A Euro Short Squeeze

I got home last night, and looked at the currencies, and was in shock at the run the euro (EUR) had yesterday while I was gone… The euro climbed all the way to 1.2673! But before you start to kick yourself for selling into the weakness this week, as many people did, the euro has given back 1.50 cents to 1.2525… The thought was that the single unit had gone too far too fast.

The move to 1.2673 was pushed and fueled by a short squeeze… The covering of long term short positions pushed the currency higher, and as the euro went higher, it triggered many more closures of short positions… And we all know that when you close a short position, you have to buy the asset that was short.

I truly believe that the euro has received a “get out of jail free” card, for now… Which means I don’t expect this strength that began with European Central Bank (ECB) intervention, has any strong legs to stand on much less run with from here.

By the looks of the Aussie dollar (AUD) it looks as though people that bought Aussie dollars because it looked so good, are now selling it just as fast as they bought it. It’s not that Australia doesn’t look so good anymore… Well, it is some of that in a forecast, but not right at this minute, day, or week. The forecasters are calling for a crash in the Chinese economy, which has brought commodities to their knees, and thus the selling in Aussie dollars…

But, it’s more than that… There’s this general feeling in the markets these days that global growth is a house of cards that’s about to crumble… Everyone is becoming a Chicken Little… And when that happens, investors go to cash or Treasuries.

Now, I’m not saying that the Chicken Littles are wrong… In fact, I’ve been preaching this stuff for some time, but I was more of the thought that the US economy and stock market was a house of cards… I was under the impression that China would pull Asia through, and help Europe by buying their exports, while Rome (the US economy and stock market) burned…

It has turned into a case of the “Whole Shootin’ Match is going to burn”.

You would think that a thought pattern of the sky is falling would certainly be good for gold… But, NOOOOOOOOOOOOOO! These investors are saying that even gold isn’t good enough to weather the storm, they need Treasuries…

Personally, I think they need help… To think that buying Treasuries at these ridiculously low yields that are denominated in dollars is going to help them ride out the storm is making me believe that they are not “Smarter Than a 5th Grader”!

But… That’s the way of the world these days… I could sit here and fire off warning after warning about Treasuries, but it wouldn’t matter.

It sure doesn’t fly alongside the Modern Portfolio Theory of Harry Markowitz, which, for years, I would highlight in my presentations.

And the thing that it’s fueling is that same old circle of bad things here in the US with yields falling on Treasuries from all the buying, Home mortgages rates will be going down again too, and before we know it, another mortgage bubble pops up.

There are rumors this morning that the Reserve Bank of Australia, (RBA) which is usually selling Aussie dollars each month to even out trade, was in overnight to intervene, and prop up the beleaguered Aussie dollar. Of course the RBA denied the intervention, and claimed that they were only “checking levels and wanting to provide liquidity in very disorderly markets”.

To me… That’s central bank parlance for, “we intervened to prop up the Aussie dollar.”

I think that all this intervention does is scare the markets into believing that if they short a currency (so far, the euro and Aussie dollar) too much, that they could get burned by central bank buying… And, if done, and I mean really done, and not just talked about, then the central bank has a chance to hold off the wolves.

The Bank of Japan has done this for years… But their treasure chest of reserves is much larger than the RBA’s… The trick is for the central bank not to come in to buy every day… They have to catch the markets off-guard and then hit them hard…

But in the end… If the markets are determined to cut the legs off a currency, they will eventually win… Their determination needs to be tested, though… Ahem, do you hear me RBA? Do you hear me ECB?

Well… Here in the US yesterday, the Senate approved a new comprehensive regulation of the financial industry… All I’ll say about all this “regulation” is that when a dolt like the Senate Majority leader, says something like this… “When this bill becomes law, the joyride on Wall Street will come to a screeching halt”… You have to wonder, just what unintended consequences will come of this… Yes, there were “outlaws” on Wall Street, but that doesn’t mean the whole Shootin’ Match was bad. I think we’ll see in a couple of years just what those unintended consequences were.

I see that US Treasury Secretary Geithner is going to visit the UK and Germany next week to see if he can “assist” them… I chuckle… For the thought that went through my smart alec mind was “assist them with what? Tax evasion?” Or… “How to turn your back on the markets during your watch as President of the NY Fed”?

In Germany this morning, Business Confidence, as measured by the think tank IFO, backed off by a small amount (101.6 to 101.5) in April… I’m surprised that it was by so little, considering the hammering the Eurozone was taking in April from Greece. But, on second thought, this is “business confidence”… I can see these business guys, watching the euro drop, and them calling up their wives and telling them to put on her good red dress, for we’re going out on the town tonight! A weaker euro helps the once largest exporting nation, and that helps businesses…

And Dansk Bank issued a report to their customers yesterday, telling them that the Norwegian krone (NOK) is finished going down, and that it was time to buy…

And I did see yesterday, that Spain budget was announced and it contained some well thought of and much needed spending cuts that will make a difference. I think that Spain “got the memo”… Now it remains to be seen if the Spanish people go to the streets like the Greeks did and protest/riot… They raised the retirement age from 65 to 67, and made the first public wage cuts since 1978, and raised taxes. I didn’t see any cuts in government, but there was a hiring freeze in there…

And New Zealand passed their budget, which showed once again that with a budget surplus, you can do things like cut taxes not only for the public, but for corporations!

And in Canada this morning, CPI (consumer inflation) printed, and consumer price report showed that the headline inflation index rose by 0.3% in April, beating expectations for an increase of 0.2%. As a result, the year-over-year rate popped to 1.8% from 1.4% in March. This is getting oh-so-near the Bank of Canada’s (BOC) target rate of 2%, and once again points to Canada being the first G-7 country to raise interest rates.

The data cupboard here in the US today is completely empty… Nothing, not even a rogue piece of data to print today!

Then there was this… The oil spill (and that doesn’t even come close to describing the devastation this oil is causing in the Gulf) continues to spew out thousands of gallons of oil every day that is not caught by the siphon that was placed in the broken pipeline last weekend. Oil is beginning to show up on Louisiana beaches… This is just awful, folks… The devastation to the wildlife, the fishing business, those beautiful beaches on the Gulf Shores… With all the “smart people” in the world, you would think that this would not still be going on a month later.

The hit to the US economy has to be HUGE… But that’s the least of my worries…

To recap… The euro enjoyed a day in the sun, as there was a short squeeze in the single unit… The euro climbed to 1.2673 on the day, but has given back over 1.50 as this move was too fast… The Aussie dollar rallied overnight on rumors the RBA was intervening (buying Aussie dollars)… Spain made some huge budget cuts, New Zealand made some tax cuts, and consumer inflation in Canada keeps rising to near the Bank of Canada’s target rate.

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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