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CashBackForex - Often Imitated, Never Duplicated!
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If the Euro Were a Car, It Would Be Recalled
Submitted by Ralph Shell
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12:00 PM Dec 02 2011
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2726 Views |
0 Comments
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 (3 Votes)
Watching the early week trade in the EURUSD, with the pair stuck at 1.3320, despite ample bear news, it was obvious something was going on. The fix was in. Selling that 1.3320 level was simply a bear trap. Then surprise, on Wednesday there was a coordinated central bank announcement. USD currency swaps for this holiday season would now be available at a cheaper price.
For Fed Chairman Bernanke, and his many banking friends, other central bankers and their many friends, the heads up, was a profitable gift. The intrusion of the central banks into the forex markets had to be leaked.
Buying the pair at the 1.3320 worked out nicely, as that market shot up to 1.3530 the next day. Forex traders outside the US, not restricted by the Dodd-Frank law, had a bonanza if they used the 200/400 to 1 margins allowed on this trade.
So following four down weeks in the EURUSD, we have a feeble recovery. After last weeks low of 1.3212, the modest recovery has taken us up to about 1.3390. Looking at the weekly chart, this past week's action appears to be a relief rally, with the major trend still down. The MACD is negative, and the RSI, at 41 is not oversold.
There is another euro zone summit meeting scheduled on December 9th. Perhaps this will give the euro a boost but I don't want to bet on it. Frau Merkel wants to impose Teutonic rules for the wayward spendthrifts, partners in the single currency venture. Her plan to impose fines, penalties, and forced austerity on those less productive single currency members is just loonie. The result would be a European depression.
The Bank of England's Governor Mervyn King had an interesting comment on the current status of the euro crisis:
"If Germany cannot find an orderly way
of burden sharing with its fellow eurozone members, then it will be done
in a disorderly way. Whichever it is, Germany will end up paying
through the nose. It's only a question of degree."
Currency futures traders are reducing their activity in the euro. Yesterday, at the CME, the trading volume was 287K contracts. (Each contract is 125K euros, or about $168K) The current open interest in the futures is about 275K. A few months back when the future of the euro, as a competitor with the USD was better defined, the daily trade would be 2, sometimes over 3 times the total open interest.
In the euro options market, specs are active. The OI is 85,963 calls, and 147,686 puts, which implies there are more bears than bulls.
Currency traders seem to be moving to the pound and the yen. The OI in the pound was up 14,618 contracts yesterday, and now exceeds 200K contracts. The yen OI climbed to 173K.
The increase in the pound OI, is interesting. We know from our last COT Report that the specs are already big shorts in the pound. The 7% increase in the OI yesterday tells us the short added to his bear stance in the pound. Had the OI gone down, the short would have likely been covering those positions. Failure of the pound to continue the rally this week implies the euro mess will spread to Britain.
As we mentioned in our note yesterday: "British lenders are not in the epicentre of the crisis, the Bank said,
but are
at risk due to their exposures to the European financial system and
investors’ concerns about their European loan book. UK banks have
£181bn of
exposure to European banks, and £295bn to European companies."
The US is not immune from the global debt crisis, but so far the economic numbers continue to suggest 4th quarter US growth will exceed the pace of either Europe or Britain. Today's NFP numbers are positive. With problems in Europe and the likely reduction of the ECB bank rate by at least 25bp at the next meeting, the USD looks like a winner versus either the euro or the pound.
For the eurozone, it is becoming obvious one currency does not serve all countries. If it were a car it would be recalled.
According to Sir Mervyn, the antidote is more capital. The greater the
bank's capital reserves, the more confident markets can be that their
money is safe and the easier it therefore is for banks to fund
themselves. Regrettably, it is quite difficult to see where this capital
is gong to come from
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Shortcuts and Syndication
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Author Bios
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Ralph Shell: Ralph did his graduate studies in economics and history at Duke University. He has ten years experience trading cash commodities in domestic and export markets and is a former commodity analyst with Merrill Lynch in Chicago. He was a member of and floor trader at the Chicago Board of Trade for 18 years.
Forex Captain: The Forex Captain has been a strategy developer and forex trader since 1998. From 2002 till 2009 he ran a successful managed account based on his tradestation coded strategies at FXCM. In 2007 his managed fund was ranked in BarclayHedge Rankings as one of the Top 10 Currency Traders managing less than $10M & more than $1M. Since 2009 he has been developing Expert Advisors in MQL4 for private trading, and from June 2010 he has joined the Project Triumph team as a currency analyst and project manager.
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