Unsustainable dynamic

IT CAME TOGETHER AND DIDN'T - Quite a wild ride over the past 24 hours and we have finally started to see some volatility in FX markets. Unfortunately for me, the volatility has produced a breakout in the wrong direction for my short NZD/USD play. Sometimes, everything comes together as anticipated, and yet, there are hiccups that produce an unanticipated reaction. I had talked about the need for a very healthy corrective pullback in US equities, and a still vulnerable USD/JPY, despite the previous weekly break above 104.00. I had also warned that EUR/CHF could still retreat below 1.2200. All of this came with the expectation that other risk correlated currencies would also come under pressure as this played out. And yet, we have seen the opposite reaction. Interestingly enough, the US Dollar has come under pressure across the board, and this US Dollar weakness has been trumping everything else.

UNSUSTAINABLE DYNAMIC - Still, I expect these other risk correlated currencies to fall back in line and once again come under pressure in response to broader flows. At the moment, it seems as though there is demand for these other currencies as market participants once again opt for higher yield that is also perceived to be safe. But this is only an illusion, and the idea of a risk asset also acting as a safe haven is completely paradoxical. Sure, this can happen for a period of time, but ultimately, with US equities starting to come under pressure and the Fed moving further away from ultra accommodative measures, this should in turn create a shake up in the interest rate market, that narrows yield differentials significantly back in favor of the buck. Moreover, there have been many rumblings out of China in recent days, and there is a serious concern that the economy could be at risk for a major cooling off. This development would also be tremendously bearish risk correlated currencies, and would weigh quite heavily. Finally, the longer-term cyclical picture continues to warn of major tops in the risk correlated currencies, and though we never really can know what will be, history has proven to be a very good predictor of the future. So while the buck is under pressure and risk currencies are well bid right now, I don't believe it will take much to 180 this picture.