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Friday, January 31, 2014
KRUGER INSIGHTS FRIDAY, JANUARY 31, 2014
By: Joel Kruger
A Whole Lotta Chop Goin On - While the outlook for risk correlated assets is still quite gloomy, market participants need to understand that we are in the process of a major capitulation that will likely result in some rocky intraday trade. My contention is that rallies in risk assets should be sold, but the trick is understanding that we are going to see whipsaw moves as the market starts to come to terms with a newer and less familiar direction. Last week was a critical week, in that it actualized the reality of a shift. And this week was mostly just about the market catching its breath and nervously consolidating. Monday risk assets were off, Tuesday they recovered, Wednesday off again, and then Thursday back on. There is nothing more textbook consolidation than that, and the takeaway is that this shift is still playing out and rallies are more likely to be rallies within a bearish consolidation, rather than any legitimate renewed bid interest. If this pattern continues, Friday will end up being a risk off day, but even if Friday sees some more upside in risk assets, there is still room for these markets to make lower tops ahead of the next major downside extension. I'm not sure we get there, but I would be aggressively selling an S&P recovery into the 1815-20 area. Though I can't decide right now if I would trade it to the short side, I would also be looking for USD/JPY to remain well capped below 103.50, ahead of the next drop to test psychological barriers at 100.00.
Emerging Insight - Moving on, I have been talking a lot about the collapse in the emerging markets in recent days. It has been a scary week for EM central bankers, and these officials are in for some tough times ahead. But one of the things I talked about this week, was the possibility that we may see a recovery from the lows in risk assets, purely on the basis that these EM markets had been beaten down so badly, and were desperately begging for reprieve. A lot of you were looking at TRY, HUF, and ZAR, where this message was coming through loud and clear, but if you had a look at RUB, this message was coming through with a scream. The USD/RUB chart was through the roof, with the daily RSI reading tracking at an astounding 90! So with all of these markets so well tied together, it stood to reason that if the freefall in RUB was going to stall out, so to would the deterioration in other risk assets. Now Friday is upon us and it isn't easy to project how these next hours will in the day, week and month will play out. We could very well see a continuation of this bearish consolidation, that opens more upside in risk assets to allow for the carving of a lower top. Or, we could see the playing out of this weekly pattern, which results in another down day for risk assets. Not exactly an endorsement for short-term exposure.
Keep An Eye On That Loonie - What I will tell you is that I will be anxiously waiting for opportunities to come to me. Should we see a rally in risk assets, I will happily look to sell aggressively. I will most likely shy away from selling USD/JPY, but would be comfortable selling a rally in NZD/USD, which I believe is finally starting to fall into line. I suspect that if this market can jump back over 0.8200 and into the 0.8230-50 area, I will establish another short position. I am less comfortable establishing any EM FX positions given the volatility there, but would be looking for any extended intraday rallies in these markets to offer a warning sign for the next leg down in risk assets overall. For those of you on the other side of the fence that believe risk assets have bottomed and should recover from here, you may want to consider playing that bet via USD/CAD. Technically, USD/CAD has gone parabolic, and with the daily RSI in this market tracking around 80, we could be in for a really nice pullback. USD/CAD has pretty much seen one way interest since breaking above 1.0700, and now that we have kissed 1.1200, it wouldn't be all that surprising to see some profit taking and fresh interest in the Loonie. I actually made some money long CAD on Thursday, but that was by way of CAD/CHF. For Friday, it might be Canada GDP data that acts as a catalyst for a minor rebound in the Canadian Dollar, or the GDP might just be another contributing factor to a day which is already seeing a move away from the US Dollar. I am tempted to sell USD/CAD up here at 1.1170, but am too much of a wimp, and will just watch from the sidelines. I never like trading on Fridays anyway. Perhaps if things move the other way and USD/CAD races through 1.1200 and towards 1.1250, I will consider the short. Have a great weekend!
