Kruger Insights Thursday – January 9, 2014 by FirstMacro

BinaryOptionsNow | Published on January 9, 2014 at 11:18 am

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By: Joel Kruger

Non Event Risk – Market participants will be digesting some central bank event risk on Thursday, although I am not too sure we should expect much at all from the ECB or BOE. Both central banks are widely expected to leave policy unchanged and the only real point of interest is whether or not Mr. Draghi makes any reference to the recently softer than expected inflation data and the potential influence on monetary policy going forward. Overall, everything really still comes down to developments out of the United States and the direction of Fed monetary policy. The recent shift towards a path of tightening, although quite mild, is nevertheless a move in a different direction, and has set the wheels in motion towards higher rates. It all comes down to the economy now and whether or not indicators are supportive of further tightening…sorry tapering. As such, tomorrow’s monthly jobs report will be critical. If we see anything like what we saw on Wednesday with the ADP report, the NFP print could further solidify Fed commitment to separate from historic ultra accommodation.

kruger insights january 9, 2014

The Grand Rotation – All of this favors the US Dollar over the medium-term, with yield differentials expected to continue to narrow back in favor of the buck. This is now a story of mass rotation, which should see money flow back into the US Dollar. The currencies most at risk going forward will be those currencies that have been heavily reliant on foreign inflows to support growth. In recent years, US Dollars have flown into commodity bloc and emerging market economies on the appetite for yield and comfort of a short-term decoupling from the US crisis. But now everything is coming full circle, and these economies will be highly exposed going forward. While I do believe that even the major currencies will trade lower against the buck, the setbacks here will pale in comparison to the anticipated weakness in the commodity bloc and emerging markets. We have already seen relative underperformance here, with many of these currencies getting hit hard in 2013. But expect more of the same in 2014.

Stubborn Holdouts – Interestingly enough, there are still some currencies that have failed to respond to this anticipated rotation, but I don’t expect these currencies to be able to hold out much longer and would be looking for underperformance with these currencies over the coming months. The New Zealand Dollar and Israeli Shekel both stand out to me, and although the fundamentals have arguably been supportive to date, both of these economies have been ignoring the influence of external factors on their local economies. Moreover, both economies are showing some serious discomfort in their respective housing markets, which could only exacerbate the outlook for the currencies, once market participants start to book profits. I have already been trading in and out of short NZD and ILS positions, and will continue to look for opportunities in the weeks ahead. Moving on, keep an eye on EUR/CHF, the USD/JPY and US equities over the coming sessions. Though all of these markets have been very well bid of late, I don’t expect this to last much longer. Weakness here will likely act as the catalyst for a sell-off in the other markets already highlighted above.

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