Equity bears face a Hydra of risk bulls, as every sell-off in risk is simply met with a new wave of double-down buying. This is an absolutely amazing market to observe and gave us cause to have a look back at past equity market rallies, and how long they can find sustenance before facing significant correction (a significant correction defined as a couple of weeks or more of at least back and forth activity and not necessarily even a strong sell-off). Our unscientific conclusion is that approximately three months is the common outer limit for the best bullish episodes in the market.
By that measure therefore, this rally began on the fifth of February and is getting very long in the tooth as we would be closing in on the end of the third month over the next couple of weeks. There have only been two clear episodes in the equity markets that lasted longer than that in the last 15+ years of US equity market history. So we are in extreme territory, folks, and within a week or two should expect markets to at least go sideways, if we are to believe the statistical evidence from the long time series.
Chart: Volatility and AUDUSD
Here is a look at FX and US equity market volatility (white and green lines, respectively) and the USD/AUD rate. From this, it appears that AUDUSD will need to see a continuation in the already remarkable, massive decline in volatility (or to put another way - sustained higher market complacency) in order for it to continue to grind higher.
Here is a look at FX and US equity market volatility (white and green lines, respectively) and the USD/AUD rate. From this, it appears that AUDUSD will need to see a continuation in the already remarkable, massive decline in volatility (or to put another way - sustained higher market complacency) in order for it to continue to grind higher.
Chart: AUDUSD and rate differentials
Clearly, the AUDUSD view is being driven as much by the rate differential view as anything else. As we pointed out recently, a number of indicators suggest Aussie is a bit expensive here, particularly Chinese equities and BHP Billiton stock, but the interest rate view is still very supportive and is a key component supporting AUDUSD at these levels. Today, this is perhaps doubly so after the rally in treasuries has been turned back in today's US session, thus aborting the JPY rally. The chart below shows AUDUSD (green) vs. the spread in the June 2011 STIRs for the two countries.
Clearly, the AUDUSD view is being driven as much by the rate differential view as anything else. As we pointed out recently, a number of indicators suggest Aussie is a bit expensive here, particularly Chinese equities and BHP Billiton stock, but the interest rate view is still very supportive and is a key component supporting AUDUSD at these levels. Today, this is perhaps doubly so after the rally in treasuries has been turned back in today's US session, thus aborting the JPY rally. The chart below shows AUDUSD (green) vs. the spread in the June 2011 STIRs for the two countries.
Looking ahead
EURUSD didn't manage much of a rally off the day's lows, which are the lows for the cycle as Greek 10-year yields are above 8.75% at the close of the session today. A break lower sets up a possible go at the 1.3000 level if the Greek situation is allowed to worsen and/or if risk aversion settles over the market. USDCAD looks interesting tomorrow with the data on tap there (Canada Mar. CPI and Feb. Retail Sales) energy prices avoiding a meltdown in today's trade and rallying strongly off the lows. Also watch out of the German IFO survey tomorrow in Europe.
EURUSD didn't manage much of a rally off the day's lows, which are the lows for the cycle as Greek 10-year yields are above 8.75% at the close of the session today. A break lower sets up a possible go at the 1.3000 level if the Greek situation is allowed to worsen and/or if risk aversion settles over the market. USDCAD looks interesting tomorrow with the data on tap there (Canada Mar. CPI and Feb. Retail Sales) energy prices avoiding a meltdown in today's trade and rallying strongly off the lows. Also watch out of the German IFO survey tomorrow in Europe.
Watch out for a potential revaluation of the Chinese yuan tonight - something that could be a psychological game changer here after it has been so heavily discussed. The timing would be good for the Chinese to get this out of the way here ahead of the weekend's G-20 meeting, though we have no special insight into their thinking on this matter, and they might not decide to move for another month or more.
Stay careful out there.
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