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Monday, October 17, 2005

OddRant: Something Fishy... Euro Short Specs to Get Mashed?

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There are several things that simply don't stack up in the very recent market action. By 'very recent' I mean partly the last week or so, and partly the actual price action since the open of the European markets. 

In recent weeks, the US long bond (actually the whole long end of the yield curve) has been smacked - that is, bond yields have been rising. This has helped the USD rise back to the 90-ish region, and has seen the Euro drop almost 5 full cents against the USD. 

Bonds are now well overdue for a bounce.

Today, 2 and a half hours into the European session, the Dow and S&P futures are down very modestly, Oil is up strongly and the Euro - and this is the odd bit - is down reasonably hard (it's down 55 pips for the session, but almost a full cent off its session high - and it's fallen 50 pips in the last 90 minutes).

Think about that for a couple of seconds...

OK... thought about it? C'mon... think faster.

Here's the strange thing. If bonds bounce, the Euro ought to do likewise (and the USDX ought to weaken); clearly, market participants in the European markets are projecting that the curent oversold condition in the bonds will persist.

If I was a currency speculator, I would be betting rather strongly on a bounce in the Euro from here. It's just made a new session low at 1.2029 (spot) and 1.2071 (futures). I reckon it ought to finish the US session above 1.2100 (futures); at the moment it's in the hands of dumbass leveraged ForEx specs, who are shorting a break of 1.2075 (futures). Later they should get absolutely gutted.

After all, if the oil bounce holds, that should be very bad for the US economy. That would reduce the likelihood of another Fed tightening; on interest arb grounds alone, the Euro would be a beneficiary.