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Tuesday, December 17, 2013
KRUGER INSIGHTS TUESDAY, DECEMBER 17, 2013
Joel Kruger
Now Or Never - I'm not too sure how much volatility we will get in the markets on Tuesday, with participants squarely focused on the outcome of Wednesday's Fed policy decision. Irrespective of the outcome, I believe this will be a huge decision that will have a major impact on markets going forward. Recent economic data has certainly been supportive of a shift in policy, and would seem to justify some form of a taper at a minimum. More importantly, strategically, I think a taper or some very strong language tomorrow warning of an imminent taper, would be in the Fed's best interest. I am in the camp that believes risk assets have been supported over the past several years by Fed policy. My worry now is that risk assets have finally taken full advantage of a Fed policy that can't extend any further. If the Fed continues to show an unwillingness to reverse policy even the slightest, we could see a scenario where risk assets start to come off heavily (investors book profit as they no longer see additional incentive from the Fed), with the Fed having nothing it can throw at the situation to buoy the risk liquidation. This in turn would create a credibility crisis and another economic crisis. If however the Fed starts to move on a path towards tightening, at least markets will be able to reconcile any pullback in risk assets, understanding that it is because of the Fed moves. This seems to be the better route at this point, as it will produce a less panicked reaction.
Forget About Monday - Technically, I believe risk assets should come under intensified pressure in the weeks and months ahead, with the charts all warning of topping in these markets. US equities are at the center of it all right now, and a serious pullback is long overdue here with studies so overextended. We saw a very nice bearish reversal week in the previous week, and the price action would suggest that US equities should close this week a good deal lower than where we closed last Friday. Yet the signal has not been sympathetic to bears in the early week, with Monday's sharp rally leaving many bears feeling defeated. Still, I would not throw too much weight behind Monday's rally, with the market only consolidating the previous weekly declines thus far and prepping for what I believe will be the next major downside extension in the S&P below 1760 and towards 1720 further down. Clearly tomorrow's event risk is the leading candidate for such a catalyst, and it would stand to reason that if we were in fact to see this bearish follow through in risk assets, it would imply the Fed decision will come out on the more hawkish side.
Be Careful With Euro And Yen - For currencies, stay away from EUR/USD right now. I like the idea of selling, but also would not rule out the possibility of one more surge to fresh yearly highs beyond 1.3835 and towards major multi-month falling trend-line resistance off of the record highs from 2008, which comes in around 1.3900. I also would be careful with USD/JPY. While the outlook is aggressively bullish over the medium and longer-term, I still feel there is risk for a significant short-term pullback that could take us back into the 99.00's. Otherwise, I would expect to see the US Dollar very well bid against all other currencies, particularly against the commodity bloc and emerging market currencies. Moving on, don't forget about EUR/CHF and the implications here if the market comes under additional pressure and starts to threaten 1.2000. Finally, I am out of the money on a long AUD/NZD trade (long 1.0897), but absolutely love this trade. I got into the position knowing that I would be holding medium-term, and I would only be concerned if we established back under 1.0700 on a weekly close basis. This is a market that has been obliterated this year and is begging for a major reversal higher. I think this reversal is imminent, and also believe that if we do see a shift in risk sentiment, this will weigh more heavily on the higher yielding New Zealand Dollar.
Now Or Never - I'm not too sure how much volatility we will get in the markets on Tuesday, with participants squarely focused on the outcome of Wednesday's Fed policy decision. Irrespective of the outcome, I believe this will be a huge decision that will have a major impact on markets going forward. Recent economic data has certainly been supportive of a shift in policy, and would seem to justify some form of a taper at a minimum. More importantly, strategically, I think a taper or some very strong language tomorrow warning of an imminent taper, would be in the Fed's best interest. I am in the camp that believes risk assets have been supported over the past several years by Fed policy. My worry now is that risk assets have finally taken full advantage of a Fed policy that can't extend any further. If the Fed continues to show an unwillingness to reverse policy even the slightest, we could see a scenario where risk assets start to come off heavily (investors book profit as they no longer see additional incentive from the Fed), with the Fed having nothing it can throw at the situation to buoy the risk liquidation. This in turn would create a credibility crisis and another economic crisis. If however the Fed starts to move on a path towards tightening, at least markets will be able to reconcile any pullback in risk assets, understanding that it is because of the Fed moves. This seems to be the better route at this point, as it will produce a less panicked reaction.
Be Careful With Euro And Yen - For currencies, stay away from EUR/USD right now. I like the idea of selling, but also would not rule out the possibility of one more surge to fresh yearly highs beyond 1.3835 and towards major multi-month falling trend-line resistance off of the record highs from 2008, which comes in around 1.3900. I also would be careful with USD/JPY. While the outlook is aggressively bullish over the medium and longer-term, I still feel there is risk for a significant short-term pullback that could take us back into the 99.00's. Otherwise, I would expect to see the US Dollar very well bid against all other currencies, particularly against the commodity bloc and emerging market currencies. Moving on, don't forget about EUR/CHF and the implications here if the market comes under additional pressure and starts to threaten 1.2000. Finally, I am out of the money on a long AUD/NZD trade (long 1.0897), but absolutely love this trade. I got into the position knowing that I would be holding medium-term, and I would only be concerned if we established back under 1.0700 on a weekly close basis. This is a market that has been obliterated this year and is begging for a major reversal higher. I think this reversal is imminent, and also believe that if we do see a shift in risk sentiment, this will weigh more heavily on the higher yielding New Zealand Dollar.
