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