Risk Aversion: Key Theme Of The Market

Risk aversion – the “on-off” trade – remains the key theme. However now “risk on” means “buy USD,” and the switch between risk seeking on good US news and risk aversion on news coming out of Japan is whipsawing the market around. The DXY index has made three new 2013 highs over the past five days, but has not been able to sustain the gains.

Central banks continue to dominate the market. Early this morning for example we saw a sudden ¥1 drop in USD/JPY after BoJ Gov. Kuroda said that the BoJ had announced sufficient monetary easing. I tend to agree with him; they announced the largest QE program of any central bank less than two months ago. It would be premature to decide that it was insufficient.

The big debate is over the US, and there too I think the market is overreacting to speculation about what the Fed might do if the data cooperate. People should remember what Fed Chairman Bernanke said back in Dec. 2008: “I made my own mistakes, but I don’t want to make someone else’s mistakes.” He said this in reference to the Fed’s error in tightening policy too soon in the 1930s, an era that he is an expert on. He may also have in the back of his mind Japan’s too-early lifting of the zero interest rate policy in 2000 and its ending of its first attempt at QE, 2001-2006, before definitively defeating deflation. Of course the fact that the FOMC is even discussing “tapering off” removes the expectations channel of influence on the markets, but the actual impact – the continued support for bond markets – will remain. I expect that liquidity from Japan will take the place of liquidity from the US and that the net impact on financial markets globally should be very little, except that the dollar should rise (which indeed does have a global impact) and the yen should weaken.

In the current “risk off” mode, CHF has strengthened somewhat with both EUR/CHF and USD/CHF falling back. Investors with a longer time horizon might want to consider looking at these pairs. I think they represent good value now as I expect risk seeking to come back and investors to move out of the CHF over time. Plus with the Swiss National Bank still setting a floor, there’s a limit to how much downside there is in the trade.

The Ifo index is the big event of the morning. Forecasts are for the indices to remain unchanged after April’s sharp drop. Given the better-than-expected data in the Eurozone recently, such as yesterday’s PMIs, the odds are that the Ifo beats expectations too, and EUR/USD gains as a result. The only US indicator out is durable goods. The headline figure is forecast to be up 1.5% mom vs the 5.7% mom decline in March. Ex transportation orders, the figure is forecast to rise 0.5% vs the 6.9% (revised) decline in March. This would show that manufacturing is stabilizing after some wobbling in Q1.

The Market

EUR/USD

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• EUR/USD reached higher after bouncing from the 1.2855 rising trendline support. Resistance is to be found at 1.2980, the 20 day moving average, followed by a strong support at 1.3075. Should the recent downtrend resume, support remains at 1.2855 followed by a stronger support at 1.2780 where there is a November rising trendline support and the bottom Bollinger Bands level.

USD/JPY
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• USD/JPY collapsed 280 pips yesterday after finding resistance at 103.80 and failing to break above the 104.00 level. The drop found strong support at 100.80, a previous high, near the bottom Bollinger level and the 101.00 level. As the trend remains bullish however the pair was able to recuperate around half of its losses and it rose overnight before lurching lower again on Kuroda’s comments. Resistance is to be expected at the 103.00 psychological level followed by the 2 day high at 103.90. Should we see another drop like yesterday, then support comes strongly at 100.80 with a break of that making 100.00 highly possible.

GBP/USD
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• GBP/USD made significant gains yesterday, recovering a bit from the continuous drop being experience over the past 3 weeks. The pair found support at 1.5040 ,its bottom Bollinger level and previous low. This level may be tested again today followed by 1.4920. A rising GBP/USD should find resistance at 1.5130 ,a level that was tested and held yesterday followed by 1.5200.

Gold

• Gold was able to gain yesterday as it continues to trade within the $1350-$1400 range. At the point of writing gold is very close to $1400 resistance level, which upon breakout should see a retest of the$1430 level and $1445 in succession. Support remains at $1350 -$1340 area followed by $1320.

Oil


• The 2-day drop in WTI was somehow paused yesterday as it found strong support and bounced at $92.20, its bottom Bollinger bands level and previous low. Nevertheless these gains were erased overnight. We think the drop is likely to continue if we see a breakout of the $93.50 level, a previous low and 3-year rising trendline support, which is being tested as at the point of writing. Further support will be found at yesterday’s low of $92.20 followed by $91.30.Resistance today can be found at the $94.50 level which was tested yesterday followed by $95.00.

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MARKETS SUMMARY