Sunday, December 15, 2013
KRUGER INSIGHTS MONDAY, DECEMBER 16, 2013
Joel Kruger
Equities Front And Center - Of all the price action in the previous week, the most important was the price action in US equity markets. We have been through this many times in recent months, and I have been looking for a top all throughout that time. Now, once again, there are signs emerging of the potential for this top, following a very convincing bearish weekly performance from record high levels. Still, it is too early to truly make any calls at this point, but we are certainly getting concurrent confirmation on the fundamental front, following a slew of very solid data out of the US over the past couple of weeks. The big questions right now are what the Fed will do in the days ahead, and how exactly the markets will respond? This has been a Fed that has consistently erred on the side of dovishness, and I presume we should expect no different at the upcoming meeting. Yet what makes this interesting right now, is the fact that economic data is making it very hard for the Fed to continue to justify such excessively accommodative monetary policy. I have been in the camp arguing for some form of a taper in recent months, as I believe we have reached a point where the risks associated with continued accommodation are greater than the risks associated with a path towards tightening.
Fed Needs To Be Careful Here - I don't think the Fed needs to necessarily taper this month for the anticipated risk asset liquidation to continue to play out, and believe this capitulation could still transpire with a Fed that leaves policy as is, but at the same time, comes out with a very clear message that policy will be reversing imminently. At this point, if the Fed were to offer no indication of a taper, it would be damaging in my view. Why? Well because it seems we have gotten to a point where risk assets have taken full advantage of monetary policy. So what happens when risk assets have fully priced in accommodation? In this scenario, there is seemingly no place to go but down (if you agree risk assets have been supported by Fed policy). So now you have a market that is selling risk and a central bank that can't do anything about it because all of its tools have been used up and it is fully extended. This is clearly a very dangerous scenario as promotes an unsettling environment. But if the Fed finally starts to taper, it sends a message to markets that things are actually getting better, and we are finally on a path to recovery. So even if risk assets sell off in this situation, at least the market can attribute the selling to the Fed's tightening, and won't be in a position of total despair (like the one where risk assets sell off and the Fed is still as accommodative as can be). What does this mean for the USD? If the Fed comes out on the more hawkish side, I would expect the US Dollar to see good demand across the board (Yen potentially only exception).
Equities Front And Center - Of all the price action in the previous week, the most important was the price action in US equity markets. We have been through this many times in recent months, and I have been looking for a top all throughout that time. Now, once again, there are signs emerging of the potential for this top, following a very convincing bearish weekly performance from record high levels. Still, it is too early to truly make any calls at this point, but we are certainly getting concurrent confirmation on the fundamental front, following a slew of very solid data out of the US over the past couple of weeks. The big questions right now are what the Fed will do in the days ahead, and how exactly the markets will respond? This has been a Fed that has consistently erred on the side of dovishness, and I presume we should expect no different at the upcoming meeting. Yet what makes this interesting right now, is the fact that economic data is making it very hard for the Fed to continue to justify such excessively accommodative monetary policy. I have been in the camp arguing for some form of a taper in recent months, as I believe we have reached a point where the risks associated with continued accommodation are greater than the risks associated with a path towards tightening.
Fed Needs To Be Careful Here - I don't think the Fed needs to necessarily taper this month for the anticipated risk asset liquidation to continue to play out, and believe this capitulation could still transpire with a Fed that leaves policy as is, but at the same time, comes out with a very clear message that policy will be reversing imminently. At this point, if the Fed were to offer no indication of a taper, it would be damaging in my view. Why? Well because it seems we have gotten to a point where risk assets have taken full advantage of monetary policy. So what happens when risk assets have fully priced in accommodation? In this scenario, there is seemingly no place to go but down (if you agree risk assets have been supported by Fed policy). So now you have a market that is selling risk and a central bank that can't do anything about it because all of its tools have been used up and it is fully extended. This is clearly a very dangerous scenario as promotes an unsettling environment. But if the Fed finally starts to taper, it sends a message to markets that things are actually getting better, and we are finally on a path to recovery. So even if risk assets sell off in this situation, at least the market can attribute the selling to the Fed's tightening, and won't be in a position of total despair (like the one where risk assets sell off and the Fed is still as accommodative as can be). What does this mean for the USD? If the Fed comes out on the more hawkish side, I would expect the US Dollar to see good demand across the board (Yen potentially only exception).
