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Big Breaks in Equities and Commodities, but FX Not as Clear

Big Breaks in Equities and Commodities, but FX Not as Clear

2011-08-02 21:43:00
John Kicklighter, Chief Strategist

There are no doubt a lot of excited traders out there - I know my interest has been piqued with the swell in temporary resolution of the United States' financial troubles and the prominent swing in risk appetite trends. However, it is never a good idea to simply jump into the market because things have gotten a little more exciting.


From the S&P 500 and other major global indexes, we have seen major bull-trend reversals that go back all the way to the beginning of the recovery move from the 1Q of 2009. While there is always the chance that an interventionist move can be made by the Fed or other authority to prevent a market selloff; their ability to hold back the tide is increasingly limited - and therefore it is likely that the risk aversion move will gain traction. That said, we have not see the same level of break and reversal from the FX market along the risk appetite lines.


The Swiss franc is a stand out exception as the currency was already remarkably strong and this drive only leverages its move. Fighting this trend is ill-advised; but jump on it now is probably a risky venture as well. It is better to look for a short-term correction in the larger trend and buy the franc on dips. Finding a franc cross that isn't already plunging record lows though is difficult. I'm keeping an eye on CHFJPY, AUDCHF and NZDCHF (pitting the franc against other currencies that have proven somewhat stubborn these past months - though they probably should have exhibited what strength they did).


The most direct route to taking advantage of the building fundamnetal pressure is to look at those other pairs that play to the risk aversion effort. Amongst the yen crosses, EURJPY and GBPJPY have potential near their respective lows; but follow through will be difficult. AUDJPY and NZDJPY look much better and have a cleaner sentiment connection. I'm looking at 83 and 66.60 as support levels respectively. If there is a short-term rebound in risk to offer some relief to the recent heavy selling, AUDJPY would do best to play to a channel bounce at that support.


Many of the majors have great short to medium-term opportunity as well. The dollar is still under significant pressure that was heaped on in the lead up to today's deficit vote. Securing its safe haven status (for a little while at least) could encourage AUDUSD to break 1.0795 support, NZDUSD to slip below 0.8650 and perhaps drive GBPUSD to close below 1.6260. There are a few other pairs to consider; and the heads-and-shoulders pattern on EURGBP with a neckline at 0.8745/15 tops that list.

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