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.