This text is from blog famous currency strategist Joel Kruger .
I HEAR YA MR. BASS – So I am sidelined with USD/JPY after taking a couple of shots on the short side over the past week, but coming up flat with no follow through on both attempts. While I am fundamentally against the short trade, the need for a technical reversal in the Yen’s favor is highly compelling at current levels and very difficult to ignore. I feel quite confident that we will see a reversal back towards the 92.00 area at a minimum over the coming sessions, but I am also not comfortable at this point attempting another short (not gonna lie…Kyle Bass, who I completely agree with, has also scared me silly, against the establishment of any long Yen position). Nevertheless, the key short-term level to watch in USD/JPY is 95.40. Look for a break and close below to officially alleviate immediate topside pressure, and trigger the anticipated corrective move.
See daily forex analysis :
SHORT-TERM REVERSAL PROSPECTS – It is worth noting that with much of the new BOJ yen weakness now priced in, there is the potential for a reversal in the Yen’s favor on this merit alone. Throw in some comments from ex-FinMin, Mr. Yen, Sakaibara, who said that the USD/JPY rally had run its course and was unlikely to top 100.00, and there is yet another reason to potentially see the onset of a short-term Yen rally (USD/JPY lower).
END OF THE POUNDING – Elsewhere, I had mentioned the Pound as a currency to watch earlier in the week, after the market had taken quite a beating, and it looks as though we are finally seeing some stabilization (BOE King comments on UK recovery and Pound have helped). While we did see a nice pop in GBP/USD, I was more interested to see the reversals on the crosses, with GBP/AUD bouncing from record levels, and EUR/GBP selling off from multi-month highs. I really like the GBP/AUD long trade over the course of the next 18-24 months, although to take a position like this, one needs to be appropriately leveraged and willing to sit on the negative carry. This is not a trade for those looking for a quick in and out.
THE WHEELS ARE IN MOTION – Moving on, the two key interrelated themes over the coming days in my view will be 1) equity markets and 2) watching the Fed for any updated insights into the direction of monetary policy. With regard to equity markets, we are seeing record highs and near record highs in the major US indices, and yet the volumes have been unimpressive, with the move seemingly lacking any real bite despite the exceptionally well bid tone and relentless push higher. I contend that it is very difficult to see the equity markets extend much further, and a major reversal is around the corner. This reversal will then have a wider negative influence on risk correlated assets and will weigh heavily on global macro sentiment. I have been saying this for a while now I know, but for the first time, I have actually started to exercise this view (started selling S&P on Thursday and will look to build into full position at average cost around 1600 if given opportunity).
FED SPEAK AND GLOBAL MACRO INFLUENCE – The reality is the Fed could also play a key role here. There is no question that US economic data has been consistently solid in recent weeks, and this should really start to force the Fed’s hand a bit. I suspect you might start to hear comments more on the hawkish side over the coming weeks, and this will scare market participants into liquidating risk correlated positions, on the realization that we are in fact inching closer and closer to the end of the free money government and central bank proponomics. Have a good weekend!