The Euro Short Squeeze is Over

Well, the heat returned to the euro (EUR) overnight… After enjoying a couple of days in the sun, rising from the ashes due to a short squeeze last week, it appears to me as though that sun bathing for the euro is over… Yes, it looks like the selling will return this week, I mean I may only have one eye, but I can see a reversal when there is one! The euro began the overnight sessions climbing to 1.2587, and then turned on a dime! The single unit is now grading below 1.24… Do you see the reversal?

The heat is also back on the GIIPS… For those of you new to class, that’s short for: Greece, Italy, Ireland, Portugal, and Spain… I had the Bloomberg TV station on here in the office this morning, (Robin Meade is on vacation!) and I saw them bring up charts on the percent GDP is taken up by debt from these countries. It’s not good… Not at all… BUT! Where was the chart of the US’s debt, or Japan’s debt?

I saw an article in The Economist this past weekend that was pointing out this huge omission they have been doing for months now. (Glad to see you on the ball, well, at least sort of, Economist Magazine!)

The Big Boss, Frank Trotter, has a slide he uses in his presentations – one of which he just did in Montreal last week – and it’s called the “Ring of Fire”… And it takes into consideration all the countries and their fiscal positions… It’s pretty amazing just how many countries have gone down this road to ruins. The thing to think about here, folks and always keep in mind, is that you could add all these debt ridden countries together, and they still wouldn’t compare to the debt problems in the US or Japan.

At least in Japan, they have a trade surplus, and, a very high consumer savings level. Here in the US? No Trade Surplus… And… Guess what? Consumers are spending more than they make again here in the US!

Oh… And I didn’t mean to leave out the UK! Their debt problems are HUGE! So, throw them in with the US and Japan!

Well… The US Treasury Secretary and the Secretary of State are in China… They are there to give the Chinese some advice on how to run their economy… Sort of like consultants… I remember hearing a line about the guy who asks to borrow your watch so he can tell you what time it is… What I’m trying to get to here is that the old words ring pretty true in this case… These two US officials will get nowhere with the Chinese, but they sure are going to give them their “advice”. Of course, if I were in the Chinese official’s shoes, I would ask the US Treasury Secretary just what happened in the US financial meltdown, and watch him squirm…

Anyway… China, being China, smiled at the US officials, and said that they would continue to “steadily advance” reform… And all that jazz… One more time, I’ll send a memo to US officials, and tell them to not waste taxpayers money traveling to China, for China will do what’s best for China, and no amount of pressure by the US – or Europe, for that matter – is going to change their plans… The renminbi (CNY) will eventually gain versus the dollar again, and might even get revalued, but it will be on China’s timetable, not ours.

Well… Gold is hanging a positive number on its value this morning for the first time in a week. The shiny metal is up $8 this morning. The commodities are not faring well, so it’s not a reversal to speak of in commodities. Gold sellers last week probably figured that “that was enough” and it was time to buy again.

Speaking of commodities… I see that the price of oil is still on the slippery slope, and I was somewhat happy with that as I filled the gas tank of my car, yesterday! I’m really surprised that the price of oil has found itself on this slippery slope down, given the thousands of gallons of oil that continue to spill into the Gulf every day. You would have thought that oil traders would have used that excuse to mark up the price of oil.

The data cupboard here in the US will contain mostly housing data this week, and that’s about it, going into a 3-day weekend, that will see the bond market close at noon on Friday, as the “boys” head to the Hamptons.

For instance, today we’ll see Existing Home Sales for April, which will include the “rush to get government money” tax refunds for buying homes, which ended at the end of April. Let’s see just how good this report looks when it prints next month… (Oh, and “government money” doesn’t exist… It’s taxpayer money, because the government doesn’t have money unless it steals it from us… Oops, did I say, “steal it” out loud?)

There’s a rumor going around that the euro is now being added to the currencies that are used to finance carry trades.

For those of you new to class, the carry trade, is a “risk trade” that has the investor selling “short” a low yielding currency, and taking the funds to purchase a high yielding currency… The list includes the most famous financing currency, Japanese yen (JPY)… But has also recruited the Swiss franc (CHF), and the US dollar along the way.

The key is to make certain that the currency you “short” remains weak, for if it begins to get strong, you will lose more than you make on the interest rate differential in the carry trade… You’ll also want to make certain that the currency you go “long” remains strong… Oh! And that interest rates in the short currency don’t go up, and finally… The “short” currency has to be very liquid, so that there are enough buyers and sellers.

So… With the “crisis” in the Eurozone, and with the euro, interest rates aren’t going higher for a while, and most people think the euro will get even weaker than it was last week, so it sure qualifies, eh?

You would think that if the carry trade is going to return, the high yielding currencies like Aussie (AUD), Brazil (BRL), South Africa (ZAR), and then not so high, Norway (NOK), and New Zealand (NZD), would be seeing buying… But from the performance I’m seeing overnight in these currencies, there hasn’t been any buying that is evident.

Then there was this… There I was on Saturday morning, reading the local business section, and I came across a story that caught my eye… The 2010 yearbook, for the World Competitiveness came out with their rankings, and for the first time since 1993, the US wasn’t number 1… It wasn’t number 2 either! Singapore and Hong Kong were found to be more competitive than the US. I’m sure it doesn’t count for a hill of beans, but, to me, I read “the need for a weaker dollar”…

To recap… The short Squeeze in the euro is over, and short positions are being put back on with the single unit falling almost 2-cents overnight. There are rumors that the euro is now being used as a finance currency for the carry trade. That does not bode well for euro strength in the near future. The price of gold is rising this morning for the first time in about a week, and the data cupboard is going to have mostly housing data this week, before the “boys” head to the Hamptons before the 3-day Memorial Day weekend…

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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