Euro Euphoria "Don't Dream It's Over"

Neil Finn of Crowded House wrote a song, "Don't Dream It's Over", that would be a fitting motto for the huge sums of money flowing into euro and crude futures.

This euro euphoria is destroying all currencies in its path.
To put it plainly, there is no fear of a stronger US dollar derailing resumption of the pre-great recession era trading arb of selling the dollar and buying commodities, specifically crude and gold.

There are very few contrarians willing to jump in front of this train by going short the euro, crude or gold. And with two more months of the US Treasury increasing bond supply, there are few fundamental arguments left for a strengthening US dollar. Also, Ben Bernanke has confirmed that there will be no increasing of Fed Fund interest rates anytime in the near future.

There will be occasional pull backs as high frequency traders move in and out of the market to capture profits or reverse commodity short positions to long. Take advantage of these down moves and "Don't Dream It's Over."

The $75 Billion Bond Feast

Weak retail sales and consumer confidence data this week created a huge appetite for bond buyers. $75 billion in US bonds were well covered creating a rise in bond prices and fall in bond yields.

Investor consensus is that the US consumer is not in a position, or has the desire to spend aggressively as in prior recession recovery periods. This should enable the treasury to complete its remaining bond sales in the next few months without much difficulty, as institutional investors will seek the safety of bonds.

Crude broke $68 support on the poor consumption data. Traders long on commodity play currencies were forced to sell their long positions and buy the dollar, causing the dollar to close the week strong vs the euro.

This week look for crude to try to carve out support in the $65 area. Barring any hurricanes arriving in the gulf this week, gas and distillate futures will also seek the least resistant path lower.

U.S. Dollar Exuberance

Energy traders were taken by surprise this Friday. Not by the better than expected unemployment data. Rather it was the reaction by currency traders to the good news.

For the first time since the collapse of Lehman Brothers, the U.S. dollar staged a rally on good economic news. Currency traders have begun to price in a rise in US interest rates occurring sooner than previously anticipated. Until Friday, any surprise good news on the economy has met with buying of the euro and selling the US dollar.

The unexpected strength of the US dollar brought the energy complex to its knees.

This week will be a great test of dollar bull's trading plans, as the US Treasury will again be flooding the market with bonds. Any weakness in demand for the bonds send bond prices lower, giving dollar bears the opportunity to mount a come back..

Really Gross Domestic Product

It was a roller coaster for energy traders this week. Crude and refined products fell sharply following Wednesday's DOE inventories report. Then proceeded to finish the week with a strong two day rally on hopes the presumed recovery will stimulate demand.

Energy bulls are betting heavy that the low inventory numbers and lower company operating expenses are creating leverage that will catapult production higher. One problem with this theory is that most of our production has moved overseas. If demand for products does increase, our imports will need to increase, contributing to decreased GDP numbers for Q3.

The key to long term GDP growth is to increase our exports. This is unlikely to happen in the near future, but as the US$ continues to weaken, our exports will be in greater demand.

Traders will be watching this week to see if the euro can finally break through $1.43 resistance vs. the US$. A break above this figure will have crude traders gunning for $73 with gas and distillates following the least resistance path higher.