Pound Shorts Squeezed With No Mercy

Last updated 3/17/2010 6:02 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• BOJ expands QE to 20 Trillion yen
• UK claimant count blows past expectations at -32.3k vs. 8.2K eyed
• Nikkei, Europe up on Fed's dovish stance
• OIl at $82/bbl
• Gold spikes to $1130/oz.

Overnight Eco

• AUD Housing Starts much higher at 15.1%
• AUD MI Leading Index 0.2% vs. 0.6%
• JPY Tertiary Industry Activity 2.9% vs. 1.3%
• JPY BoJ Rate Decision 0.0%
• GBP Claimant Count Change -32.K vs.8.2K
• GBP Average Earnings Index 0.9% vs. 1.7%
• GBP Unemployment Rate 7.8%

Event Risk on Tap

• CAD Wholesale Sales
• USD PPI expected at -0.2%

Price Action

• USD/JPY rallies to 90.60 on BOJ easing moves
• AUD/USD holds above .9200 as housing data proves strong
• GBP/USD
• EUR/USD makes a run to 1.3800 but capped for now

Dollar tumbled against the pound and remained on the back foot against all majors with the exception of  the yen in the aftermath of yesterday’s FOMC  announcement that kept the “extended period” language in the communiqué. Fed’s insistence on maintaining a dovish stance knocked wind out of the dollar bulls who had been hoping for a move to a more neutral posture given the improvement in the US economy. However, it is now clear that the Fed will not even consider the possibility of tightening until it sees tangible proof of sustainable job growth, preferring for the time being to err on the side of caution.

The Fed’s inaction likely elicited a reaction from the BOJ which kept rates unchanged at 0.1% but expanded it QE program by 10 trillion yen despite improving fundamentals of the Japanese economy. As we noted earlier, “The Japanese fiscal authorities are loathe to see the pair trade below the 90.00 figure as most of the country’s exporters are hedged around this level. Therefore, the BOJ expansion of its QE program may have simply been a countermove to offset the dovish bias of the Fed and maintain the pair above the 90.00 handle for as long as possible.“

Elsewhere in Asia-Pacific the Aussie remained quite strong holding the .9200 figure for most of the  night. Australian housing starts jumped a massive 15.1% versus 6.4% eyed, indicating that the RBA will have to tighten rates further in the near future. While chances are low that they will move in April,  the RBA is likely to hike another 25bp sometime in Q2 of 2010. Given the fact that the Fed has signaled that it will remain stationary well into the third quarter of this year, the Aussie becomes even more attractive to investors on yield basis alone. If risk appetite holds up, the pair could soon make a run at the triple top highs above .9300.

Meanwhile while euro was relatively sedate in overnight trade with  rallies capped at 1.3800, the pound  skyrocketed on unexpectedly better claimant count numbers which declined by -32.3K versus 8.2K eyed. This was the  biggest monthly improvement in labor market conditions since 1997 and suggests that the underlying  UK economy may be finally recovering from the credit crunch induced recession of 2008-2009. The news was a massive surprise to the market and spurred further short covering in cable pushing it through the 1.5300 level in mid morning London trade. The pair has now rallied more than 300 points over the past 24 hours in one of the most vicious short squeezes of the year and could press its way to 1.5450-1.5500 level before finally encountering some resistance.

In North America today, the eco calendar carries only the PPI data which is expected to rise only 0.1% and is unlikely to have much of an impact on trade, but the focus will likely shift to Chairman Bernanke testimony in front of a House Financial Services Committee. The Chairman is not expected to make any comments regarding the economy, but will rather make a case against curtail Fed’s regulatory powers over the banking sector.  Overall the tone today is likely to driven by risk flows. If equities prove supportive, the pound could make a run to 1.5400 before the end of the day as shorts continue to be squeezed with no mercy.

FX Upcoming

Comments (2)

EMA

March 17, 2010 at 10:43 AM ET

Borris, I am interested in your opinion on AUD USD reaching the 0.98 to parity level. The housing starts blew away expectations and there is no doubt that the Aussie economy is one of the strongest of the G8. The US economy is NOT regressing or sitting idle..it is also improving. Is the relative strength of the Aussie economy potent enough to push the aussie dollar beyond 0.98 in 2010 as I have seen on some blogs ?

bschlossberg

March 17, 2010 at 10:55 AM ET

That is THE risk trade this year

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.