Thursday, January 30, 2014
Wednesday, January 29, 2014
KRUGER INSIGHTS THURSDAY, JANUARY 30, 2014
By: Joel Kruger
Wait For It - I know there are many of you out there who might be thinking now is a great time to buy USD/JPY. The market is clearly in a very well defined and intense uptrend, and this latest setback is just a fantastic opportunity to jump into a long. While I do agree with the idea of buying a USD/JPY dip, I would still recommend waiting. The fact is, there is still a very strong correlation between USD/JPY and US equities, and with stocks looking like they could head a good deal lower in the weeks ahead, this does not bode well for USD/JPY. I have said that at some point I believe there will be a divergence between USD/JPY and US equities, but I don't think we are there just yet. If however you want to argue that equities have bottomed and this is why USD/JPY should bounce, I don't have much to say. I just don't believe this equity pullback is complete and still think we have a ways to go. So what am I looking for? Well, I am looking for a pullback into the 99.00-100.00 previous triangle resistance now turned support zone. Once we get down there, I think the idea of buying will become a lot more attractive. And even then, I wouldn't jump right in and buy, I would be looking for daily studies to be well oversold and for intraday studies to also be well stretched. At that point, wherever it may be, it will finally be a good time to buy USD/JPY.
Still Hiding - Perhaps I am being overly cautious with this one, but as much as I want to be in the trade, I won't force it. Now is it possible that from now into the end of the week we see a supported USD/JPY market? Absolutely. Considering how pressured stocks have been and how much of a mess emerging markets are in, it is entirely possible that we see a bit of a relief rally. But my expectation from here is that any USD/JPY rally is well capped ahead of 103.50. What else am I looking at right now? Kiwi has finally started to move and it is nice to see the currency come off after anticipating such underperformance. I would look for NZD/USD to soon take out some key support at 0.8085 in the sessions ahead. The only market on my radar that has yet to respond to all that is going on is the Shekel. Despite this latest wave of global uncertainty that has plagued the markets, the Israeli Shekel has managed to more than hold its own and is virtually unscathed. Still, the powers of cyclicality can not be ignored, and I suspect that at some point very soon, we will start to see a sell off in the Shekel. I am looking for any USD/ILS setbacks to be well supported ahead of 3.40, with an upside objective of 3.80 in the months ahead. Finally, for any of you contrarians out there, it might be worth looking into a short-term long CAD position. Maybe you want to sell EUR/CAD, maybe you want to sell GBP/CAD, maybe you want to sell NZD/CAD, or maybe USD/CAD straight up. Whatever the case, this could produce some nice returns over the coming sessions.
KRUGER INSIGHTS WEDNESDAY, JANUARY 29, 2014
By: Joel Kruger
Just A Correction - The early part of this week has been a story of correction and nothing more. Although price action since Monday might suggest a renewed appetite for risk, I do not believe this to be the case. Instead, we are simply seeing some markets that had been beaten down in the previous week, now trying to catch their breath and break for a moment of pause. Emerging market FX, USD/JPY and other risk correlated currencies have been bid in recent sessions, while equities have managed to bounce as well. And yet, if you take a step back and look at the bigger picture, nothing has changed. Risk correlated currencies are still well offered overall and we should soon expect another fresh round of selling in these markets, once this correction plays out. The markets got a bit of a boost overnight on the aggressive Turkish central bank move, but I would be sitting a lot less comfortably after a move like that.
Missing The Point - To me, the message being sent is that we have no way of fighting out of this and the only thing we can do is try and keep you interested with higher rates. I am happy to look for yield when it is attractive and shows signs of stability, but what good is the lure of yield if it comes for the wrong reasons. Rates aren't going higher because things are good or getting better, they are going higher because things are a mess! While equities and USD/JPY have been better bid than EM FX and the case for bearishness is arguably less compelling at this point, we still have seen some legitimate signs of bearish, toppish price action that would suggest this latest bounce should be used as an opportunity to sell. Just as with risk correlated currencies, these markets should be exposed to a reduction in risk appetite, and I don't believe we see much more upside on Wednesday before we head lower again. I would recommend selling any pre or post-event risk rallies in the S&P towards 1815, and selling risk correlated currencies on extreme oversold intraday readings. I will also be looking for another jump in NZD/USD above 0.8300, and will be very excited about selling into such a rally. The New Zealand Dollar is highly exposed at current levels given the broader macro environment and it is only a matter of time before this currency takes a turn for the worse.
