By: Joel Kruger
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Uncomfortably Numb - The Australian Dollar is the standout underperformer on the day thus far, with the relative weakness unquestionably driven off more dovish than expected RBA rhetoric. While the central bank did leave rates on hold at 2.50% as was widely anticipated, comments that the currency was "uncomfortably high" and a lower level "would likely be needed" to achieve balanced growth, have been the clear influence of the noted selling. Still, at this point, given the broader uncertainty around the US Dollar, we would need to see additional Aussie bearish confirmation before upgrading expectations for accelerated declines. Right now, AUD/USD 0.9420 is the key level to watch, and only a break below would strengthen the immediacy of bearish case.
Nothing Else Matters - But at the end of the day, it isn't the Australian Dollar, Euro or even Yen that maters. It isn't GOLD prices or OIL prices. Everything right now comes down to the US equity market and where the next big move will be. In the previous week we saw signs of potential topping after the market stalled at record highs and retreated back to weekly opening levels into the Friday close. Yet, despite every compelling technical and fundamental justification for a very necessary corrective reversal in the stock market, this asset class continues to ignore these justifications, only left to think about the incentives behind ongoing ultra accommodative Fed monetary policy. The price action in this market is what will dictate the course in all other major markets, and until we see a pickup in volatility in US equities, nothing else really matters.
It Takes A Lot To Laugh, It Takes A Train To Cry - So why has it been so hard for stocks to show any signs of let up? Well - to understand this requires an understanding of a major fundamental difference between equity markets and currency markets. In the currency markets, there is always some inherent demand for a currency, no matter how badly it has been beaten down, and always some reason to sell a high demand currency no matter how well bid. Simply put, when selling a currency, you are always buying into another currency. So with currency markets, the idea of shorting is fundamentally more acceptable and natural. Conversely, with stocks, this is really not the case. The equity market is a market that by design is always trying to move higher over time. There is no real demand for actually being invested on the short side, other than to profit from expected bad news.
Simple Twist Of Fate - This therefore makes looking for a reversal in equity markets all the more difficult. The presence of actual short interest in this market is lacking, and as a result, there either needs to be some major fundamental event that shakes investor confidence and forces an exit, or there needs to be a very good excuse to inspire a material profit taking. So as much as I contend this market should indeed reverse lower at any moment, it seems the momentum required to inspire such a reversal is much harder to come by. I do however remain quite bearish equity markets, but as a currency trader, I have realized more and more just how different these market dynamics are, and wanted to share this with you all today.
It Takes A Lot To Laugh, It Takes A Train To Cry - So why has it been so hard for stocks to show any signs of let up? Well - to understand this requires an understanding of a major fundamental difference between equity markets and currency markets. In the currency markets, there is always some inherent demand for a currency, no matter how badly it has been beaten down, and always some reason to sell a high demand currency no matter how well bid. Simply put, when selling a currency, you are always buying into another currency. So with currency markets, the idea of shorting is fundamentally more acceptable and natural. Conversely, with stocks, this is really not the case. The equity market is a market that by design is always trying to move higher over time. There is no real demand for actually being invested on the short side, other than to profit from expected bad news.
Simple Twist Of Fate - This therefore makes looking for a reversal in equity markets all the more difficult. The presence of actual short interest in this market is lacking, and as a result, there either needs to be some major fundamental event that shakes investor confidence and forces an exit, or there needs to be a very good excuse to inspire a material profit taking. So as much as I contend this market should indeed reverse lower at any moment, it seems the momentum required to inspire such a reversal is much harder to come by. I do however remain quite bearish equity markets, but as a currency trader, I have realized more and more just how different these market dynamics are, and wanted to share this with you all today.
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