KRUGER INSIGHTS MONDAY, NOVEMBER 25, 2013

Joel Kruger 

How Quickly We Forget - It wasn't too long ago you would wake up, look to see what the Australian Dollar was doing, and know immediately how this was translating into risk appetite and equity market performance. But those days are gone now. The Australian Dollar no longer serves as a proxy for risk and the currency has completely broken away from this correlation. As we look at the market on Monday, US equities have catapulted to yet another fresh record high, while at the same time, Aussie is at its lowest levels against the buck since early September. So what happened? Well - simply put - there came a point when the Australian economy finally started show legitimate signs of cooling off, and favorable yield differentials were no longer enough incentive to be wanting to have the Aussie exposure. The result - a massive liquidation in the Australian Dollar that is still playing out today. But I am not so sure there is as much of a disconnect between the Australian Dollar and US equities. In my view, this is all a part of the domino effect from the initial crisis in 2008. First it was the US Dollar, then it was the Euro, now it's commodity bloc and emerging market FX. 

When You Least Expect It - So what next? Next I think we come full circle back to the US and look for the final beneficiary of this free money central bank economics to be exposed. Of course I am talking about US equities and the probability that this furious rally will fizzle out at some point in the very near future. We have yet to see the catalyst for the liquidation in equity markets, but I am quite certain that it is very very close. Big reversals often happen when no one thinks they can happen, and that the market can only continue in the direction it has been heading. With US equities, we have certainly arrived at a point where it looks as though there is nothing to stop these markets from rallying even further. But from experience, this is when you finally get that nasty reversal. So be on the lookout in the sessions ahead. We have a data stacked initial half of the week, with US markets closing up shop for Thanksgiving on Thursday. Things could get very interesting this week. USD/JPY has been the most notable mover on the currency front, and though I remain aggressively bullish, with the market seen through the yearly high at 103.75, it is worth noting that daily studies are very stretched right now, and we could see a sizable short-term pullback before the next upside extension.