EM FX More Reliable than Equities for Risk Trends around USD
- SPX500, GER30, and JPN225 all telling different stories.
- As market volatility rises, it's a good time to review risk management principles.
Equity markets in Europe are rallying while US futures are pointing higher. Meanwhile, the US Dollar is clawing back some of last week's losses. Which way is risk heading? The truth is, equity markets around the globe are offering different perspectives, depending upon where you look.
While some Asian stock markets have rallied, one in particular looks vulnerable: the Japanese Nikkei 225 (CFD: JPN225). With Bank of Japan policy in question ever since the introduction of NIRP in January, the headline Japanese stock index looks poised to move towards its yearly lows. In Europe, equity markets have moved sideways more than anywhere else over the past month, despite promising technical developments (the German DAX 30 comes to mind (CFD: GER30)). In the United States, it's apparently quite sunny, where both headline indexes (CFD: SPX500 and CFD: US30) are challenging multi-month consolidations on what could be the verge of a breakout.
Maybe the mood in equity markets reflects sentiment over the central banks' recent policy changes. The Japanese Nikkei 225 is on the weakest footing as the BOJ looks inept; the German DAX 30 is on neutral but potentially fertile ground as markets grapple with the implications of the ECB's credit channel-focused (not FX channel) easing measures; and the US S&P500 has seen a burst of enthusiasm after Fed Chair Yellen pivoted to the dovish side of the spectrum.
If equity markets are behaving like spoiled teenagers, then they're not going to be the best place to look for a true gauge of risk sentiment (particularly if they're so fickle depending upon central bank easing efforts). Instead, for FX traders, attention may way to turn to emerging market currencies (EM FX) as a "truer" gauge of market sentiment. This means that pairs like USD/RUB and USD/ZAR should be followed more closely; the implications for a pair like AUD/USD are indirect, but apparent nevertheless.
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
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