KRUGER INSIGHTS FRIDAY, NOVEMBER 01, 2013

By: Joel Kruger 

Under the Rug - The latest slide in the Euro has been a pretty big story in the FX world over the past couple of sessions, and it seems the fundamental catalyst has come from some softer than expected inflation data out of Europe and the expectation that this could inspire fresh rate cuts. Technically, the Euro had been overextended on the daily charts and already due for a pullback. This in conjunction with failure ahead of critical longer-term trend line resistance just shy of 1.4000, has opened the door for an accelerated liquidation. For the most part, the rest of the markets were rather tame in the final day of October, although I suspect things will heat up immediately in November. The post Fed profit taking in risk assets is also another major story, with the markets realizing perhaps they were a little too aggressive in pricing out near-term taper prospects. Still, the reversal in risk assets on the back of this news has been marginal at best, and I believe we should soon see some accelerated declines. For now, the reality of the Fed statement hasn't fully resonated with a spoiled investor base refusing to accept the fact that the Fed won't be there unconditionally to always and forever prop risk assets. Some other risk negative themes to think about as we enter November include the reemergence of stories kicked just a block or two down the road, that feel like they are now only about a half a block away. Just as the markets are starting to forget about the government shutdown and debt ceiling uncertainty, we enter the final weeks of the year that guard against the resurfacing of these themes in early 2014. Meanwhile, geopolitical risk has also been brushed aside and yet, with the US confirming an Israeli strike on a military base near the Syrian city of Latakia (Israel has declined to comment), we could be headed for another escalation in global tensions. All of this a testing ground for the real elephant in the room - a major conflict on the horizon with Iran.

What Lies Beneath - Unfortunately, Fed risk, US structural risk, and geopolitical risk are all problems that aren't just going to go away, as much as we think these problems can be swept under the rug. After all, there is only so much crap that can build up under the rug before it all eventually rips right through. As far as the markets are concerned, looking beyond anticipated equity weakness, keep an eye on EUR/CHF. Any intensified pressure to the downside could really warn of a broad vulnerability in risk assets. Though the SNB 1.2000 floor is a ways off right now, the level is symbolic of the new world intervention we have seen in recent years to artificially prop the global economy. If 1.2000 is threatened, it could really have a ripple effect on the macro landscape. I am also of course watching the Yen and very interested to see how any escalation in risk impacts the currency. While I believe that such an escalation will initially inspire a favorable Yen reaction on traditional correlations, ultimately, the reality that these correlations no longer have any lasting influence on the beleaguered currency will win out, with the Yen remaining under broad pressure into 2014. I will be looking to take advantage of any short-term Yen strength, and will be an aggressive buyer of USD/JPY on dips. Elsewhere, I would recommend staying away from trying to trade GOLD right now, but would be on the lookout for another pullback below $1250 and towards those critical multi-month lows from late June at $1180. I hold a rather bullish longer-term outlook here, but given how wacky this market has been, I would only take my shot at buying on another severe sell-off. Finally, OIL has once again become an interesting market to watch. Though we have already seen an impressive retreat back under $100, I still feel there is room for additional weakness into the $93 area before consideration is to be given for a compelling buy opportunity. Have a great weekend!