US Dollar Changes Tack on Back of Economic Data

Early, the USD was under pressure yesterday with across the board selling. ‘The US recovery is slowing and it is time to sell the USD’ was the mantra. The markets were attracting a lot of new bears, and they were hardly prepared for a bullish surprise.

That surprise was the Institute for Supply Management’s Manufacturing PMI, expected to be 53.0, came in at 54.8. Prior to the report the EURUSD was trading above 1.3270. The number caused the pair to sell to 1.3215. The pound likewise took a hit, selling down to 1.6190 prior to trading at 1.6240 prior to the report.

The performance of the pound has been a pleasant surprise for the bulls. For ten consecutive days the GBP had worked higher versus the USD. The move took the pound from 1.5820 to a high of 1.63 on the eleventh day, and then turned around. It is a rare occurrence for any market to move more than seven or eight periods without a reversal. Despite some negative British fundamental news, earlier a negative first quarter GDP, and today a smaller Manufacturing PMI, the Pound has been remaining strong.

Speculative money, flowing into the pound, may be a major reason for the strength. As we noted in our latest COT Report, there has been a surge in speculative buying in the pound. During the most recent period, the large specs, flipped to the long side of the pound. Large and small specs have now accumulated a long position of about 31K contracts.

The total open interest of futures and delta adjusted options was 179,211 contracts at the end of the reporting period. During the four days since the period ended, the open interest has continued to increase smartly. This morning the CME reported the OI to be 190,363 contracts of futures only. For the OI to grow, this means that traders had to be adding to existing positions, so the long was getting longer. Had the longs been taking profits, the OI would have gone down. Since the 190K OI excludes options, this means the total OI has surged above 200K.

This week’s volatility is not about to end today. Tomorrow we get Britain’s Construction PMI, followed by their Services PMI on Thursday. In the US we get employment reports three days in a row. First the ADP Non-Farm Employment Change, then first time unemployment claims on Thursday, followed by the US unemployment rate and the Non-Farm Payroll report on Friday.

In my opinion good US numbers, should we get them, will be a surprise to the market, and friendly to the USD.

In addition we have some weekend elections in Europe where the politicians want to dump austerity and try a little Keynesian spending one more time. It is doubtful the bond market will cooperate with that plan unless the ECB again loosens the money supply.

Should the numbers give us a rally back toward the recent sterling high of 1.63 we are tempted to try the short side, though we are not inclined to stay with the position long if it fails to promptly work.

GBP USD 1st May 2012

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