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Monday May 10, 2010 - 10:08:28 GMT -

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Daily GVI Forex Forex View- Europe Trying a Short Squeeze


The Daily Forex View

Europe Trying a Short Squeeze

10:00 GMT- May 10 (  Global financial markets are digesting the massive European stability pact announced over the weekend. A lot of details still need to be fleshed out, but in essence Europe has put together a massive fund (EUR 440 bln European Union, Eur 60bln European Commission and EUR 220 bln IMF) to back the debt of European sovereign states. European central banks have already been in buying sovereign in the markets as they try to put on a short-squeeze against short sellers. One risk is that those who were stuck as holders of the paper will use this buying simply as a second chance to get out of this paper (or at least reduce their exposure) once and for all. Confidence in this distressed debt will only be turned around when the markets believe the underlying paper has credibility. That will happen once the countries involved individually address their budget problems. 

It is dangerous for traders who live in the short run to be cynical about a program like this whose intent is to generate a short-covering squeeze. One can have doubts about the viability of a program but go with the flow in the short term. It is also important to underscore that this is a European sovereign debt bailout program. It is not a Euro (currency) bailout plan. Most in the Eurozone see the need for a weaker EUR over time to promote exports. In short, forex dealers must be quick on their feet and take events as they come, one at a time. 

Political events over the weekend have not been positive for those looking for stability. The CDU/CSU coalition government of Angela Merkel suffered a significant loss in state elections in North Rhineland Westphalia and lost control of the Upper House of the German Parliament. This has weakened the German government. In the U.K., the process of forming a new government continues, The U.K. will wind up with a weak government as well. There is already talk of a new election before the year is out.

CHARTS: Forex pairs vs 2-yr note spreads


Forex   EUR vs.     GBP vs. 9:56
EUR 1.3021 279 JPY 121.33 484 JPY 139.64 415
GBP 1.4986 165 GBP 86.89 92 CHF 164.05 -22
CHF 1.0947 -137 CHF 1.4254 131 CHF vs.    
JPY 93.18 176       JPY 85.12 264

The EURUSD is higher on a short squeeze. The GBPUSD is up, while the EURGBP is higher. All markets are keeping a sharp eye on the short squeeze in European sovereign debt.

In the GBP,  post-election uncertainty has the GBP in play.

Our bias for the EURUSD and GBPUSD is mixed

The EURCHF has bounced higher. SNB intervention tactics have changed. We will have to see what happens next.

The USDJPY pair is higher and the EURJPY cross is up sharplt. Rating agencies warn that Japan's public finances are a worry. Some note that virtually all JGB bonds are owned by the citizens of Japan. The Hatoyama government wants a lower exchange rate and is pressuring the BOJ to promote growth. Some traders focus intently on the Japan vs. U.S. 2-yr note spread (only the U.S. 2-yr moves much).

COMMODITIES and Commodity Currencies

Click on Chart to Enlarge


Commodity         9:56
CAD 1.0246 -184 AUD 0.9042 181 Gold 1189 -18.33
CNY 6.8275 11 NZD 0.7261 129 WTI 78.33 3.17

The risk trade has been on and off in commodities and the commodity currencies (CAD, AUD and NZD). Today the commodity currencies are higher. After the RBA raised its cash rate target to 4.50% (+25bp) on Tuesday, it also signaled a policy pause. An onerous mining tax proposed by the government has undermined confidence in the unit. Bank of Canada interest rates are seen being hiked June 1. Monetary officials have little concern about CAD strength. A strong currency eases the pressure on the central bank to tighten policy aggressively. Oil and gold are mixed. We favor the AUD, CAD, gold and oil fundamentally.

Far East equities closed higher. European bourses are up. U.S. equities are up. The U.S. 10-yr last 3.59%, +11 bps. Bonds are a counter to risk trades because risk investments must be financed. When the cost of money moves up (higher interest rates), the return and allure of risk trades such as equities falls. 



Equities           9:56
NIK 10531 166 DAX 5981 266 DJIA 10380 24
HSI 20427 506 FTSE 5378 255 S&P 1111 2
SSEC 2699 11 SMI Symbol not found ##### NAS 2266 2
ASX 4600 119       TSE 11692 28


UPCOMING DATA HIGHLIGHTS:  In Europe, the Bank of England policy meeting (delayed due to election) is awaited. No rate changes are expected. In North America, the U.S. and Canada release no major data.

See ECONOMIC CALENDAR for a complete list of future forex market events and consensus data estimates. Go to the forex forum for up-to-date market developments and technical trading ideas.


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