After the many EU summits to address the myriad of problems, there has usually been a pattern of optimism ahead of the summit, and a sell off after the meetings are over. After the most recent summit, we had a tiny rally followed by a perfunctory sell off on Tuesday. Wednesday's recovery in the EURUSD has engulfed the previous day's trade. Could this be a warning for the many USD shorts?
The reasons given for the euro rally seem lame. First, the Chinese Manufacturing PMI at 50.5 was a little better than last month's number and the estimate of that expected for this month. An increase in Chinese manufacturing does not always equate to sales, however.
The m/m German and EU's PMI came in at 51, and 48.8 respectively, both .01 better than anticipated. Did this modest improvement really set off a rally in equities and the euro? This was followed by some poor US numbers. The US ADP employment change at 170K was less than the anticipated 181.5K, and down from the previous month's number which was lowered to 292K. Later the US ISM Manufacturing number at 54.1 was short of the estimate of 54.5.
To me, the fundamentals do not seem vigorous enough to give us the rally back to the 1.32 handle. It is always possible there is progress in the talks with the Greeks. If you are the Greeks, you will eventually agree to just about anything to have access to the next tranche of funds. Besides, a parliamentary election, thought to be coming in the early spring of 2012, makes it even more important to reach an agreement quickly, and get the money prior to leaving office.
The currency markets, whatever the reason, act like they are tiring of a long USD position. Sales of the USD versus something else may also be putting some pressure on the USDCAD. Tuesday's Canadian GDP m/m number, a negative 0.1% down from an estimate of +0.2%, has given the market little reason for the USD to sell under parity with the CAD.
While touching on a few different themes, we wonder when the speculators in the yen will prompt the Ministry of Finance and the Bank of Japan to again start selling the yen. The last COT report showed the specs were collectively net long 35,267 contracts. Since this report the open interest has gone up by about 17K (futures only) so we probably have a spec long in the vicinity of 50K. By comparison, specs were long about 57K on October 25th, just prior to the last intervention.
The yen is flirting with the high versus the USD prior to the intervention in October. If the BOJ wants to sell the yen, and the euro shorts want to cover, maybe the trade is to buy the EURJPY. It is my view that the ultimate fundamental in forex is the flow of funds. As always, manage your money because there are no guarantees.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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