This text is from blog famous currency strategist Joel Kruger .
NOT EVEN A DENT – As much as Wednesday was an impressive day, and as much as markets on the whole moved in my projected direction (on the back of the various catalysts I have been talking about, including; Fed less dovish, equity declines, concerns in China, central banker currency talk, etc), let’s not fool ourselves. The move was a one day (one session even) reversal, within some trends that have been overwhelmingly one directional for several months and years now. If there is to be any legitimacy to my analysis, which calls for a material resumption in broad USD buying (Yen not included short-term), global equity weakness, relative underperformance on the commodity bloc/emerging markets, and a resurfacing of troubles in China, this latest risk reduction needs to take a much firmer grip. We need to see the onset of a new trend that extends for days, weeks, and even months.
See Joel’s forex technical analysis video:
INEVITABILITY – For the past four years, risk correlated markets have benefitted from a global coordinated intervention that has incentivized a move into risk, despite contrasting underlying fundamentals. But what happens when governments and central banks can do no more? Inevitabilities set in, that’s what happens. Five years ago it became overwhelmingly apparent financial markets were in such a dire state, there was no other choice for governments but to step in and prop the global economy. The reaction to these efforts has however been somewhat ironic in that the mechanism used to respond to the financial crisis has seemingly produced yet another bubble that once again could be at risk of bursting. Still, I do not take issue with the ultra accommodative monetary policy and fiscal response.
REHABILITATION – Some would argue that governments should not have stepped in, but I believe this would have been the wrong decision, as there was an element of fear and panic at the time that needed to be addressed and eliminated. But now that these fears have been substantially mitigated, it is finally time for reality to set back in and for markets to normalize. I believe investors are starting to realize that we are fast approaching the end of the medicated recovery, and a hard road of rehabilitation lies ahead. If I am correct in my assessment, a lot of the money that has flowed into risk correlated assets over the past 4 years will start to reverse course. Investments in global equity markets, commodity and emerging market economies, that had been paradoxically perceived as both yield driven and safe haven investments (away from the US and European economies), will no longer seem as attractive, and a major capitulation trade will take hold. But first things first, let’s just see if we can get some follow through from Wednesday’s price action.
