Joel Kruger .jpg)
Just An Inside Day - All of that wild price action on Wednesday and yet the Euro still held within Tuesday's range against the buck. So in reality, not a lot happened and there was just a bunch of noise. What this does do however, is it makes the recent range more significant and a break of this range more influential as far as being able to determine shorter-term and potentially medium-term directional bias. So what are the key levels to watch right now? Keep an eye on 1.3620 above and 1.3520 below. Look for a break and daily close above or below to open the door for a breakout. Still, I am of the view that a downside break with have a more meaningful impact and potentially expose more significant declines than any bullish momentum from an establishment back over 1.3620.
Attractive Downside - There is some very solid internal resistance in EUR/USD at 1.3650, and beyond this point, I would also highlight the 78.6% fib retrace off of the October to November high-low move, which comes in at 1.3720. So if we do see a breakout beyond 1.3620, look for gains to then be well capped in the 1.3650-1.3720 area. On the other hand, if we manage a break and close back under 1.3520, I see a much bigger risk for the move to the downside to be a good deal more meaningful than a bullish break, with deeper setbacks towards 1.3100 not to be ruled out. Fundamentally, markets will spend the day preparing for and then digesting major event risk in the form of the European Central Bank rate decision. This will likely offer itself as the primary catalyst for Euro moves. Market participants will be looking to see if Draghi and co. show any signs of being more upbeat than they were at the previous meeting, when the ECB surprised with a rate cut.
A Lot More Going On - But the focus shouldn't only be on the ECB into the end of the week. There are other things going on right now, and broader price action suggests that we could soon see a significant rise in volatility across all markets. We have been getting signs of potential exhaustion in US equity markets, while currencies like the Yen and Franc are also finding relative strength. A potential pullback in USD/JPY could be in the works, while the EUR/CHF break to fresh 2-month lows is warning of additional stress in the market place. The SNB hasn't really needed to worry a whole lot about its 1.2000 barrier defense, largely because extended ultra accommodation from the Fed has indirectly helped to keep EUR/CHF propped. But with the prospect for the start to Fed policy reversal looking quite high, this could put some serious strain on the Swiss central bank, and as highlighted Wednesday, could in turn have a more significant, risk negative ripple effect. Let's also not forget about Friday's monthly US employment report and some Fed speak from the more hawkish Fed's Fisher and Plosser, which could do a good deal on their own to inspire some serious activity.
Joel Kruger
Misleading- I wouldn't be giving any serious attention to Tuesday's currency bounce against the buck. Despite some broad US Dollar weakness, at closer glance, the important variables for sustained USD demand are still very much present, and the relevant themes still apply. In fact, I contend Tuesday's price action was quite misleading. I have long argued that financial markets should undergo a major risk liquidation over the medium-term and that risk assets are due to come under intensified pressure. This type of market environment generally welcomes broad USD strength on a combination of flight to safety demand for the buck and implications that also favor USD yield differentials. But sometimes, markets can deviate a little bit, even though these themes are still very much alive.
The Forgotten Indicator - So why was Tuesday's price action so misleading? Well - if you look at the price action in the key risk correlated markets, the message was still risk negative. One of my favorite barometers of risk in the currency markets is the EUR/CHF cross rate. While the cross isn't moving a whole lot these days, its direction is still important, particularly when moving lower. On Tuesday, EUR/CHF traded to its lowest levels in nearly 2 months, and the breakdown could carry with it some dangerous consequences. Although the most publicized form of artificial central bank support to the financial markets since the onset of the global crisis has come from the Fed, we must not overlook other key forms of artificial intervention, including the SNB EUR/CHF 1.2000 barrier defense.
What Happens When? - The SNB has promised to vigorously defend this level, and has managed to do so somewhat successfully over the past 2 years. I say somewhat because the market hasn't exactly taken off since the defense and has only managed to hold moderately above the defense level. Let us also not forget the SNB has had the benefit of defending this barrier in risk positive Fed supported world. But what happens when markets start to price in an end to ultra accommodative Fed policy and the artificial support is slowly removed? Risk assets are sure to be highly exposed and this in turn could renew downside pressures on EUR/CHF and make things significantly more challenging for the Swiss central bank.
Credibility Crisis - So if 1.2000 is in fact breached in the coming weeks, this would send a message to global markets that intervention can never really be successful as a longer-term solution and markets will ultimately dictate where prices should go. A breach of 1.2000 could therefore have a ripple effect where all artificially supported markets are exposed on the realization that no intervention (including Fed intervention) can truly last forever. Another important factor to highlight with regard to the EUR/CHF intervention is that the intervention has been defined by a specific level. It isn't too often that you see something like this and the danger of citing a specific level as the line in the sand, is that if and when that level is ever breached, it carries with it a crisis of credibility.
A Fed With A Different Face - Right now, most of this is theoretical and the SNB doesn't need to be sweating just yet. But if we see a break below next critical support in the 1.2195-1.2215 area, I promise you will be hearing a lot more about EUR/CHF, the SNB, and the implications of a 1.2000 break. Other markets confirming the risk off bias on Tuesday and into Wednesday (despite Tuesday USD weakness) include Aussie, Kiwi, Cad, the Yen and US equities. All of this tells me we shouldn't expect the US Dollar to remain offered for much longer. Oh and don't forget about upcoming Fed speak from Fed Fisher and Fed Plosser this week. Both of these members will be voting in 2014 and both of these members have expressed deep concern with the current state of Fed policy and the grave dangers associated with this highly unusual utra accommodation. The combination of a Fed that can't really doing anything in the way of easing further, and the arrival of these hawkish voting members, should not be taken lightly by doves.
