclosure: None