KRUGER INSIGHTS THURSDAY, OCTOBER 10, 2013

bY: joel Kruger

EXPECTATION ANALYSIS – We enter Thursday trade with the US Dollar regaining a broad bid tone, and US equities also showing renewed interest. To see the buck and US equities higher at the same time is almost certainly symptomatic of some kind of expectation that there could be a resolution in the works that would alleviate immediate concerns over the debt ceiling. The uncertainty in Washington has weighed on the buck and stocks in recent days, so it is only logical to assume that today’s early price action is indicative of optimism for a resolution. Still, I am not a believer in these correlations, and do not feel that positive developments in Washington will have any meaningful influence on the medium-term price action. While a resolution of some kind could favorably impact the USD and stocks, I suspect that once this drama is behind us, the focus of recovery in the economy and subsequent monetary policy response, will be the key market drivers into 2014. We now know that Janet Yellen will be assuming the responsibilities of the most important position in financial markets. Yet the dovish implications have seemingly already been factored into market expectations. I would argue that given these expectations, market sentiment is probably skewed too much to the dovish side and there are some very real risks that Mrs. Yellen will not be nearly as dovish as the markets may want her to be.  

THE ONLY WAY OUT - Again I stress that even if monetary policy stays as is (without a taper), this should not be reason alone to rally equity prices and other risk assets. The markets are going to need to start preparing for Fed exit over the coming months, and this reality carries with it implications that are far more bearish risk assets than any bullishness resulting from existing policy remaining as is for a few more months (without the start to taper). I would also argue that the US Dollar should remain in demand over the medium-term irrespective of how things play out in Washington. Again, the key stories are the recovery in the US economy, and an already overextended Fed policy. This is the real reason why you should be buying US Dollars. Technically, the USD outlook is still very constructive and supports these fundamentals, particularly against the risk correlated currencies, where the Dollar has been carving out what appears to be a longer-term cyclical bottom. For today, I will once again be keeping a close eye on the Yen and Franc. Though not necessarily justified with the Yen, these markets have been good barometers of risk sentiment. Both the Yen and Franc have sold off over the past few sessions as sentiment has recovered, but I wouldn’t be so sure that this will continue much longer. I still contend that we should see one more USD/JPY drop into the 95.00 area, and a EUR/CHF decline towards 1.2000 that could cause some major headaches.