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US Dollar, Yen See Inflows as Investors Lose Appetite for Risk


Tough talk from Obama and his administration reverses what was a short-term "risk-on" condition around the globe.

For the latter part of last week and the early part of this week, it appeared like global investors and traders wanted all the risk they could find. However, as soon as Obama and his administration hit the airwaves with new tough talk, everyone seemed to lose their appetite for risk.

  • It has been "risk on" for the most part with S&P e-Mini futures (ES) jammed higher since Sunday night and key risk currencies like AUD/JPY and EUR/JPY seeing major buying. That changed Tuesday morning, however, with the Syria chatter heating up.
  • Syria looked like it would take a backseat to data points this week up until Congress votes and/or Obama acts. However, with the Obama administration out on the airwaves talking tough, everyone's level of trepidation is being raised once again.
  • Traders and investors may tread gently until one or all of the following occurs:
    • Syria discussions calm down;
    • the flurry of interest rate announcements from global central bankers later this week comes and goes; and / or
    • the monthly jobs report here in the US on Friday comes and goes.
  • The yen was being shunned as investors were pulling money out of safety assets and pushing it into risk assets. The US dollar was seeing only a little of that, but is being buoyed by tapering talk and higher rates. This shift reversed itself Tuesday, however.
Below are some additional notes on the bonds and currencies.

  • Ten-year Treasury yield: It barely held support at 2.715% last week, but it held nonetheless. A run in yields up to the Fibonacci projected 3.021% may now be underway (which is bullish for risk assets in the short term as it is unlikely that rates would shoot higher like that if stocks are being sold off).
  • High yield: SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) is still trading bearishly, failing to confirm equities' bounce.
  • Emerging markets bonds: Like JNK, iShares JPMorgan USD Emerging Market Bond Fund ETF (NYSEARCA:EMB) is technically broken as well; it is headed to 102.50 from its current level of 105.25.
  • US dollar: It is ripping higher on the resurgent tapering talk. The DXY has already taken out "correction resistance" at 82.08, so this is no longer to be considered a short-term correction. We should, in theory, see a rally in the DXY up to as high as 85 in the coming weeks or months.
  • Euro: It failed at 1.3409 resistance and is getting crushed. Will the entire head-and-shoulders formation end up playing out as I've suggested for months now? The euro is short-term oversold (see green box), so a bounce should be expected and sold into.
  • Yen: It was suddenly seeing massive outflows as noted above. However, renewed Syrian concerns have some folks running for safety once again. I will respect the price action and close out all bullish yen positions in my models / portfolios if USD/JPY closes above 100.203 -- but not before then.
  • Aussie dollar: There was a corrective rally after 5 waves lower were completed in the short term; fundamentally, the Aussie dollar is rallying due to a perceived hawkish change in stance on the part of the Reserve Bank of Australia in its interest rate policy statement yesterday. Will this be another instance of "hope versus reality" as I pointed out recently?
There's no short-term edge here from a technical perspective. Gun to head, I'm going with a continued short-term rally (possibly up to 0.9193 resistance) before the clear macro bearish trend takes back over. I'll be shorting all things Aussie up at that resistance if not sooner if the trading activity dictates.


Were it not for the Syrian situation, I am fairly convinced that we would be seeing a continued "risk-on" condition in the global markets. My call, however, would not be for a runaway rally. Rather, I saw short-term / limited upside in stocks (1,690 was my target for the S&P futures) and risk currencies (as reflected in my Aussie dollar comments). I definitely felt / feel, though, that another fairly nasty down-leg in risk would / will take place once the upside correction played out (perhaps due to tapering, budget battles, Ben Bernanke successor talks, or international goings on; check this piece out by Nouriel Roubini for more on the risks we face. Now, my question is whether we will even get to enjoy the projected bounce.

Twitter: @seachangereport

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No positions in stocks mentioned.

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