KRUGER INSIGHTS TUESDAY, NOVEMBER 12, 2013

Joel Kruger 

FX Smarts - The US Dollar remains very well bid across the board, as the currency market continues to price in the likelihood of a sooner than later Fed taper after last week's strong US economic data. Though the Yen has been one of the standout underperformers, I would be careful to attribute the price action to risk on trade. I believe the Yen is being sold more aggressively on the diverging US-Japan fundamentals and probability that yields will only widen further in favor of the buck in the weeks and months ahead. Remember - to be short Yen is a trade without the pains of negative carry. While other currencies have been vulnerable against the buck, establishing short positions in these currencies means that you will be paying to hold the short currency (long USD) position on a daily basis. 

Strange Brew - Still, with all of this going on in the world of FX, equity markets have failed to react in the same way. Stock markets continue to retain a very strong bid tone. If the Fed is truly preparing for an earlier than expected taper, it would be logical to conclude that an equity market so well supported by Fed policy on the way up, should come under pressure as this policy starts to reverse. And yet, we have seen no such reaction on that front, with US indices tracking at record highs. It is all a bit strange. Right now, the key level to watch is S&P 1740. Look for a break and daily close below this level to signal the equity market is finally waking up to the fact that this rally can't go on forever and that the time has come to book profits and run for the hills. I believe we will see this break at any moment and I am anxiously waiting for the confirmation.