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Joel
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By: Joel Kruger
Picking Spots - I had warned that following a nice bout of risk liquidation, there was a very strong possibility that we would get a bit of a bounce on Tuesday. This is exactly how it played out and as per my recommendation, the sidelines were the best place to be for the day. Having said that, with NZD/USD rallying sharply on the day, I started to take my shots late Tuesday. I initially sold 0.8220 and with the market showing no follow through ahead of the Kiwi employment data, I exited the position at cost. The data came out better than expected and the market jumped up just over 0.8250 before pulling back. I was watching the rally closely and took the opportunity to sell again, this time at 0.8246. At the time, hourly studies were well overbought, and the market was also testing a key 78.6% fib retrace off of a recent high-low move. Given my more medium-term bearish bias here, I also really liked the idea of jumping back in. Fundamentally, despite the solid data, there is too much going on outside of New Zealand at the moment for the price action in the currency to be so heavily weighted to the domestic front. The macro picture is changing, and with the other commodity bloc and emerging market currencies under pressure, we should expect the same from the New Zealand Dollar.
Erring On The Side Of Caution - At the same time, we also need to be careful, and prepared to exit if the trade is not working out. It is still unclear at this point whether this latest bout of short-term consolidation in markets is over, ahead of the next big selloff in risk assets, or if we are going to see more consolidation, resulting in a bit more upside in risk assets (risk currencies), before that bearish continuation. I have placed my stop at cost on the 0.8246 NZD/USD short and we will see how it plays out. My bias is clearly bearish risk, but my biggest concern is that emerging market currencies have been sold so aggressively of late that they could be looking attractive to some, which could inspire a rally. And if we see a rally here, it would probably influence other markets like USD/JPY, EUR/CHF, NZD/USD and US equities (higher). Again, I don't believe these emerging market currencies have much upside, but technically, it wouldn't be inconceivable to see a bit more of a rally before they once again head lower. So this is what is keeping me ultra cautious at the moment. Whatever the case, I will continue to look for opportunities to be fading currencies and buying US Dollars, particularly against the non-major FX markets. Keep an eye on the hourly movements in USD/JPY, EUR/CHF and US equities today. These markets will probably give the best indication of what lies ahead.
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.
By: Joel Kruger
A Month In Review - At the end of 2012, there were some amazing setups ripe for the taking. I had a very strong feeling that I would get a nice start to 2013, with both the Yen and Australian Dollar on the verge of collapse. And just as expected, both currencies came under intensified pressure and the rewards were there. At the end of 2013, I had a similar feeling, with US equities so extended and closing out the year at record highs. I had been selling US equities in the second half of 2013 with little success, but was careful about exactly how I was selling and exactly how much much I was selling. I definitely took some losses there, but was ready and able to keep taking shots as I knew the moment would come. And in that final week of December, with the S&P tracking around 1850 and showing no room for any additional gains, I took my first shot of the year (technically end of December) and it paid off handsomely. This gave me some good momentum early on, and from there, fresh opportunities kept presenting. January is now over and the books are closed for the month. As I look back, I must say, I never would have expected to put in a performance like this (the portfolio is leveraged at 5X). My expectations were exceeded more than quite a bit, and I ended up putting in a much stronger result that January 2013 (See Performance Here). But I think the key takeaway is that we never really know when the best opportunities might come, and if we are patient and wait, usually good things will happen. We just need to make sure we are always keeping ourselves in the game, and are never forcing anything. It's more than ok to take your shots, but always be ready to walk away and take another shot another day. It is also important to make sure we never get too high or low in this game, and so the time for looking back is over. Now it's time to stay focused and look ahead. I will do my best to keep my head down and continue to look for good opportunities.
Where Should We Be Looking? - Now onto markets. Where do we stand? Well, I think we should be expecting more pressure on risk correlated assets. I'm not too sure whether we head lower in the early week, or whether we get a bit more consolidation first. But look for more downside in US equities and emerging market FX, and upside in the US Dollar and Yen. I would say the more important FX markets to watch right now are USD/JPY and EUR/CHF. A break and daily close below 101.75 USD/JPY will open the door for a test of major psychological support at 100.00, while a drop back under 1.2165 EUR/CHF, will certainly turn some heads and get people talking about a possible assault on that widely publicized and seemingly impenetrable 1.2000 SNB defence barrier. Downside pressure in both of these markets has risk off implications and would likely result in fresh downside for US equities and emerging market FX. However, I do believe there will be some good buy opportunities for USD/JPY and EUR/CHF, and while we could still see US equities and emerging market FX pressured, once USD/JPY gets down below 100.00 and EUR/CHF towards 1.2000, these two markets will become very attractive as longer-term buys (fundamentally and technically). But for now, I will just sit back and wait for the market to come to me. At current levels, there really isn't anything jumping out. I know many of you are focused on EUR/USD, and this latest break below 1.3500 opens the door for a retest of the November base at 1.3295. Still, while the outlook is bearish, I do not feel comfortable recommending a Euro short here, as we could see a nice little corrective bounce before heading lower. Wait for intraday rallies and then look to sell.
