CONSIDER THIS - I think we need to consider the possibility the US Dollar runs into a period of downside pressure in the weeks ahead. We have seen such a nice run of late that it would be foolish to not at least consider the prospect. The commodity bloc and emerging market currencies have been hit hard against the Buck over the past several weeks, with many of these currencies trading to fresh multi-year lows. And so, with these markets looking a little extended now and with so much event risk ahead, I am considering the possibility of a period of either correction in favor of these currencies over the coming weeks, or if not this, than some choppy consolidation where we don't see the US Dollar rally much more just yet. Remember, we are also in summer months for many, which means lighter, less liquid trade. So to what extent this price action can be taken 100% at its word is also in question.
DEVIATION - At the same time, I also believe the US equity market is on the verge of really coming off. We will of course need to take out the March low, but if this level is broken, look out below. The interesting thing here is that a pressured equity market would suggest broad based US Dollar demand. And yet, as per above, I am calling for a slowdown in the appreciation of the Dollar for a little bit. I think this could happen, with the market temporarily deviating away from familiar correlations, with stocks dropping while currencies rally. I think we have already seen an extended period of currencies adjusting to the prospect of a Fed liftoff, while equities have yet to start pricing this in. So while equities drop, finally reacting to the disincentive to be long on the removal of ultra accommodative central bank policy, currencies will have already reacted and won't need to be dropping. This is just my theory. :)
SAFE FX - Now there are some currencies out there that should benefit in a equity bearish environment, with the Yen being one of them. Any time you see pullbacks in stocks, there is a natural flight to safety reaction that results in a repatriation of Yen. As I highlighted the other day, this really has less to do with the fact the Yen is actually a safe haven currency and more so to do with the fact market participants have used the ultra low Japanese borrowing rates to fund their higher yielding investments abroad. So when things get scary out there, these investors look to exit their investments and convert back into Yen. The other non-USD currency that has traditionally benefitted from safe haven flows is the Swiss Franc. But this one has left us scratching our heads these past few days. We have seen stocks come off quite a bit and yet, the Franc is weakening! What gives? Well, my view with this one is the SNB is stepping in during these bouts of risk off trade to try and intervene under the radar and knock the Franc down, when it would otherwise be moving up. EURCHF has traded back above 1.0500 despite all the equity selling and I just wonder if this sell-off in stocks intensifies, how much longer the SNB will be able to keep it up (literally)?