Tuesday, January 28, 2014
KRUGER INSIGHTS TUESDAY, JANUARY 28, 2014
By: Joel Kruger
Long EM FX/Short Equities? - So everything is a all over the place in the very short-term and I am going to wait a bit more until things feel right. I will be looking to sell risk correlated markets when the opportunity presents and will be looking to buy USD/JPY lower down towards 99.00-100.00. Perhaps in light of the above, the best trade over the next few sessions is some form of an exotic basket pair trade Short USEquities/Risk CorrelatedFX (ie be short US equities and at the same time be long super stretched currencies like TRY, ZAR, BRL, MXN, THB, CAD, AUD). The threat of intervention from EM central banks could slow the pace of the currency decline in the sessions ahead, and this in turn could make US equities the more attractive short play. Fundamentally, it feels like things are changing and it doesn't look like there is any real lure to be wanting to start to build back into long risk exposure. The only thing I see in favor of long risk right now is the possibility of some form of a technical bounce following some heavy selling in recent trade. There is a lot of economic data and event risk ahead this week, but all of this shouldn't change the bigger picture which ultimately favors more risk liquidation and a rotation away from emerging markets, which favors the US Dollar and developed currencies.
Monday, January 27, 2014
Sunday, January 26, 2014
KRUGER INSIGHTS MONDAY, JANUARY 27, 2014
By: Joel Kruger
The Perfect Storm - So this week should really be an interesting week. We have quite a bit of economic data, end of month flows, and some key central bank event risk in the form of the Fed and RBNZ rate decisions. Throw in the previous weekly technical reversals in USD/JPY and US equities, and then add another layer of ongoing emerging market underperformance, China uncertainty, and geopolitics, and we have a real recipe for some major volatility. Each and every one of these themes could on their own inspire a surge in vol, so the prospect of contending with all of them at once is rather intense. Technically, it seems we could be headed for another round of weakness in risk assets. I have been focused on the S&P, and for me the key level to watch comes in at 1760, which represents the December low. Should we take out this level this week, it would set up a bearish outside month formation off of record highs and open the door for fresh weakness into the upper 1600's. I know this sounds like a real stretch at this point, but I wouldn't be so quick to discount the possibility.
Off To A Great Start - Meanwhile, USD/JPY has finally rolled over, and looks like it could now correct all the way back down into the desired 99.00-100.00 area. I have been talking about buying USD/JPY on a dip into this area for some time, and it looks like we may just get there. Overall, things have been playing out really nicely for me, and I would never have expected to be off to an even better start in 2014 than the one I had in 2013. I was able to book some nice profits on Friday, after exiting S&P and NZD/USD shorts, and am now flat at the time of this report. I will be looking to sell rallies in both of these markets, and will also look to see if we can't get another dip below 1.0500 in AUD/NZD. I really like the idea of buying this market and holding for a few months, as the price looks to carve out a cyclical bottom. As I outlined on Friday, EUR/USD is less interesting at the moment, but I suspect we could soon see the market stall out and reverse lower. Ultimately, only back above 1.3900 would negate the bearish outlook. Finally, GOLD is making some waves, and has managed a break back over $1270. While this still does nothing to compromise the underlying bearish structure (selling rallies still preferred), it does take some of the more immediate pressure off of the downside.
Friday, January 24, 2014
KRUGER INSIGHTS FRIDAY, JANUARY 24, 2014
By: Joel Kruger
Will We Get That Dip? - Was really pleased to see how things played out Thursday, in
light of the Wednesday strategy piece. I had been looking for the focus to shift back to USD/JPY and equities and that is exactly how things played out. It felt like there was a nervous tension in these markets, and we were on the verge of a pickup in volatility. Now we will see if these short-term setbacks can develop into something a little more significant. Both of these markets should in theory have no trouble backing up a bit after running so far, and I will be looking for a break and close below USD/JPY 102.85, and S&P 1820 on Friday to confirm my bias. Ideally, we should see a pullback in USD/JPY into the 99.00-100.00 area, which acts as previous triangle resistance now turned support. The correlation with equities is still rather pronounced, despite the fact that I believe the merits of this Yen safe haven correlation were never really well founded, and with equities looking like they could fall a lot harder than USD/JPY, it seems quite logical to extrapolated such a modest retracement in USD/JPY. But once we get into the 99-100 area, I anticipate the correlation will become a lot less relevant, and while we could still see additional weakness in equities once USD/JPY retests this zone, I don't believe USD/JPY will have any desire to fall much further. In fact, I am looking to aggressively buy USD/JPY back into this area and have been waiting very patiently for quite some time. The medium and longer-term outlook for USD/JPY is highly constructive, so the strategy of being on the short side (even if I have been looking for this pullback) is far too unnerving. As such, I prefer to just wait and buy into a good dip if we get it.
