Uncomfortable divergence

BEHIND THE DOLLAR MOVE - Good to be back writing again after my FirstMacro road trip. I am very excited to bring the FirstMacro product to market. I have already beefed up the coverage, with the addition of an emerging markets desk. Anyway, back to markets. So quite a bit of a shakeup in the currency markets, with the more hawkish Fed interpretations opening the door for an across the board surge in the Greenback. The price action was quite welcome in my view, as I have been looking for medium-term US Dollar strength on account of this anticipated shift in Fed monetary policy. Technically, the move is also welcome, with the US Dollar looking like it wants to carve out a cyclical bottom. Interestingly enough however, equity markets have held up quite well, despite the movement in the FX and fixed income markets, and I am still scratching my head here. The equity correlated USD/JPY and EUR/CHF markets were also supported post Fed, and this is something that I would not have expected. Still, while the equity rally is more difficult to reconcile, the rallies in USD/JPY and EUR/CHF are nothing more than corrective rallies within some bearish consolidation.

UNCOMFORTABLE DIVERGENCE - I suspect there is more downside to come for both of these markets, and I also am still looking for equity markets to finally roll over. One would think the latest Fed decision and elevated geopolitical risk would be enough to diffuse stock market appetite, but that has not been the case. Moving on, one of the most interesting markets out there could very well be an unsuspecting cross rate. NZD/CAD has been very well bid for some time, but with the market tracking in overbought territory on a daily, weekly and monthly basis, it looks like we could soon see a major trend shift. I would recommend keeping this one on your radar screen going forward. No specific recommendation just yet, other than look to sell. Overall, something is a buzz in the markets, and I think we should expect more volatility ahead. The key focus right now is on this latest US Dollar rally and the inability for equity markets to be scared away with the demand for the buck. Again, I suspect that equities will ultimately fall in line, and will start to relent, in favor of a very well deserved corrective decline. How much of a corrective decline you ask? Well, I'm thinking 15% would be quite realistic. After all, a 15% pullback would still have the S&P trading above the fresh record highs established in 2013. So does it really sound that far fetched. I think not. Have a great weekend!