FX Closing Note: Key Reversal?

Today saw risk making another attempt at a comeback. Friday's attempt at a risk comeback was a red herring and looked a bit fishy anyway since it was only a flurry of trading at the close of the US equity session that created the impression of a reversal. Today's reversal in risk has far more technical credibility because of the way in which equities gapped lower and traded at new lows for the cycles before seeing a long rally from almost the open of trading and then all the way into a very strong close, with a closing level slightly above yesterday's close. The Dow closed back above the psychologically critical 10,000 level that gave way during the day. Another boost came in the form of a strong surge in the May US Consumer Confidence survey, certainly a surprise considering the developments in markets this week and the ongoing tragedy of the Gulf of Mexico oil spill.

Looking at other risk indicators, however, we see little or no improvement in the likes of risk spreads and signs of accelerating interbank stress levels and we wonder if equities and currencies are playing some crazy little reflexive game based on short term trading flows.  Still, one important market that at least partially supported the risk-on stance today in the US was the bond market, where a somewhat weakish 2-yr. note auction (yield about 1 bp. higher than expected and bid to cover at 2.93 vs. 3.06 six-month average, though one still has to note that the yield at the auction was a record low), so this also took the pressure of the JPY crosses after EURJPY had crossed below 109 briefly earlier in the day.

USDCAD
The chart we showed this morning showed USDCAD breaking above key 1.0750/80 resistance, but the developments by today's close leave the chart about as ambiguous as it gets: the CAD bulls will point out that the pair failed to close above the recent high in the 1.0750 area an the more strategic 1.0780 resistance level, though the close is not quite low enough to create a solid shooting star pattern. The next important level lower is the 200-day moving average just below 1.0500, which provided some resistance on the way up. Bulls will want to see a close back above 1.0780 to suggest that the pair can make a move to the 1.1100+ target next. The direction for USDCAD will inevitably be determined by whether risk can make a stand here or whether today's action only offers false hope. 

Looking ahead
Last week, we suspected we might see a trading low this week and the action today in certain markets has certainly tried to take some of the momentum out of the bear, though still very elevated worry levels in various other indicators suggest we should be very cautious in shouting out the all clear for now. For now, we have compelling technical patterns suggesting a trading reversal, so for the bears to regain the upper hand we need an immediate momentum shift in the next day or two. The end of this week could get a bit chaotic as well as we effectively have the end of month fixing on Friday since Monday the 31st is the US Memorial Day holiday with market closures. We have seen tremendous moves in equities and bonds this month, so the portfolio shifts might be massive and may have to take place in less than ideal liquidity conditions - all a recipe for plenty of volatility.

After the US close, we get the latest weekly ABC consumer confidence survey. Let's see if this market turmoil is getting in the way of the increase in the ABC weekly confidence readings (still within the previous range while we have seen a decided breakout now in the May US conference board number), or if there really is enough momentum building in the job market to see a continued recovery of confidence for now.

Stay careful out there.