KRUGER INSIGHTS TUESDAY, JANUARY 28, 2014

By: Joel Kruger

Sidelined But Anxious - So as much as I don't want to be, I am on the sidelines right now. Everything is looking great and playing out like I want, and yet, in the very short-term, it is difficult to isolate attractive entry points for fresh positions. What am I saying? Well, the trouble is, as much as I see the risk off trade as the trade to be in, given how far EM FX has fallen in recent days, it is hard to argue for (or at least feel good about) another intense round of selling without some form of corrective activity. At the same time, the correlated US equity market still looks like it could fall off quite a bit, which would suggest that the EM FX weakness would continue. By extension, this type of environment should not bode well for the commodity bloc currencies, and while I like the idea of selling here as well, it is hard to get behind a short Aussie and short Cad position against the buck, with these markets also having fallen quite hard in recent sessions and potentially at risk for a move in the other direction, or at a minimum some consolidation. Meanwhile, EUR/USD and GBP/USD have taken a bit of a backseat, but these major pairs have been well bid into attractive resistance, and could be poised to roll back over. This would then suggest a resurgence in broad US Dollar demand.

 

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.