Ban The Shorts!

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By Mike Conlon | June 9, 2010

Both France and Germany have called on the EU to ban short-selling on certain stocks and government bonds with the intention to curb speculation in the market.  While I am never a fan of this type of regulation, there does need to be some sort of “fix” for the market as speculation has gotten a little out of hand.

However, there are always unintended consequences to this type of action, and this could end up hurting their ability to raise capital.  This could also hurt the forex market, as Euro-related pairs lack the volume to trade orderly.  Nevertheless, there still is a ton of risk related to the Euro, with sovereign debt defaults the primary driver.

In addition, ECB President Trichet helped push the Euro higher with comments on the state of the Euro.  As I mentioned yesterday, expect the game of “show and tell” to pick up, with officials telling us how great everything is but showing us little.

Also today, the US Fed Beige Book report comes out, with Bernanke expected to echo his comments from the other night.

In the forex market:

Aussie (AUD):  Consumer confidence fell for the 3rd straight month down under, nevertheless the Aussie is higher on risk appetite.  Fears of a global slowdown (particularly in China) and the raising of interest rates have added to the sentiment that the economy will slow in Australia.

Loonie (CAD):  The Loonie is also higher this morning as oil prices have bounced higher and equity futures are set to open higher on risk-taking in the market.

Kiwi (NZD):  The Kiwi is higher ahead of its interest rate policy meeting tomorrow, where the market is anticipating a 75% chance that the RBNZ will raise rates 25bp to 2.75%.  Put me in the camp that is betting against the rate hike, as I feel the NZ economy rides on the coattails of Australia, and that the risk in the market may be too great to warrant a hike just yet.

Euro (EUR):  The Euro is mixed this morning, trading higher against the safe-haven currencies, but lower against the commodity currencies.  Comments from the ECB have helped push the Euro higher slightly, but let’s not forget about the huge risk the Euro poses as they struggle to get their fiscal houses in order.

Pound (GBP):  The Pound has a bid this morning after a 4-day decline as investors seems more confident in the UK’s ability to combat their fiscal woes, much more so than the EU.  The UK trade balance missed estimates, but narrowed from last month’s reading.

Dollar (USD):   Today we get “Fedspeak”, as Bernanke gives his beige book report to Congress.  I do not expect any change in language from the Fed Chief, and at this point I’m guessing that we will not see a rate hike this year.  The Dollar has been higher this year on the flight to safety trade, and at this point I believe that inflation is a non-issue.

Yen (JPY):  The Yen is lower this morning as risk-taking inspired carry trades are taking place ahead of the New Zealand rate decision.  Japan will report its own GDP figures tomorrow, which are expected to show moderate but steady growth.  In addition, new Finance Minister Noda said he would like to see price gains above 1%, but didn’t make that an “official” inflation target.   Japanese deflation has plagued its economy for some time.

As I mentioned yesterday, this is “cheer-leading” week for the various markets, as the lack of hard economic data is supplanted by discussions of various economic situations.

I am always skeptical when it comes to government announcements and prefer to analyze the hard data myself. But with that in mind, you have to pay attention to what they are saying.

As a trader, it is important to trade what you see and not what you think should happen.  If Bernanke wants the market to go up, you should play along even if you think the fundamentals don’t match.  However, be sure to exit quickly at the first sign of market sentiment change as the market is always right, regardless of what is said.

So pay close attention to the technicals as the various market participants digest the rhetoric.

Do you have a strong grasp of technical analysis?

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