Cyclicality - So what else is interesting in the interim? Well, I have recently sold back in NZD/USD and will be looking for Kiwi to start to fall in line a bit more and respond to the US Dollar as its commodity bloc cousins have already been. The Kiwi outperformance in recent months is unpalatable, and with Aussie and now Cad already taking huge hits, the New Zealand Dollar is due to take its turn. Again, it really comes down to the cyclicality of markets and the reality that all of these currencies are currently carving cyclical tops against the buck. Kiwi is no different. Some of you might argue that Aussie is much weaker because of the major downturn in the Australian economy. While that has unquestionably contributed to the currency's demise, it is really more about the external global macro economics and cyclicality. Take the Canadian Dollar weakness for example. The Canadian economy hasn't been contending with the same type of downturn as Australia in recent months, and yet, the Loonie has begun to fall at an accelerated pace. All of this is cyclicality. So to think for one second that New Zealand isn't exposed, is a gross miscalculation. And as it always happens, when the currency starts to fall, all of a sudden the local fundamentals don't look as attractive and this only fuels an intensified liquidation. The other currency I have warned about that has yet to show any real signs of responding to this cyclicality is the Israeli Shekel. But here too there should be no exception, and I think sooner rather than later, we will start to see some relative weakness in the shekel. Look for USD/ILS to continue to be very well supported ahead of 3.40, with a breakout to 3.80 seen in the months ahead.
Emergency Meeting - What else? Well, EUR/CHF is another market I have been nagging about. I have warned repeatedly that this cross rate should be watched as a barometer for risk, and although the moves are relatively sedate, they carry with them a lot more meaning. Thursday's break back below 1.2300 is significant, and should we see an escalated risk reduction mentality, this market could gravitate back towards that scary SNB 1.2000 defense level. Things would get very very interesting if this level were even close to tested, and the implications have a reach that extends much further than Switzerland. Intervention is intervention and if it can't work in Switzerland, it will beg the question of its effectiveness in the US and Japan. Ok Joel..ya ya ya..but why aren't you talking about EUR/USD? Well honestly, because it really isn't all that interesting right now. Despite the explosive move on Thursday, the pair remains locked within a well defined range and still could just as easily be sold right back down. There is no evidence of a bullish break at this juncture, and so long as we hold below 1.3900, I retain a bearish outlook. The strategy right now is just to stay sidelined and enjoy the price action from a distance. I will say that it has been quite interesting to see the Euro and Pound moving higher with equities. I think a lot of this has to do with the fact that if you basket the global crisis, the US, UK and Eurozone economies were all the first to get hit, and all are now on the path to recovery. This makes for a nice diversification strategy, and offers a way to not be entirely exposed to the US Dollar, if that's what you are looking for. So as the commodity bloc and emerging market currencies come under massive pressure, the Euro and Pound are also finding bids. Ok, so let's see how it all plays out on Friday. I know there will be many now calling for an emergency Fed meeting after the catastrophic collapse in US equities yesterday, but these people need to get a grip. It's ok and quite healthy for the financial markets to give a little back. This will not undermine the recovery in the real economy and who knows, might even help a bit. The US economy needs to know that it can stand on its own two feet. I don't like it when people say the Fed will need to keep supporting the stock market, as if it really needs so much support at record levels. If that is really true, then there is something very wrong, Have a great weekend!
