WILL IT OR WON'T IT - A lot of interesting price action in recent trade and it looks like things could get exciting as we head into the fuller September trade. One of the big markets to watch for me has been EUR/CHF, and we continue to see downside pressure with the rate inching closer and closer to that well publicized and all important SNB barrier defense. What makes the situation even more compelling is that the downside pressure has come in a period where we have been seeing fresh record highs in US equities. Traditionally, a well bid equity market translates into a higher EUR/CHF rate, and yet we haven't been seeing this lately. And now that we have dipped back below 1.2100 and are just a stone's throw away from 1.2000, this makes for some potentially dramatic trade (particularly if equities turn). Technically, I love the idea of looking to buy this market, but at the same time, I am thinking the deluge of stops parked just below 1.2000 could get taken out before we head higher. I imagine the SNB is also well aware of this possibility and could be weighing the risk of defending now versus defending after the level is broken. But if we do see a break below 1.2000, I will happily step in a take a shot (i.e. buy EUR/CHF below 1.2000 once stops taken out).
LOWER BEFORE HIGHER - Broadly speaking, the US Dollar has been in good demand for a good while and should be due for some short-term corrective selling. I bought some EUR/USD earlier in the week just under 1.3200 in anticipation of this correction, and we haven't seen any real follow through just yet. But I expect we will and believe currencies like the Euro and Pound that have been the hardest hit of late, should benefit the most during this USD corrective phase. The Euro recovered a bit late Thursday after it got around that various ECB sources were saying not to expect any action at next week's policy meeting (markets had sold the Euro over the past week following comments from ECB Draghi at Jackson Hole that the ECB was prepared to act). I've also noticed the Canadian Dollar has been outperforming this week. While I really like the idea of looking to buy USD/CAD dips, I would recommend staying away right now, given the fact that I am calling for some currency strength against the Dollar in the sessions ahead. So if you are set on selling CAD right now, I think you might have a better time playing the trade on the crosses via EUR/CAD or GBP/CAD long positions.
DATA UPGRADE - Moving on, I am still waiting for another sharp pullback in US equities. One encouraging sign to support this prospect over the past 24 hours has been the confirmation across multiple markets. Both USD/JPY and EUR/CHF have been moving lower, while commodities like GOLD and OIL have regained a bid tone. All of this sends out a risk negative message and also warns that we shouldn't interpret any currency strength against the buck as necessarily risk positive. So while we could indeed see the USD sell off over the coming days, we could also see a liquidation in equities and other risk correlated assets. Looking ahead, US GDP will be the big event on the calendar for Thursday, and the result could bring some additional volatility. Now that the Fed has downgraded the significance of unemployment and inflation, other major releases will likely take on added significance in attempting to determine Fed policy direction. As always, keep an eye on US equity indices. This latest rally is looking stretched and with the market so incredibly well bid over the past several days, some profit taking wouldn't surprise (especially with key psychological barriers finally cleared).