Friday, December 13, 2013
Thursday, December 12, 2013
KRUGER INSIGHTS FRIDAY, DECEMBER 13, 2013
Joel Kruger
Yen Will The Slide Stop? - The Yen continues its slide and USD/JPY has finally broken the previous yearly high from May. Fundamentally, there is no surprise with the move, given the outlook for the Japanese economy and extreme response from the government and Bank of Japan. Technically however I would have rather seen a short-term period of Yen strength (ie USD/JPY weakness) before this Yen slide continued. I have said for many months that I fully expect USD/JPY to trade higher and towards 110.00 into early 2014, but given the intensity of the Yen declines, a small correction would be ideal and healthy. Still, if you look at the Yen short trade, it is highly attractive for investors because it gives an opportunity to be long the USD and other currencies, while also actually getting paid to hold that position. The outlook for the US Dollar may be highly constructive against risk correlated currencies, but with these trades, investors need to stress about the negative carry. With the Yen, there is no stress at all, and yield differentials should only continue to widen out of the Yen's favor. And so, the Yen continues to slide.
Wait For The Correction- In the short-term, I had been looking for some older correlations to spark a brief Yen rally (ie USD/JPY pullback), but this has not happened. The irony is that I never believed in the validity of the Yen as a beneficiary in risk off environments, but felt the market still respected this relationship to a degree. Yet in recent days, we have seen a pullback in risk sentiment, and the Yen has only continued to depreciate. The breakdown in this correlation has been glaringly obvious. But short-term, I still can not recommend selling Yen (buying USD/JPY) at current levels, and would defer to the stretched technical studies that are warning the Yen will regain some form of a bid tone over the coming sessions. EUR/JPY has been on fire of late and technical studies are also warning of a decent correction here as well. So stand by and wait for the next Yen rally and then look to aggressively buy USD/JPY, EUR/JPY etc on the dip.
A Patient Kiwi Bear - Elsewhere, I am hanging onto a NZD/USD short from a while back at an average cost of around 0.8355 now. I have also sold the S&P this week at 1805 (stop-loss at cost so no risk) and bought AUD/NZD at 1.0897. The S&P trade has moved a bit in the right direction, while AUD/NZD is off to a more precarious start following some dovish RBA comments. Still, I love this trade and believe that at this point, the market has priced in just about as much Aussie dovishness and Kiwi hawkishness to really encourage reversal prospects here. I will be looking to hold this trade over the medium-term and would only exit below 1.0700. I think 1.1500 is a very reasonable upside objective into early 2014. For those of you focused on EUR/USD, the market put in a bearish reversal day on Thursday, shifting the immediate focus away from the topside and a break to fresh yearly highs. At the moment however, we would need to see a daily close back under 1.3700 to suggest the market is topping out.
Yen Will The Slide Stop? - The Yen continues its slide and USD/JPY has finally broken the previous yearly high from May. Fundamentally, there is no surprise with the move, given the outlook for the Japanese economy and extreme response from the government and Bank of Japan. Technically however I would have rather seen a short-term period of Yen strength (ie USD/JPY weakness) before this Yen slide continued. I have said for many months that I fully expect USD/JPY to trade higher and towards 110.00 into early 2014, but given the intensity of the Yen declines, a small correction would be ideal and healthy. Still, if you look at the Yen short trade, it is highly attractive for investors because it gives an opportunity to be long the USD and other currencies, while also actually getting paid to hold that position. The outlook for the US Dollar may be highly constructive against risk correlated currencies, but with these trades, investors need to stress about the negative carry. With the Yen, there is no stress at all, and yield differentials should only continue to widen out of the Yen's favor. And so, the Yen continues to slide.
Wait For The Correction- In the short-term, I had been looking for some older correlations to spark a brief Yen rally (ie USD/JPY pullback), but this has not happened. The irony is that I never believed in the validity of the Yen as a beneficiary in risk off environments, but felt the market still respected this relationship to a degree. Yet in recent days, we have seen a pullback in risk sentiment, and the Yen has only continued to depreciate. The breakdown in this correlation has been glaringly obvious. But short-term, I still can not recommend selling Yen (buying USD/JPY) at current levels, and would defer to the stretched technical studies that are warning the Yen will regain some form of a bid tone over the coming sessions. EUR/JPY has been on fire of late and technical studies are also warning of a decent correction here as well. So stand by and wait for the next Yen rally and then look to aggressively buy USD/JPY, EUR/JPY etc on the dip.
A Patient Kiwi Bear - Elsewhere, I am hanging onto a NZD/USD short from a while back at an average cost of around 0.8355 now. I have also sold the S&P this week at 1805 (stop-loss at cost so no risk) and bought AUD/NZD at 1.0897. The S&P trade has moved a bit in the right direction, while AUD/NZD is off to a more precarious start following some dovish RBA comments. Still, I love this trade and believe that at this point, the market has priced in just about as much Aussie dovishness and Kiwi hawkishness to really encourage reversal prospects here. I will be looking to hold this trade over the medium-term and would only exit below 1.0700. I think 1.1500 is a very reasonable upside objective into early 2014. For those of you focused on EUR/USD, the market put in a bearish reversal day on Thursday, shifting the immediate focus away from the topside and a break to fresh yearly highs. At the moment however, we would need to see a daily close back under 1.3700 to suggest the market is topping out.
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