While the uptrend in US Equity markets remains intact the moving average set ups on the monthly charts, compared to history, suggests that the trend is stretched and could be susceptible to a correction, warns CitiFX.
"This suggests to us that the danger of a material correction (possibly in excess of 20% but certainly one of double digit percentages) has grown," Citi argues.
"We view such an event as a likely market event rather than a US economic event and therefore would expect it to materialise over a number of months (2-4 months) rather than an extended period before likely recovering again," Citi adds.
How to play that in FX?
"If our cautious outlook develops into an outright bearish one, this would have material implications for the FX market," Citi argues.
In particular, Citi quant analysts have highlighted previously that in the event of a US Equity correction AUD has historically (since January 1999) been the most susceptible currency while JPY has been the outperformer," Citi notes.
"The technical set ups add further reason to remain suspect of AUD and potentially bullish on JPY, as declines on AUD/USD, AUD/JPY, and USD/JPY all look possible/probable if this equity market dynamic were to develop," Citi advises.
"The technical set up on USD/JPY is less definitive than those for AUD/JPY or AUD/USD. However, a break of the late 2014 lows in the 115.57 – 115.86 range would suggest that further losses are likely," Citi adds.