YELLEN AND GEOPOLITICS - Although we haven't really seen a significant pickup in volatility just yet, markets have been quite jumpy in recent days and it definitely feels like something is brewing. Overall, the US Dollar has been on its back foot, while risk assets are generally supported. But if we look closer, USD/JPY and EUR/CHF remain pressured, and the US Dollar Index is tracking near critical support. Moreover, US equities are starting to show signs of topping, and despite Wednesday's recovery rally, it looks as though this rally could just be in search of another lower top, ahead of the next downside extension to fresh weekly lows (last Friday down, Monday up, Tuesday down, Wednesday up, Thursday down?). Janet Yellen's testimony to Congress offered very little in the way of any new insights, with the Fed Chair sticking to her ultra accommodative bias and showing no real reaction to the latest employment data. But what I did notice that should not be overlooked, were her comments about geopolitical threat and the impact this could have on the emerging markets. While I have said that I don't believe geopolitics are influencing the markets at the moment, I also have said that everything revolves around the Fed right now. So if the Fed is concerned with geopolitical risk, the markets will probably listen. This would support the argument I have been making for further weakness in US equities and risk correlated assets.
STILL WORK TO BE DONE - Moving on, it has been a pleasure to see the New Zealand Dollar pull back from the highs earlier in the week. Yet, I am still out of the money here, and we will still need to see more downside follow through before this anticipated trend reversal can get going. We have broken back below 0.8650, but I would like to now see a daily close below 0.8650 to help things along. Critical support comes in at 0.8515, and a break below this level should open the floodgates. I suspect bulls will still be trying to buy on dips until 0.8515 is broken, but once this level is taken out, we should see a capitulation. Fundamentally, there have been signs of cooling within economic data, and this latest weaker than expected employment should temper hawkish views. The RBNZ has been quite vocal with its concerns over the strength of the currency, and I believe, any signs that recent interest rate hikes are having an impact, will be enough to put the central bank on hold at the June meeting. I also contend external pressures could escalate over the course of the coming months, which could have a more profound influence on the RBNZ and force it to reconsider its aggressive monetary policy stance. But let's talk again when 0.8515 is broken.