Wednesday, January 22, 2014
KRUGER INSIGHTS THURSDAY, JANUARY 23, 2014
By: Joel Kruger
Wild and Crazy - Some wild moves in the markets over the past few sessions. The key standouts have been the Pound, the Canadian Dollar, and the gross divergence between the two. Market participants have been feeling more comfortable with the UK currency following a solid round of employment data, while a very dovish Bank of Canada policy decision has the Loonie running in the opposite direction, to fresh multi-month lows. The intraday price action in these two currencies has gotten so out of hand, that I have been compelled into a short-term trade, in an attempt to fade both sides of the craze. I sold some GBP/CAD late Wednesday, and have been playing the violent overbought reading with little success. Still, on a more medium-term basis, the direction in these markets should not come as a shock, and it would be silly to attribute the most recent moves to Wednesday's events. The key fundamental point here is that the global economy is cyclical and with the US and UK economies emerging as the first to enter the crisis back in 2008, it is quite logical to now see these economies showing the first signs of recovery. This type of rotation by extension should then translate into a stronger demand for the US Dollar and Pound relative to other currencies, and this is exactly what we are now seeing. Conversely, the Canadian Dollar sits in the commodity bloc, and with these currencies standing out as outperformers in the initial stages of the crisis, they are now at risk for major underperformance. We have already seen this play out with the Australian Dollar, and the Canadian Dollar is now taking its turn. As a side note, I have been quite bearish the New Zealand Dollar and expect this final holdout amongst these three major commodity currencies to soon relent as well.
Sum Of The Parts - Moving on, just as the markets have used the latest UK data and Bank of Canada event risk as a catalyst for the already anticipated movement in the Pound and Canadian Dollar (on the aforementioned broader global macro shift), they have also used this latest bout of disappointing China PMI data as an excuse to sell equities. And yet, just like with the Pound and Loonie, there is something bigger going on at the moment, and the equity market should already be quite vulnerable at current levels on the merit that it has run too far too fast, and has not even begun to fairly price in the expected shift in Fed monetary policy that is now underway. Stocks were supported for over 5 years with unprecedented Fed policy, so the removal of such policy should have some form of a weighing influence. The key point here is that if a market wants to go in a certain direction, it will move in that direction. The day to day fundamentals are basically meaningless and the focus should always be on the sum of the parts and the bigger picture. For today, I would recommend keeping a close eye on USD/JPY and US equities. I suspect and am hoping that GBP and CAD will take a backseat after the fireworks from Wednesday, and these other two major markets will come back into the spotlight. Both are correlated and both have been chopping around with a nervous tension. Clearly the trend in USD/JPY and US equities has been intensely bullish, but there is a very serious need for a healthy corre
KRUGER INSIGHTS WEDNESDAY, JANUARY 22, 2014
By: Joel Kruger
Yen Will We See A Rally? - It has been a quiet week for me so far and really not a lot going on. Right now, it looks like the best opportunity out there might be another NZD/USD sell, on a rally towards 0.8400. Not sure if we get there, but if we do, I really like the idea of fading the move. The US Dollar continues to retain a strong bid tone, and although the buck has been consolidating in recent trade, the underlying price action suggests this is some sideways trade ahead of the next upside extension. The only exception I am considering at the moment is the Yen, where I continue to look for this currency to put in a nice short-term rally (ie USD/JPY lower) before the prevailing trend takes hold and we see some renewed Yen depreciation. I would love the chance to buy USD/JPY on a dip just below 100.00 over the coming days. I think it can happen, but we will have to keep our cool for the time being.
Be Patient - On a similar note, the US equity market is still having a very hard time accepting the need for a more significant corrective pullback, and the ability for this market to remain so well bid each and every time it looks like it is finally ready to relent, has been nothing short of amazing (and a little unnerving). Generally, I think the trick right now, with not a lot going on, is to stay very disciplined and keep to the sidelines until the next good trade comes knocking at your door. No point on forcing anything just because you feel you need some action. This type of trading always has a way of backfiring. Moving on, for any of you out there watching GOLD, this market has remained very well capped ahead of key short-term resistance just shy of $1270, and the latest bearish reversal could be setting the stage for the next major downside extension below critical support at $1180. But the key point here is that although we may have been seeing a bit of demand for the yellow metal in recent days, the GOLD price would have to rally back over $1270 at a minimum to alleviate immediate downside pressures. Until then, even the short-term trend favors a resumption of weakness.
