KRUGER INSIGHTS TUESDAY, FEBRUARY 04, 2014

By: Joel Kruger

Don't Get Caught In The Middle - Quite a lot going on right now and the trick is to not get caught in the middle. We are finally seeing a legitimate correction in US equity markets, and this has opened fresh downside in the emerging markets, where things are getting scary. Everywhere you turn, there is talk of another EM central bank about to raise rates to offset the crippling depreciation in their local currency. But it isn't only EM central bankers that are feeling the heat, you also have the SNB on the opposite side of the coin, sweating out the appreciation in its local currency. EUR/CHF has dropped back below 1.2200, and a break of 1.2165 would put more focus on that well publicized 1.2000 barrier defense. So while EM central bankers are being forced to think about tightening, Swiss central bankers are feeling the pressure to ease. It's all a bit of a mess and will take some time to sort out. Everything is connected and the markets are in the process of an unwinding of investments that has been made away from the developed global economy in the earlier phases of the global crisis. Money had flown into the emerging markets and into equities, and now that money is rotating out as the Fed starts to reverse policy. 

Too Far Too Fast? - Although the Fed is reversing, and will reverse at a snail's pace, even the little tweaks that we are seeing now are having a major impact. So hold onto your hats. USD/JPY has fallen back under 101.00 on similar correlations, and could be poised for deeper setbacks below psychological barriers at 100.00 in the sessions ahead. It is hard to project just how fast this will all play out, and this is what makes trading markets quite challenging at the moment. While these risk assets should see additional downside, we have also seen some huge declines in a very short time, and there could just as easily be a corrective bounce and rally in risk assets ahead of the next downside extension. This means we could see a USD/JPY bounce, EM FX recovery, equity rally, and EUR/CHF demand, before the resumption of this intense bout of risk liquidation. I have gone ahead and taken a shot into risk via USD/SGD today. I am not sure where this market will be trading when you read this, but I bought into the Asia close on Tuesday at 1.2688 and will see how the rest of the day pans out. The catalyst for the trade has come from the expectation that we could see a bit of a bounce on account of what I have talked about above, and on the basis that hourly technical studies were violently oversold and warning of a bounce. Just as with USD/JPY, USD/SGD is also trying to rally on a more medium-term basis, and this market is locked in a broader uptrend at the moment. So while buying here is quite risky, at the same time, if this broader trend is to remain intact, taking a shot here seems to be worth the risk.