IB FX Brief

Trichet departs Sydney in a hurry

Tuesday February 9, 2010

On Tuesday the euro was on the rise after it was revealed that ECB President Trichet was going to leave a central bank meeting in Sydney. His premature departure created a significant amount of speculation that a Thursday EU summit in Brussels had been called to present a bailout for Greece and other struggling Eurozone nations. The significant number of latecomers to the euro-bashers ball was in part forced to move rapidly to the sidelines and so illustrated the vulnerable state the market finds itself in. The euro added a cent in a very short time frame as a result of today’s story, which turns out to be true in content but lacking in rationale.


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Euro – According to a statement given at the Reserve Bank of Australia to explain Mr. Trichet’s movements, the early departure is purely on account of logistics. In other words, it’s an awful long way back to Brussels. Elsewhere traders discovered that the EU summit is routine and not emergency and that it was indeed scheduled one month ago.

But, there is an important lesson being played out here. A record number of euro shorts have built up in the futures market over the last week according to CFTC data. The euro has quite understandably become the whipping boy and a vulnerable target where speculators can easily make money. However, announcing the presence of an ice-cream truck handing out free ice creams in the school yard over the elementary school public address system would probably teach the same lesson. Too many speculators are betting on the same outcome and the reality of free ice cream comes at the cost of fighting through the scrimmage in order to qualify.

The euro is sitting at the day’s high at around $1.3750 as the school yard shifts to New York. Against the yen the euro has regained ¥1.50 to stand at ¥123.40, while it’s also sitting at its highest point in two weeks against the British pound at 88.10 pence.

British pound – As the pace of shorts against the pound has also reached an extreme according to the same CFTC data, the pound is now benefitting from the same over crowded situation. The unit has just sprung to life against the dollar and has risen to $1.5625. Since Friday morning the pound has failed to close above $1.5650 on the hourly chart and yesterday traded as low as $1.5535.

The pound continues to suffer from anxiety over the probability that the summer election will leave neither political party in charge. Data today showed a worsening of the trade deficit to £7.3 billion making it the widest export shortfall in about one year. Last month’s shortfall stood at £6.8 billion. The numbers show a surprising lack of demand for British exports at a time when the pound has been ultra-competitive.

Elsewhere the British Retail Consortium confirmed that January’s retail sales decline of 0.7% compared to the same month a year ago was the worst performance for sellers in at least 15 years. Meanwhile a RICS survey showed that the balance of surveyors reporting higher house prices rose to a near-three year high.

Aussie dollar – The Aussie dollar has found its sea legs this morning after being tossed overboard last week. It’s currently trading at 87.47 U.S. cents having been capped at 87 cents since last Thursday.

Japanese yen –The slightly firmer tone to market sentiment on Tuesday is allowing a subsidence in the demand to the Japanese yen, which has pared recent gains against the dollar to stand at ¥89.67. Finance minister Kan told reporters after a regular cabinet meeting that the recent weakness in domestic stock indices was brought on by international concerns and did not mark fresh weakness for the Japanese economy.

Canadian dollar – The Canadian dollar is also breaking higher and moving away from recent lows that saw it as low as 92.74 U.S. cents. Currently the dollar is trading at 92.68 cents.  


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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