Post Madrid, These Three FX Pairs Make Sense
Post Terrorist Attack
Today’s column will continue to follow the same
format as shown in recent writings, a section addressing both HVT & FX.
HVT:
Yesterday’s deadly bombing in Madrid surely was
the event that drove an already weak market to much lower levels. It finally
appears as though the mantra “the recovery is coming….trust us” is finally
wearing thin. Equities are priced for perfection, and the bombing and recent
lousy economic data is front and center right now.
Ironically, most of the good HVT trades yesterday
were to the long side. Given that so many stocks were under some solid selling
pressure, they fell fast and far. This makes for an ideal scenario for Fade the
Gap type trades. Like a rubber band, when stretched too far, it will likely
snap back. These are naturally counter-trend trades and against the basic HVT
premise, however like all rules, rules are meant to be broken. Over the years,
these types of trades have always proven effective.
Take a look at the 1-minute charts in the last
hour of trading yesterday of GE,
MO. On the opening,
HAL offered some great setups also as it was under a lot of pressure.
While it is purely speculation, it appeared there
was some solid program buying the last 30-minutes of the session as most of the
stocks on the move were the large caps.
^next^
FX:
Whenever there is bad news, like the bombing in
Madrid, the FX markets get wild, yet somewhat unpredictable. The only obvious
beneficiaries are gold, bonds and the Swiss Franc
(CHF) as traders/investors seek safety. It is likely that all “safety buying” is
complete by this point, so looking to establish longs in here now based on
geo-political reasons is likely the wrong decision. According to commentary
from Goldman Sachs:
“After the market
prepares for the worst, there usually is a period – 1-2 weeks that nothing
matters or happens. The FOMC meeting may be that cathartic event which turns
the tide. Fears and reality are likely to dominate each data point ahead.
What will markets be looking for? 1) Fundamentals – global growth, US consumer,
inflation, trade, intervention. 2) New trends. As many will be on stockpiles
of cash – new trends will be dangerous – and likely to be quickly joined should
fundamentals support them. 3) New problems. The list of worries didn’t include
terror until this morning. What many may really be looking for are more excuses
not to trade – and to wait.”
Nonetheless, there are some areas that remain
critical going forward. I continue to view 89 in the
DXC as a critical resistance level that needs to be breached and
held, if the present short positions in the EUR
are to play out. With Asia, particularly Japan, seeming to exhibit the most
potential for solid and sustained growth short positions in the following pairs
makes sense:
USD/JPY
EUR/JPY
AUD/JPY
(currently short)
Going short the USD/JPY
will be a tricky one. The chart pattern is not exactly what one would call the
ideal setup, but with 112.50 capping the current thrust higher and capital flows
to Japan on the rise, a move lower seems likely. The only thing standing in the
way is the ever present BoJ and their mountains of selling power at the
ready. With the fiscal year closing at the end of March they will likely keep
pressure on the Yen. A weaker yen would ensure that Japanese exporters could
buy the currency at more attractive leading into next year.
As always, feel free to send me your comments and
questions.