Joel Kruger
Finally Some Excitement - Markets are finally actually getting interesting again, and there is a lot to talk about today. The USD remains very well bid across the board, but now we are seeing some of the key holdouts relent, with the Euro and Pound both putting in convincing bearish outside days on Monday. The Monday price action in both EUR/USD and GBP/USD was quite nasty, with the major pairs initially ascending to fresh multi day highs before reversing sharply to take out previous daily lows. We had already been seeing broader currency weakness against the buck in recent weeks, with commodity bloc and emerging market FX standing out. Traditionally speaking, in this type of a commodity bloc/EM weakness environment, it would not have been normal to assume that we would see the Yen correlating, but that is exactly what we have been getting. The Yen has actually been one of the weakest currencies since breaking out of a multi-month triangle against the buck, and USD/JPY is flirting with the yearly high at 103.75, established back in May.
And You'll Pay Me Too? - So the Dollar is now unanimously bid, and it has been quite some time since we have seen such staggering demand. What is driving this demand? Well - in my view it is all about Fed taper implications and yield differentials. I believe the day the financial markets never wanted to come has finally arrived, and the reality that some form of a monetary policy reversal looms, is sinking in. The financial markets don't want to live in a world where they are no longer artificially supported, but this is a very necessary reality that is long overdue. And if the Fed is in fact at long last ready to make some small move towards reversal, this should start to narrow yield differentials (widen in the case of USD/JPY) back in favor of the buck. Part of the reason the Yen has been so well offered is the fact that the long USD/JPY play has not only been highly attractive fundamentally on the merits of diverging economic prospects, but also on the added bonus of being able to establish a long USD position, while at the same time getting paid (albeit it fractionally) to hold that position. This is truly a rare opportunity.Stars Aligning - Other standouts on the currency front confirming this outlook are the break to fresh yearly highs in USD/CAD, and the ongoing deterioration in the Australian Dollar. Elsewhere, even resilient and seemingly immune currencies like the Shekel are showing signs of bearish reversal. But the buck literally doesn't stop here. If we look at the price action in other asset classes, it becomes apparent that all of the stars could finally be aligning. The sharp sell-off in GOLD on Monday now exposes a retest of the multi-month lows from late June at $1180, and I believe if we assume the US Dollar is better bid on expectation for Fed policy reversal, it would make perfect sense to see a waning in the Gold hedge against inflation. While I still believe there should be medium and longer-term value in GOLD at lower levels on risk liquidation themes, for the time being, the price action can be reconciled on the USD appreciation story.The X Factor - Finally, last but not least, we are getting very early signs of confirmation on the equity front. The equity markets remain the X factor, and we are going to need to see a serious pullback here to truly confirm the fact the markets are actually pricing in a Fed reversal. This is the one market that has failed to relent in 2013, and we have seen record highs now, seemingly on a daily basis. But Monday's bearish reversal in the major US equity indices should not be taken lightly, especially in the context of this broader price action. Although we still have a long way to go here, the fact that we are getting this price action consensus across all asset classes, could be a red flag for a major capitulation in US equities. So how does all of this translate to my trading? Well - medium term, I am going to look to sell the S&P again and hope that this third time is a charm. Short-term, I have also put in a sell order for USD/JPY at 103.70 on Monday with a stop-loss at 104.55. Technical studies are super stretched in USD/JPY at the moment, and I still believe there will be some Yen demand on traditional flight to safety correlations (even though I do not believe and never have subscribed to the Yen safe-haven idea) should we see a deterioration in risk sentiment. My only other notable exposure at the moment is a short NZD/USD position established several days back just under 0.8400 and I am looking for deeper setbacks towards 0.7500 into early 2014.
Joel Kruger
Reflections - Ok..so we head into the final month of trade for 2013. It has been a tale of two halves for me. I was able to get out of the gates fast and managed to capitalize after making some big bets on Yen and Aussie shorts against the buck. There were some other nice ones in the first 6 months of the year, but the key standouts were definitely the Yen and Aussie short plays. The second half of the year has been a net loser, though fortunately, the setbacks during this time have paled in comparison to gains seen in the first half. The key standout losers in recent months have been an AUD/NZD long back in July which was stopped for a loss, and a couple of short attempts in US equities that were clearly mistimed. I was able to mitigate some of these second half losses with a long Gold position in late June at $1250, and an exited longstanding long USD/CAD position from just under parity. Overall, I can't complain and am definitely looking forward to 2014.
Looking Ahead - So what am I looking for in 2014? Well..I will be looking for a lot of what I have been looking for in the second half of 2013. Despite the losses with my shots at fading the equity market rally, I will continue to look for opportunities to short what I believe to be a very exhausted rally. The effortless push to fresh record highs on (what seems to be) a daily basis, at this point, can not be sustained on technical merits, and the risk for a more sizable corrective decline increases with each passing day. The higher we go, the further I think we will drop once this liquidation gets going. There is no denying that the stock market has been artificially supported by the Fed, and with very little dovishness left to price in at this point, how much more can this market really rally? A fed taper might not be coming as soon as this month, but should happen at some point over the next few meetings. This taper will represent the official shift in monetary policy, and though not doing much to really tighten things up, will carry with it this deeper symbolic implication. So my favorite trade for 2014 is not an FX trade, but rather, looking for that significant pullback in equities. Interestingly enough, my only short-term exposure right now is in another non-FX market. Last week I sold some Bitcoin at $1175, and will be curious to see if I can catch a nice move here, as this parabolic firestorm looks to contend with the forces of gravity.