Monday, January 20, 2014
KRUGER INSIGHTS TUESDAY, JANUARY 21, 2014
By: Joel Kruger
What's All The Fuss About? - Quite a fuss going on in early Tuesday trade, and not too sure what all the noise is about. The two key events since late New York hours have been the hotter than expected inflation data out of New Zealand and the PBOC liquidity injection. The New Zealand Dollar has found a renewed round of bids on the back of the data, with the expectation that the RBNZ will be forced to hike sooner than later in response to this data. Meanwhile, it seems risks assets have been well bid across the board, perhaps finding some encouragement from the China news. Equities are higher, USD/JPY is higher, EUR/CHF is higher, and currencies are generally bid against the buck. All of this price action does however seem a little odd to me, particularly because it has occurred in the normally tamer and less committed Asian markets. On the surface, the New Zealand data may very well seem to be Kiwi bullish given the yield differential side of the equation, but the prospect of rising inflation and what I believe to be a slowing economy, is not exactly a recipe for optimism. Meanwhile, the fact that the PBOC has been forced to inject liquidity into the markets is great in that it will be helpful to stimulate the economy, but again, the reality is that the very need to inject liquidity should be a bit of a red flag.
Fade The Craze - So I wouldn't be so quick to jump over this latest risk rally, and would probably be more inclined to be looking for opportunities to fade the moves. All of the markets mentioned above are at risk for weakness, and all of them have arguably run a little too far too fast. Over the coming sessions, I will look for an opportunity to fade strength in NZD/USD towards 0.8400, and EUR/CHF towards 1.2400. I will stay away from USD/JPY, but am expecting this market to also roll back over for one more decent pullback towards 100.00. At the moment, I am only short US equities via the S&P, but will exit the short and wait for another opportunity to sell should the market race to another record high. I had been long AUD/NZD from 1.0590 and booked some profit on half the position around 1.0660, and was taken out on the remaining half just above cost following the sharp pullback post Kiwi inflation data. I will now be looking for another chance to buy AUD/NZD into the next downside extension towards 1.0500 should we get there. There is a tremendous amount of longer-term support in the 1.0400-1.0500 area and given the extreme oversold nature of technical studies, the prospect for a major base at some point in the near future looks to be quite realistic.
KRUGER INSIGHTS MONDAY, JANUARY 20, 2014
By: Joel Kruger
Bearish Outside Week - Moving on, the only currency where I would like to see some short-term strength against the buck is the Yen, which seems to be due for a nice little corrective rally before considering the next major downside extension against the buck (ie USD/JPY lower and then higher). At the moment, a lot of the performance in this market has been heavily tied to the direction in US equity markets and investor expectations for Fed policy direction. In recent weeks we have been seeing signs of topping and evidence that the market is finally starting to price in a shift in monetary policy, and this has begun to weigh a bit, but there hasn't been any real confirmation. I would say that the previous weekly close in the S&P could be critical and could very well act as the necessary catalyst to trigger a correction, after the market put in a bearish outside week formation off of fresh record highs. The timing for a pullback feels right, so let's see how it all plays out.
Thursday, January 16, 2014
KRUGER INSIGHTS THURSDAY, JANUARY 16, 2014
By: Joel Kruger
Must We Part Ways? - I have been trading in and out of the S&P over the past few weeks, and for the most part with good success. On the whole, I caught a nice move from 1847 to 1818, and then sold again late Tuesday at 1839. My expectation was the market would put in a lower top ahead of a fresh downside extension back under the Monday low. But the market had other plans, and broke to yet another record high on Wednesday. At the time of this report, the S&P is consolidating just below the high and should it break higher again, I will part ways with the trade and revisit another time. At least I will be able to say that I was able to make money in 2014 with my bearish equity view. The funny thing about stocks is that there is no real value in playing the short side. Stocks are built to go higher. Currencies on the other hand are a different animal. Shorting one currency means you are buying another. So the dynamics are different. I had written about this idea several months back, and I have found it to be all too true as I have experienced this difference first hand. If you are selling equities it is because you don't like them. If you are selling a currency, it might be because you like something else and not purely because you don't like the currency you are selling. Moreover, with currencies, no matter how beaten down a specific currency gets, there is always demand for the currency on non speculative merits. So I guess my point here is that while the argument for a pullback in equities is highly compelling and completely justified, because stocks are not inherently designed to be sold, it becomes a lot harder to see the materialization of such a bearish reversal. The lack of a direct relative value play as you have with FX markets is a bit of a game changer. But I swear, I am a currency guy through and through and apologize if I have spent too much time focused on US equities. It's just that in this market environment, where everything is so closely tied together, it has become impossible to ignore the price action in this other asset class.
