Dollar Soared Broadly As Funds Flowed Back To Major Stock Markets

The developments in financial markets last week were rather significant. On the one hand, U.S. equities continued the run for new records with the DOW breaking through the 15000 level to close at 15118.5. S&P 500 also moved away from 1600, to close at another record at 1633.7. It should be noted that German DAX also closed at a record high at 8278.6. The FTSE 100 extended the run toa new five year high to close at 6625, which is not far from the historical 6950 high. U.S. bonds tumbled sharply towards the end of the week, with the 10 year yield closing at 1.900%, compared to May's low of 1.614%. 30 year yield jumped to close at 3.104%, compared to May's low at 2.810%. The strong rally in treasury yields helped dollar staged broad based rally with dollar index breaching April's high of 83.49 before closing at 83.14.

The jump in U.S. treasury yields were in tandem with broad based selloff in the Japanese yen. The USD/JPY finally took out 100 psychological level, as did the CAD/JPY. The EUR/JPY also broke through the 131.12 resistance to resume the larger up trend. The Aussie and Kiwi were overwhelmed by the strength in dollar and U.S. equities. The treasury yield had weakened sharply and broadly. The Aussie was pressured by the unexpected RBA rate cut, while the Kiwi tumbled on RBNZ intervention comments. Both currencies were indeed worse than the Japanese yen. The Canadian dollar also reversed against dollar, even though it was firm against European majors. In addition to the broad based weakness in JPY, AUD, and NZD, the CHF dropped sharply against the EUR and GBP. Meanwhile, the euro and Sterling displayed some weakness against the greenback.

The overall movements argued that funds were flowing back to major stock markets for higher returns. The funds were from bonds (as seen in rally in yields), yen, and even the so called higher yielding Aussie and Kiwi. Gold suffered a steep selloff but rebounded strongly on Friday. We'll see whether more funds will flow out of gold in the next two weeks to affirm this view. US, UK and EU all benefited from the current move with the U.S. and dollar having an upper hand.

The strategies mentioned last week, long GBP/JPY and CAD/JPY but short EUR/GBP didn't yield any result. The near term trends are quite clear that weakness in Aussie, Kiwi and Yen should extend. Comparing the three, we maintain our bearish view in AUD/NZD, and neutral to bullish view in AUD/JPY. Shorting yen is still preferred, even though AUD and NZD were the worse performer last week. Swiss Franc is avoided as fund from swiss should also follow and move out. The question is whether to long USD, EUR, GBP, or CAD against JPY. It should be noted that EUR/USD, GBP/USD and USD/CAD displayed sign of near term reversal last week. The Dollar index breaching 83.49 was viewed as up trend resumption. We prefer the dollar over others. An important motivation on long dollar is the possibility of a steep selloff in gold.

To recap we'd prefer to switch GBP/JPY and CAD/JPY long to USD/JPY long this week. Meanwhile, we'd close the EUR/GBP short, because while a deeper fall could happen, downside potential is relatively limited. We'd better focus on what's happening now.