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!