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Monday October 4, 2010 - 14:45:16 GMT
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A One-Way Bet?

Leading off today is none other than the Commitment of Traders report; we mentioned this in our weekly audio/visual summary provided to our Currency Currents Professional members on Friday. Not surprisingly it showed a net short position on the US dollar greater than any time since mid-2008. The biggest reason for the move was the change in euro positioning.

From Reuters:

Currency speculators' bets against the dollar swelled to $22 billion in the latest week, the largest value since at least mid-2008, data from the Commodity Futures Trading Commission showed on Friday.

That was the largest bet against the U.S. currency since at least June 2008. A short position is a bet that a currency will decline in value.

Most of the move came from speculators' bets in favor of the euro, which rose nearly seven times on the week to 35,330 contracts from 5,097 the prior week. That was the largest net long euro position since at least October 2009, according to Reuters calculations.

The euro is taking it on the chin today. It looks like traders are a little uncomfortable with how extended the euro has become at a time when the US dollar trade appears a bit one-sided. There was another Reuters story we read last night that may have had some influence on the euro to start this week:

Speaking at a conference in Rome, [Governing Council Member Mario] Draghi warned many euro zone banks are much weaker than appears from their balance sheets because the very low level of interest rates understates the worsening of their financial situation.

"The problem of addicted banks should not be addressed by the ECB but by financial authorities," said Draghi, who is president of the Financial Stability Board and governor of the Bank of Italy.

These "zombie banks" need to be identified by national authorities either before or at the same time as the ECB implements its exit strategy from non-conventional liquidity measures, Draghi said.

These comments, at this time, bring to light some additional issues among Eurozone banks, perhaps letting some air out of the euro at current lofty levels. But the market has been shaking off banking concerns like it’s nobody’s business. Maybe the more important tidbit in this story is the latter-mentioned “exit strategy.”

Equating those two words with the ECB right now, when the two words equated with the Federal Reserve are “quantitative easing” (read: lame ducks), could prove quite supportive of the euro. A buying opportunity in the making? Or should we respect this massive US dollar short position and the potential for some of it to unwind from here?

Let’s take a look at the euro going back to October 2009 when long position was last as large as it is now (based on the COT report); presently about 67% long and 33% short:

[Chart not available in text format]

The red box denotes October 2009. The euro battled to new highs in November and then it quickly got very ugly, very fast. We’re just saying.

And speaking of just saying, the eurozone is expected to say they back the US et al in their efforts to pressure a Chinese yuan appreciation/revaluation/spin operation. Surely officials in the eurozone didn’t mind the added stimulus of a euro trading at $1.20; now that it’s back at $1.40 it’s time to rail again on China.

But China is not offended. Of course not!

China supports a stable euro and won’t reduce its holdings of European bonds, underlining its strengthening ties with the European Union, Premier Wen Jiabao told Greek lawmakers in Athens.

Strengthening ties? Maybe the Greeks should tell somebody in Brussels about these “ties” before they get too deep in their “currency manipulation” and “global economic responsibility” rhetoric. After all, China and Europe are supposed to be buddies because China buys Eurozone bonds.

So the question is: will the tag-team rhetoric from US/Europe help to balance the global imbalances or simply just redistribute the imbalances among the surplus nations.

China opposes rebalancing via currency policy as we know.

Europe may, to an extent, support redistribution but not just among surplus nations (i.e. away from China, into Germany.) Many are catching on to this game and don’t want to see it continue. Meaning: the benefits of yuan appreciation will need to be felt among deficit nations of the eurozone so that they may escape recession and over-indebtedness. Germany is the obvious beneficiary from a redistribution of surplus away from China, but that’s not going to solve Europe’s problems we don’t believe, and could worsen them.

Et tu, US?

Just some thoughts to get the week started off!  Stay tuned for some new trade ideas -- lots of jockeying in front of US Nonfarm payrolls report on Friday could set up some short-term opportunities at least.

John Ross Crooks III
Black Swan Capital LLC


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