Keep a Careful Eye on Risk
Perhaps it is another false start, but it is important to keep a close eye on 'risk'. This past session, we had a pullback in global equities with the S&P 500 returning to a three-month trendline support. This is where dip buyers usually step back in, but there is little volatility spike to fade and thereby limited risk premium to absorb. Add to that a pullback in emerging markets, yen crosses and even dollar-based carry pairs; and there is early but broad read for 'risk off'.
This is not a theme to move too early on - just look at how many false starts there has been on the S&P 500 over the past five years. However, the potential is so substantial should sentiment roll over, that it is prudent to have a strategy ready.
For me, the first step to a scaled upgrade in risk aversion would be felt through the yen crosses. We have already seen EURJPY and CHFJPY give, and just this past session AUDJPY and NZDJPY have followed in their footsteps. This breadth suggests the yen crosses can fold even without a risk driver; but I like to leverage my chances. Looking for a risk aversion spark, I like the laggards playing catch up. USDJPY below 101 and GBPJPY breaking 170 are good options on genuine speculative flight.
A bigger move has recently arisen from the Aussie dollar. AUDUSD broke a medium-term trendline, AUDJPY tumbled below 94.50 and AUDCAD broke a head-and-shoulders neckline. I am not particularly interested to trade these moves however as I am dubious of follow through.
As for the pound's mild response to the UK inflation data, it suggests the market is still at risk of a pullback in rate hopes. I still consider GBPUSD dropping below 1.6750 a considerable trade option.
Among my existing trades, I am still short EURUSD and long USDCHF (a longer-term position), which carries substantial negative correlation. This is an ECB policy shift and risk impact that is more likely to play out, and I will stick with it. Meanwhile, my long-term AUDNZD long has been pushed back modestly by the Aussie's slip. The EURAUD short has been more substantially impacted. Yet, my expectation of a AUD trend is dubious and outlook for the Euro steady.
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