DailyFX
Japanese Yen: USD/JPY Slips Below 95 as Nikkei Collapses 6 Percent
John Kicklighter

  • Dollar and S&P 500 Traders Face Major Trend Reversals

  • Japanese Yen: USD/JPY Slips Below 95 as Nikkei Collapses 6 Percent

  • British Pound: Despite Rally After Report, GBP/USD Yet to Break 1.5700

  • Euro Rallies to February Highs Despite Greece Troubles

  • Canadian Dollar Looks to Break Chop with BoC Financial Stability Report

  • Swiss Franc Gains, USD/CHF Hits 4 Month Low after Tax Evasion Vote

  • Gold Advances as Dollar Stumbles, Yen Crosses Retreat

Dollar and S&P 500 Traders Face Major Trend Reversals

Both the US dollar and S&P 500 futures have made ominous moves over the past 24 hours to threaten long-term trend changes. While the recent, positive correlation between the benchmark equity index and currency would seem to suggest that both are susceptible to a collapse; the change to the fundamental landscape under such seismic shifts would likely revive the ‘risk / safe haven’ dynamics that the dollar seems to have abandoned. The line in the sand both FX and capital market trader should watch for is 1,600 on the S&P 500. The combination of the 50-day moving average, seven-month channel floor and psychological appeal of a round number can draw enough attention that its failure can set off a tidal wave of pent up fears. Global market yields are just off record lows; the Federal Reserve is running short on flexibility to continually drive markets higher; growth forecasts have cooled; volatility measures are rising; and leverage (measured on the NYSE) is at a record high. These are troubling but vague conditions. What better way to bring them all to the surface than a pressured selling / deleveraging?

In a market where over-exposed market participants have to quickly unwind geared trades, there is a high risk of panic. The greater the sense of unstable markets, the more extreme the need for refuge in absolute liquidity and financial assurance. In such tumult, the deepest market, largest economy and most dependable regulations trump yield or long-term fiscal debate. And, that leads the battered back to the United States and the US dollar. However, that unflinching flight to quality must be engaged to fight the dollar’s countervailing wind: fading ‘Taper’ premium. Depending on the traditional sparks for reviving fear leaves us with a docket lacking event risk until next Wednesday’s FOMC rate decision. If we are to see a shift to risk aversion before that high-profile event, it will likely be borne from market sentiment itself.

If US equities can find a floor once again in the upcoming session, the stability could bode poorly for the greenback. Since the beginning of the month, the currency has shed gains forged under the auspices of a June tempering of the $85-billion-per-month QE3 program. The consensus now projects a September or later date for that safety net withdrawal. A significant level of premium has been extracted, but a break of 10,500 for the USDollar Index could escalate the effort. Meanwhile, the market is still showing its consciousness of the Fed’s eventual withdrawal of support. The US 10-year Treasury auction this past session drew its second lowest demand since August 2009 and volatility is trending higher.

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