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Monday May 10, 2010 - 20:36:01 GMT -

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Daily GVI Forex Forex View- No Short Squeeze on EURUSD


The Daily Forex View

No Short Squeeze on EURUSD

20:00 GMT- May 10 (  Markets have had a lot to absorb on Monday as they digest the massive European stability pact announced over the weekend. European leaders 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 tried to put on a short-squeeze against short sellers. Presumably, since these are spending bills they will have to be approved by sixteen separate legislatures. This could take a while. 

One problem with intervention in any market is that manipulating prices can backfire as those who are stuck as holders of the bad paper may use the buying as a chance to get out (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 credibly 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 longer-term viability of a program but one has to 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 may have to be be quicker 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 thereby losing 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. 20:04
EUR 1.2794 52 JPY 119.23 274 JPY 138.57 308
GBP 1.4870 49 GBP 86.04 7 CHF 165.12 84
CHF 1.1104 20 CHF 1.4206 83 CHF vs.    
JPY 93.19 177       JPY 83.92 145

The EURUSD is up but of its highs on a short squeeze. The GBPUSD is up, while the EURGBP is steady. All markets are keeping a sharp eye on the short squeeze in European sovereign debt and on the threat of forex intervention..

In the GBP,  post-election uncertainty has the GBP in play. Our bias for the EURUSD and GBPUSD has turned 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 sharply. 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         20:04
CAD 1.0241 -189 AUD 0.9032 171 Gold 1201 -6.38
CNY 6.8273 9 NZD 0.7227 95 WTI 77.15 1.99

The risk trade has been on and off in commodities and the commodity currencies (CAD, AUD and NZD). Today the commodity currencies are stronger. After the RBA raised its cash rate target to 4.50% (+25bp) last week, 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 ended up. U.S. equities are better. The U.S. 10-yr was last 3.54%, +11 bps. Flight to safety demand has diminshed.  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           20:04
NIK 10531 166 DAX 6018 303 DJIA 10748 391
HSI 20427 506 FTSE 5387 264 S&P 1155 46
SSEC 2699 11 SMI Symbol not found ##### NAS 2363 99
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.

John M. Bland is an author and co-founder and partner of Prior to, he was a forex trader and a private-label forex analyst for a top Fed watching service in NYC. He has been a corporate forex advisor and also worked in international liability management for a major N.Y. money center bank. John holds an MBA from the University of California at Berkeley and a B.A. in International Economics from that school.


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