Kruger Insights Monday – December 3, 2013 by FirstMacro

BinaryOptionsNow | Published on December 3, 2013 at 11:30 am

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Finally Some Excitement – Markets are finally actually getting interesting again, and there is a lot to talk about today. The USD remains very well bid across the board, but now we are seeing some of the key holdouts relent, with the Euro and Pound both putting in convincing bearish outside days on Monday. The Monday price action in both EUR/USD and GBP/USD was quite nasty, with the major pairs initially ascending to fresh multi day highs before reversing sharply to take out previous daily lows. We had already been seeing broader currency weakness against the buck in recent weeks, with commodity bloc and emerging market FX standing out. Traditionally speaking, in this type of a commodity bloc/EM weakness environment, it would not have been normal to assume that we would see the Yen correlating, but that is exactly what we have been getting. The Yen has actually been one of the weakest currencies since breaking out of a multi-month triangle against the buck, and USD/JPY is flirting with the yearly high at 103.75, established back in May.

kruger insights december 3, 2013

 

And You’ll Pay Me Too? – So the Dollar is now unanimously bid, and it has been quite some time since we have seen such staggering demand. What is driving this demand? Well – in my view it is all about Fed taper implications and yield differentials. I believe the day the financial markets never wanted to come has finally arrived, and the reality that some form of a monetary policy reversal looms, is sinking in. The financial markets don’t want to live in a world where they are no longer artificially supported, but this is a very necessary reality that is long overdue. And if the Fed is in fact at long last ready to make some small move towards reversal, this should start to narrow yield differentials (widen in the case of USD/JPY) back in favor of the buck. Part of the reason the Yen has been so well offered is the fact that the long USD/JPY play has not only been highly attractive fundamentally on the merits of diverging economic prospects, but also on the added bonus of being able to establish a long USD position, while at the same time getting paid (albeit it fractionally) to hold that position. This is truly a rare opportunity.

Stars Aligning – Other standouts on the currency front confirming this outlook are the break to fresh yearly highs in USD/CAD, and the ongoing deterioration in the Australian Dollar. Elsewhere, even resilient and seemingly immune currencies like the Shekel are showing signs of bearish reversal. But the buck literally doesn’t stop here. If we look at the price action in other asset classes, it becomes apparent that all of the stars could finally be aligning. The sharp sell-off in GOLD on Monday now exposes a retest of the multi-month lows from late June at $1180, and I believe if we assume the US Dollar is better bid on expectation for Fed policy reversal, it would make perfect sense to see a waning in the Gold hedge against inflation. While I still believe there should be medium and longer-term value in GOLD at lower levels on risk liquidation themes, for the time being, the price action can be reconciled on the USD appreciation story.

The X Factor – Finally, last but not least, we are getting very early signs of confirmation on the equity front. The equity markets remain the X factor, and we are going to need to see a serious pullback here to truly confirm the fact the markets are actually pricing in a Fed reversal. This is the one market that has failed to relent in 2013, and we have seen record highs now, seemingly on a daily basis. But Monday’s bearish reversal in the major US equity indices should not be taken lightly, especially in the context of this broader price action. Although we still have a long way to go here, the fact that we are getting this price action consensus across all asset classes, could be a red flag for a major capitulation in US equities. So how does all of this translate to my trading? Well – medium term, I am going to look to sell the S&P again and hope that this third time is a charm. Short-term, I have also put in a sell order for USD/JPY at 103.70 on Monday with a stop-loss at 104.55. Technical studies are super stretched in USD/JPY at the moment, and I still believe there will be some Yen demand on traditional flight to safety correlations (even though I do not believe and never have subscribed to the Yen safe-haven idea) should we see a deterioration in risk sentiment. My only other notable exposure at the moment is a short NZD/USD position established several days back just under 0.8400 and I am looking for deeper setbacks towards 0.7500 into early 2014.

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