“Risk On” is the prevailing market mood and it’s been showing up everywhere:
Contagion risk inspired a sharp swing to “risk off” across asset classes this week. The US Dollar Index (USDX) surged to 14 month highs while the “stealth strength” of the US Dollar against 2nd and 3rd tier currencies was spectacular.
My trading this week: I started the week flat...waiting for good risk/reward setups to develop. On Wednesday I shorted CAD when it rallied on the Bank of Canada interest rate increase, shorted WTI when it failed to rally on a huge American inventory draw down and shorted EUR as it reversed from Tuesday’s rally.
What I’m doing: I started this week long CAD and AUD against the USD. I was expecting the USD to correct after strong gains the past couple of months. I covered my positions Friday after the employment reports as the USD fell to 3 week lows and CAD rallied nearly 2 cents from the 1 year lows made June 27.
Bank of Canada governor Stephen Poloz is giving a speech this afternoon (12:15pt) titled “Let Me Be Clear: From Transparency to Trust and Understanding” that will be scrutinized closely for any hints as to what the Bank of Canada will do with rates at its next meeting on July 11th.
What I’m doing: I took profits Thursday on my short NZD/USD position and bought AUD/USD looking for a short term correction in the USD rally. AUD looks really oversold on technical and sentiment indicators. I also bought YEN Thursday thinking it might rally for 2 reasons, 1) short term USD weakness and 2) it might catch a flight-to-safety bid if US stock markets roll over.
May 29/30 was a Key Turn Date for Market Psychology...a date when the Euro currency “bounced back” after looking into the black hole of an Italian inspired existential crisis...a date when prices of a number of different markets registered sharp reversals as contagion fears surged and then subsided.
Market Psychology had a classic “Risk Off” profile early this week as the “existential crisis” unfolding in Europe rallied the safe havens (USD, Swissy, Yen, Treasuries, German bunds) while the Euro, stocks, commodities and peripheral European bonds were dumped.
EUR/USD has dropped from over 1.25 to below 1.17 (~7%) in the last 9 weeks...closing this week at 7 month lows as political/economic developments in Italy herald a potentially existential crisis for Europe as “contagion” fears start to creep into the market.
“It doesn’t matter until it matters and then it really matters!” was how I began my April 21 TD notes. My point was that rising American interest rates were REALLY starting to matter in the foreign exchange world...and that was going to drive the USD higher. The USD index is now at a 5 month high, up 6% from its February lows.