As always, when we experience a seismic shift in sentiment in the FX market, it always looks so obvious in hindsight. Before we begin to concentrate on what may, or may not be new trends that have developed on our major currency pairs and commodity pairs since the fall out of the FOMC meeting of last week, we'd like to cast a weary eye over to some of the exotic currencies which have made some stunning moves in recent days…
Peso loses pace…
Mexico’s peso collapsed by its greatest margin since the global financial crisis in 2008 due to speculation that the USA Federal Reserve will cut back on its monetary stimulus which would completely change the demand for the Latin American nation’s assets.
The peso fell 4.5 percent this week versus the greenback to 13.3050 per U.S. dollar, the biggest weekly decline since November 2008, recovering slightly by 0.5 percent on Friday. Alarmingly the yields on peso bonds (due in 2024) rose nine basis points, or 0.09 percentage point, to 6.02 percent, this week’s surge was approx. 85 basis points.
The South Korean won, loses…
The won suffered its biggest weekly drop in over twenty one months and bonds slumped after the South Korean Finance Minister stated contingency plans are being reviewed as the Federal Reserve’s possible stimulus cuts hit markets.
The Kospi index of shares lost 3.5 percent since the Federal Reserve signaled on June 19th that it may start reducing bond purchases this year.
The won fell 2.5 percent versus the greenback to 1,154.15 in Seoul last week, the largest decline since Sept. 23, 2011. The currency fell 0.7 percent on Friday touching 1,159.33, the weakest level witnessed in almost 12 months.
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Asian currencies tumble
Asian currencies tumbled by their most in over 21 months last week as the Federal Reserve Chairman stated that the central bank will probably taper stimulus that has fueled funds flowing into emerging markets.
India’s rupee touched a record low and Malaysia’s ringgit had its worst week in three years after Bernanke stated on June 19th that $85 billion a month of debt purchases, known as quantitative easing, may be trimmed this year and ended in 2014 as long as the U.S. economy performs in line with Fed estimates.
Armageddon isn't confined to the USA, the Eurozone and the UK.
Occasionally we get to see behind Ben Bernanke's Wizard Of Oz curtain and on a humane level you have to have sympathy for the man given that he's currently the financial equivalent of Atlas holding up, not just the USA economy, but as he proved this week if Atlas shrugs the after shocks could be immediate and cataclysmic. The unlimited QE programme that the USA Federal Reserve embarked on might have had huge and dubious 'benefits' for the prices of equities worldwide, but we experienced a sneak preview of what unintended consequences could occur when (and it's not an 'if') the Fed finally switches of the financial life support mechanism and it isn't going to be pretty….
Trend outlook for week beginning June 23rd 2013.
USD in focus versus major and commodity currencies
A return to the traditional risk on-risk off paradigm returned with avengeance last week; as indices fell there was an immediate correlated return to the dollar as a safe haven asset. Versus yen, euro, Canadian dollar and sterling the dollar 'enjoyed' a marked secular rally.
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Cable suffered a significant fall post the FOMC meeting having breached the 200 simple moving average for several days in the previous week. Looking at the daily time frame the conditions still favour the bears; most of the commonly used indicators for plotting swing trends are bearish; the PSAR is above price, the MACD is printing lower lows as is the DMI. Looking at the price action (using Heikin Ashi candles) we didn't experience the classic doji on the daily chart, this reversal was more violent – an open candle with an extended downward tail. It is impossible to create justification for a long trend trade whilst the current conditions exist.
Turning our attention to EUR/USD we witnessed a new perfect doji using H.A. candles on the 19th of June. However, rather than indicating classic indecision the reversal was as sudden as that experienced in cable. The following days until the week's end saw the currency pair push through support each day to breach S2 on the 21st. Similar to cable and using the same basic indicator set MACD, the DMI and PSAR all exhibit bearish tendencies. As with cable it's impossible to justify a long trend trade based on the current graphical evidence displayed on the charts underpinned by the lack of confidence in the markets since the FOMC announcements and statements.
Dollar – yen displayed a near perfect doji on the 18th, the day preceding the end of the FOMC meeting. Perhaps investors believed that the dollar was oversold prior to the FOMC pronouncements. The reversal in trend was far less dramatic than experienced in cable and the euro. Despite many bullish conditions being met, when triangulating many of the commonly used indicators, the price action is still indecisive. It would be understandable if many investors maintained a neutral stance on this currency pair.
The Australian dollar has flattered to deceive and proved to be an incredibly difficult trend trade to call over recent weeks. Having appeared to gain momentum to the upside, due to many investors believing that the Aussie had been oversold, the currency reverted to being sold off after the FOMC meeting. In truth the rise was never convincing; looking at the most basic indicator set the DMI, (an exceptional tool to use for trend trading on an adjusted 20 level) remained bearish thought the gyrations from early May. It would prove difficult arguing versus traders who are currently short AUS/USD.