A Classic Overreaction

09 Jun 2016 08:11 BST · Time Estimate: 2 minutes ·
  • AUDNZD always requires some wrestling
  • Market making too much of last week's NFPs
  • Have you seen the price action in the Franc lately?

NEVER EASY - Just as a reminder, I have traded AUDNZD many times with great success in recent years. And yet, each time I establish the position, it is always a bit of a battle before we see follow through. I have long argued this market to be highly undervalued, with yield differentials expected to eventually widen in favor of the Australian Dollar. Meanwhile, technically, the market is near record lows and looking to put in a longer-term cyclical bottom. All that said, we are up against levels now where a reversal should be imminent. Ideally, I'd like to see the market manage a daily close back above 1.0500 to start show that it is wanting to base out. 

UNJUSTIFIED - Otherwise, the US Dollar is getting blasted. While I would agree that it would make sense to see the US Dollar lower after last week's US employment report, I also think this move is now well overdone and unjustified. To assign so much importance to one employment report and to throw out what had been a very good chance for a July rate hike all because of one NFP print, seems a little ridiculous to me. The second we see a remain victory in the EU referendum and the moment next month's US employment data comes in solid again, I'm guessing the market will once again be talking July hike. This leaves many currencies exposed at lofty levels against the Buck. 

The market shouldn't be so quick to abandon the US Dollar. Via @joelkruger

SUSPICIOUS ACTIVITY - Another interesting development in FX that might not be getting a lot of attention is this latest drop in EURCHF, or perhaps more appropriately, this latest appreciation in the Franc. These gains in the Franc have come despite Dollar selling and risk buying, which is counterintuitive considering this type of risk on price action is usually bearish Franc. So could this be a red flag for some hidden distress in the market that has yet to reveal itself on a wider scale? Certainly a pullback in the SPX500 in the sessions ahead, would help confirm this warning sign from the Swiss Franc. I am still holding my short SPX500 position from 2100 and would like to see a break back below 2085 to get this trade going. 

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