The Superfecta - Ok so back to currencies. I have gone ahead and re-established a long position in AUD/NZD today (see below). The latest slide in the cross rate has resulted in a drop to fresh multi-year lows, with the market now trading close to monumental support in the 1.0400-1.0500 area. The much softer than expected Aussie employment report has been the driver behind this latest slide, and as the market settles into this longer-term support zone, I am trying to start to look beyond the what was to focus on the what will be. The market has priced in a ton of Aussie bearishness over the past several months, and I was there at the very start of this when everyone thought I was crazy to sell AUD/USD above 1.0500. And while I still think Aussie is exposed against the buck, it seems like the divergence between Aussie and Kiwi has gotten a little out of hand. Perhaps we have now reached a point where the balance is so far out of whack that too much bearishness is being priced into Australia and not enough in New Zealand. Admittedly, at the moment, the picture looks rather bleak for Australia and much more encouraging for New Zealand. But these things always have a funny way of turning around. The technical picture is already warning of such an event and is screaming for a correction. It isn't too often that you see an FX superfecta, and today, AUD/NZD is showing highly oversold across all of the major time frames. The hourly, daily, weekly and monthly charts are all well overextended, and if you are a believer in the concept of mean reversion, we should soon see a reversal. Now what does soon mean? It means the market may still drop into the 1.0400's, but I suspect that at some point over the coming sessions, we will get that sharp reversal bounce. The fundamental catalyst could come from many different fronts. Perhaps it is a Kiwi specific event, or perhaps it is a sell-off in risk that weighs on higher yielding currencies. But the key takeaway is that something this oversold is highly compelling at a very minimum. I may be wrong and my timing might be off with this one, but happy to take another shot and find out. I would like to hold the trade for a while, but will need to see how the market responds over the coming sessions. At this point, only a break below 1.0400 would give reason for rethink. As far as the upside potential is concerned, I believe we could get a recovery back into the 1.1200-1.1600 area in the months ahead.
Wednesday, January 15, 2014
KRUGER INSIGHTS WEDNESDAY, JANUARY 15, 2014
By: Joel Kruger
All Bark, No Bite - I was definitely a little surprised (but not shocked) to see the recovery in US equities on Tuesday. It is truly amazing just how well this market has been supported on any form of a dip. While Monday's setbacks were only marginal in the grand scheme, the bearish reversal formation from record highs, certainly generated a good deal of attention and concern that the bottom could finally fall out. But as has been the case again and again, the idea of any extended declines was quickly rejected, with the market rallying back quite sharply Tuesday. I have been trading the S&P in and out this year with success, and was able to catch most of the move from Monday. I exited into the Monday close and watched the Tuesday rally not thinking I would get another chance to sell at such an attractive level. But with the hourly chart trading overbought ahead of the Tuesday close, the opportunity to get back into the short could not be ignored. I am not sure how this newly established position will play out, but as highlighted the other day, I do not believe this market will be able to establish any meaningful and sustainable gains above 1850, without some form of a more significant correction. It seems the recovery was attributed by some to the better than expected retail sales data out of the US on Tuesday. Yet, I am not so sure I buy into this.
What's Changed? - While the solid economic data is a positive for the real economy, it should not necessarily be taken so easily as a net positive for financial markets. After all, a healthy retail sales print should only translate into the need for a less accommodative Fed. Less accommodation = less incentive to be buying stocks = increased chance of profit taking (if you believe Fed policy has been supporting the stock market). Over the years I have said that when I am fading a trend, I actually like seeing these sharp (scary) moves back in the direction of the trend, as it only makes the counter-trend play that much more compelling when the market stalls out again and reverses (in this case Tuesday's rally stalls and the market breaks back below Monday's low). So as we head into the meat of Wednesday trade, I see no less of a reason to be wanting to sell equities than there has been over the past several days. The fundamentals of Tuesday did nothing to change the picture, and if anything, as per above, there is arguably even more of a reason to be wanting to sell equities. I would say that if this reversal is going to play out, we would probably need to see a break back below Monday's low before the end of the week. As for currencies, USD/JPY is still very well tied to US equities, while the rest of FX is expected to on the whole continue to be well offered against the buck on any rallies. The whole shift in Fed monetary policy theme and anticipated narrowing of yield differentials in favor of the buck, should be what drives FX for much of 2014.
Tuesday, January 14, 2014
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