The perfect storm in FX

The perfect storm for the FX market. A movie for George Clooney to play George Soros in perhaps? No, but certainly what we saw yesterday, a perfect storm. Coming off what the market regarded as a hawkish FOMC (read my piece yesterday), we then saw month end flows that quite clearly favoured USD buying overall and the final icing on the cake of a storm in a teacup… Every tier one bank out there calling for an almost immediate rate cut from the ECB, practically imploring them not to wait till next week and just do it that afternoon. One lousy inflation print from the Euro zone and all of a sudden these overpaid “economists/strategists” remember that a) the Euro zone still exists and b) it’s bubbling along poorly just as it has been for the last 3 years. Farcical folks, genuinely farcical. Most of these “big boys” weren’t looking for a cut for at least 6 months down the road and some even longer into the 12 month horizon. Are you f**** kidding me.

What the above serves to confirm (at least in my mind) is that the mean reversion in the DXY I have been speaking about for a few days now, is all but complete. If you pull up a daily/weekly/monthly chart of the index and look where it’s been and how its moved in the last 5 years, even your blind eye will be able to give you the middle/average level. And guess what, we’re right there now. Only a sustained break and close above this will serve to prove that the weak USD move is over. I don’t see it folks and I don’t buy into it. If I were putting on Christmas pantomime this is roughly how it would play out… The market now desperately expects a super dovish Draghi come the ECB meeting, but with the EURUSD 3 big figures lower than it was 3 days ago, his need to be so is diminished. No rate cut and no mention of an LTRO at the press conference will be interpreted by the market (just like the FOMC was) as far less dovish than expected and there in our binary world, this could only be hawkish of course and off to the upside races we go. I mentioned swings and roundabouts yesterday and this is exactly what’s happening. Market get’s beared up on the EURUSD and just when you thought it was safe and logical to be positioned that way, you get slapped in the face with a turning tide and quick stop hunt/retracement etc. I could be wrong folks, but sadly I don’t think I am (famous last words).

Overnight decent (better) PMI prints in China and Australian data gave the market a lift? Meh, stemmed the rising tide of blood of anything and in truth mostly ignored. US equities (SPX) don’t know what to do with themselves at the moment, and as in all previous cases when unsure, just keep going higher. So perhaps next week, once they’ve taken a breath.

In broader market terms, today should be a little quieter than the last 2 days. I still stick with my view that the case for USD buying is done and that soon enough we’ll see USD sales feature prominently, we’ll just have to leave it to the paid mouthpieces to come up with a catchy reason why this should be the case (perhaps a taper delayed to 2020 or something).

As far as levels, I think EURUSD in the near term (pre ECB next week) tries, hugs and holds 1.3430 at an extreme but more likely pokes it’s nose into 1.3450/80 and no further. The upside will find fresh sellers into 1.3580/1.3600/50 etc (just not today as we likely won’t get that far) but these sellers will only be there till Wednesday when books get squared ahead of the central bank meeting.

The Cable has already had a look at 1.5980 and at time of writing this looks to try and break there for next support at 1.5950. For choice I’d be a buyer through touted stops at 1.5950 and think the final resting place on this dip for Betty should be 1.5930. Looking for 1.6030/50 once again to cap the upside.

The AUDUSD has been a hostage of the EURAUD and GBPAUD but only looks marginally softer in the scheme of things. Look for dip buyers of the supranational variety into 0.9430/50 to keep the little battler supported.

USDJPY… well it just does what it’s supposed to, it trades a range, ultimately unconvinced by this USD story and smalls a hostage to the Nikkei. Topside look for 98.50/80 to cap it and stops on the downside sub the 97.80 area.

Tough week for p/l swings this week, but it’s a new month and if you’ve got your eyes open and a bucket of salt so as not to get caught up in whatever the tier 1 banks are peddling, then you should be ok.

Helmets on and good luck out there.