FX Closing Note: Collapse into the close
We have fiddled around in recent days with key inflection points in risk, including the 200-day moving average in the US S&P500 and the Ichimoku cloud level in USDJPY, not to mention the 200-day moving average in risk trades like USDCAD, but today seemed to offer a rather definitive statement on the fate of the risk on, risk off trade for now, as the strong risk sell-off took control into the finish today. EURUSD fell below 1.2000 and Dow 10,000 also gave way on the day. All risk indicators pointed south. This looks like a very emotional environment, and leverage should be adjusted accordingly.
Here's a look at a few of the day's highlights in FX-land:
Here's a look at a few of the day's highlights in FX-land:
Chart: CADJPY
The highest beta risk trades within the G-10 like AUDJPY and CADJPY gave traders a case of whiplash today, as the supposedly JPY bearish appointment of the new PM Kan clashed with a tremendous bond rally (which collapses world/Japan interest rate spreads) and sudden collapse in risk sentiment that bashed the pro-risk currencies the hardest. The BoC warned that events in Europe could affect its outlook, and this was reflected at the forward part of the Canadian curve. To take an example, the June 2011 Canadian STIR future rallied a huge 23 ticks today despite a stronger than expected employment report and strong Ivey PMI. CAD has been one of the strongest currencies of late vs. the rest of the G-10, likely due to the negative focus on Europe and Asia (which hits AUD much harder than CAD), but signs of a weaker than expected US in an environment of risk aversion could see CAD begin to underperform almost across the board, especially if the market continues to unwind BoC expectations.
The highest beta risk trades within the G-10 like AUDJPY and CADJPY gave traders a case of whiplash today, as the supposedly JPY bearish appointment of the new PM Kan clashed with a tremendous bond rally (which collapses world/Japan interest rate spreads) and sudden collapse in risk sentiment that bashed the pro-risk currencies the hardest. The BoC warned that events in Europe could affect its outlook, and this was reflected at the forward part of the Canadian curve. To take an example, the June 2011 Canadian STIR future rallied a huge 23 ticks today despite a stronger than expected employment report and strong Ivey PMI. CAD has been one of the strongest currencies of late vs. the rest of the G-10, likely due to the negative focus on Europe and Asia (which hits AUD much harder than CAD), but signs of a weaker than expected US in an environment of risk aversion could see CAD begin to underperform almost across the board, especially if the market continues to unwind BoC expectations.
Chart: USDJPY
The important benchmark for the JPY's overall strength, USDJPY found a top ahead of the key daily Ichimoku cloud resistance. Note how today's lows came in at the bottom of the cloud, which will define whether this consolidation turns into a rejection of the bullish move. Technicians should also note that yesterday's close was exactly at the 0.618 retracement of the 95.00 to 89.00 sell-off (we don't include the May 6 panic in the technicals since it was a "false event"). Note also that the Ichimoku cloud expands a bit more before falling and disappearing at a flatline around 91.50 soon.
The important benchmark for the JPY's overall strength, USDJPY found a top ahead of the key daily Ichimoku cloud resistance. Note how today's lows came in at the bottom of the cloud, which will define whether this consolidation turns into a rejection of the bullish move. Technicians should also note that yesterday's close was exactly at the 0.618 retracement of the 95.00 to 89.00 sell-off (we don't include the May 6 panic in the technicals since it was a "false event"). Note also that the Ichimoku cloud expands a bit more before falling and disappearing at a flatline around 91.50 soon.
Chart: AUDUSD
AUDUSD is closing on strong momentum lower today and a fall of the cycle lows next week could set up a down-wave all the way to the 0.7300 area if we kick into a full 0.618 Fibo retracement of the amazing risk rally of 2009-10. Risk bulls need to see momentum fade immediately and no new closes below the old lows to get their hopes up here in the short term.
AUDUSD is closing on strong momentum lower today and a fall of the cycle lows next week could set up a down-wave all the way to the 0.7300 area if we kick into a full 0.618 Fibo retracement of the amazing risk rally of 2009-10. Risk bulls need to see momentum fade immediately and no new closes below the old lows to get their hopes up here in the short term.
Looking ahead
With a close like today's, many are likely to be sweating their positions over the weekend, and we risk a rather disorderly opening to the week on Monday. The setup looks particularly gruesome, and we could see strong follow through lower or a gap lower on Monday. We have been harping on the fact that many of our risk indicators were showing far less optimism than the equities and FX carry trades were trying to show at their highs in recent days, confirming that these models are working for us in this cycle as we hope they continue to do. We would prefer to see some kind of divergence in our risk models before we're happy to take on risk again (in other words, models showing improved risk appetite while equities and perhaps FX carry trades hit new lows).
With a close like today's, many are likely to be sweating their positions over the weekend, and we risk a rather disorderly opening to the week on Monday. The setup looks particularly gruesome, and we could see strong follow through lower or a gap lower on Monday. We have been harping on the fact that many of our risk indicators were showing far less optimism than the equities and FX carry trades were trying to show at their highs in recent days, confirming that these models are working for us in this cycle as we hope they continue to do. We would prefer to see some kind of divergence in our risk models before we're happy to take on risk again (in other words, models showing improved risk appetite while equities and perhaps FX carry trades hit new lows).
Next week offers a several important event risks in the latter part of the week. At first glance the highlights appear to be Wednesday's Bernanke testimony (dovish, anyone?) and Thursday's RBNZ meeting, for which a majority recently expected the RBNZ to hike, but one has to wonder if this is the sentiment within the central bank by the time the meeting is convened - perhaps we'll see something like the last BoC decision, a face-saving hike and very cautious guidance. We also have the Australia employment report on Thursday as well as the BoE and ECB's interest rate decisions. What will Trichet do after his extremely embarrassing performance last time around? Could the ECB cut 50 bps?
On Friday next week, we get a look at US Advance Retail Sales for May and the initial June University of Michigan confidence data.
Have a great weekend and stay very careful out there. The only thing we can guarantee about next week is that it will be extremely interesting.
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