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Thursday Market Review: Currencies Remain Troubling

  • Written by Syndicated Publisher 444 Comments444 Comments Comments
    January 6, 2012

    A very odd day indeed. BAC up 8% on no apparent news was the biggest sign today was more a short squeeze or yield chase than anything else. To be fair the small and mid caps did put in quite a bullish reversal off the session lows but that too would point towards a short squeeze and or chase for yield as they both have a 1.17 and 1.3 beta respectively (1.3 beta means it moves 30% greater than the SPX with a beta of 1).

    At the same time equities were nearing session highs so too were currencies and treasury futures. Something that clearly makes zero sense. Within equities securities like HYG, JNK and BID continued to move lower. On the commodity side of the market DBC (powershares commodity index) was down 1.4% with copper also weak on the session and oil putting in a nice bearish reversal after failing two consecutive days at the 2009 up trend line.

    Gold has shown some strength of late but it appears to be another failed backtest of the 200MA. Within the commodity sector a lot of weakness was visible from wheat to soybeans and more down 3-5% in many cases.

    What I find most telling of today’s price action though is the literal war going on right now. I showed in an SPX chart the other day how the neckline had intersected for both a head and shoulders and inverted head and shoulders pattern. A literal war between bull and bear. Today though was clear the war is between currencies and equities.

    Currencies put in major moves today and are clearly breaking out (USD) and down (EUR and AUD). What’s telling about the currencies though is they are acknowledging the reality of the credit event. The recent auctions across Europe have simply been weak and the EUR is reflecting that. It’s not a technical trade with the currencies but a true macro trade and it continues to support further weakness in the EUR and strength in the USD.

    So on that note, I want to share a number of currency charts and a few SPX comparisons.

    AUD/USD VS SPY – Many have said you need to follow the AUD and not the EUR. I disagree with that but wanted to show that the AUD is also diverging from SPY as shown below.

    AUD/USD – 5 day 30 minute chart – Notice the failed breakout of the inverted head and shoulder’s neckline. The AUD is starting to shown signs of weakness and today’s multiple attempts to stay above the neckline and subsequent failure is another sign of a tired equity market.

    USD (DXY) – Look at the two powerful moves in the DXY the past two sessions as a 52 week high is just pennies away. Notice the ascending wedge which is very close to breaking out here. Intraday the USD was very strong and pulled back slightly after hitting session highs. A sure sign of strength here. A breakout of this pattern will put a lot of pressure on equities.

    EUR/USD – The EUR is a mess. After three weeks of trying to take back the 2005 up trend price moved lower today and with relative ease took out a major support line. Failure to bounce here is setting up a test of the 1.20 area in short order as little support remains below.

    SPY VS DBC – Look at the divergence over the past few months between commodities as measured by the DBC and equities. The entire commodity complex has severely rolled over the past six months and continues to weaken further. A stronger USD will further pressure that weakness.

    Bottom Line

    This trade is getting very old but don’t lose focus here. Not only do we have two head and shoulder patterns being played by traders right now but we literally have two trades. The credit event trade is alive and well as signaled by the currency moves today. Those not seeing the trade this way are bidding the market up higher as they anticipate a decoupling from currencies and Europe and new SPX highs in the coming months.

    The two could not be further apart. The currency and equity markets are literally at war right now. Within equity I have pointed out the multiple breakdowns from mid and small caps to commodities and more. The currencies though are not showing this division.

    You can feel the tension in this market right now. The move if lower will be swift and without notice I strongly believe based on the currency breakouts we are seeing right now and the breakdown within the equity market. Again this is not a guaranteed trade but it sure looks highly probable based on what I discuss above.

    Today also saw a multi year low reading with bearish sentiment at 17% and the reality that short interest is at a multi month low, possibly one year low based on recent “market squeezes.” So the market is very vulnerable right here. If the USD breaks the ascending wedge then look out below.

    And one last note as I finish up I see the mid and small cap futures gave up all of their relative strength over SPX futures. Another sign of a truly tired market.

    Another final note – DXY just hit session highs and is literally about to take out the wedge. Keep an eye on this tonight.

    Images: Flickr (licence attribution)

    About the Author

    Macro Story is designed as a one stop source for all of your macro related news and data.  From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion.  Content is presented in a format that allows you to read as little or as much as prefered.  Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.

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