3 Reasons Why the Rally Was Suspicious

The currency and equity markets are turning lower after a strong rally on Tuesday. In my Daily Currency Focus, I talked about the 3 reasons why the currency market rally was suspicious. None of the reasons for Tuesday’s jump delivered real solutions. The market only rallied because Bernanke delivered no surprises. President Obama’s attempt at reassuring Americans also failed to comfort investors.

Instead we are faced with a weakening economy that is only confirmed by this morning’s plunge in existing home sales. Sales of existing homes plunged 5.3 percent to a 12 year low in the month of January. The housing market remains the Achilles heel of the US economy as prices fall and demand wanes. The median price of a home sold dropped 14.8 percent compared to the year prior. Such disappointing numbers are not much of a surprise given the big decline in housing starts and building permits. With banks and mortgage lenders reluctant to lend, even potential homeowners with sufficient capital have found difficulty attaining loans.

The British pound has been hit the most because Bank of England member Barker said that the weak sterling is helpful. UK officials have taken every opportunity to talk down the currency.

USD/JPY on the other hand remains an animal. Despite weak economic data and a turn in equities, the currency pair continues to rise.

My favorite is still the Australian dollar because of strong M&A flow, higher gold prices and the prospect of the country remaining recession free. The AUD/USD is also prime for a breakout.



  1. I’m also bullish AUD, esp AUD/JPY. Japan credit continues to deteriorate, Oz remains strong. AUD still 500 pips below PPP of .7, a relatively high central bank rate of 3.25%, a relatively healthy economy, and running a budget surplus. AUD/JPY is 1700 pips below 200 day MA!

    however, counter indicative evidence is still-weak commodities. other than the Baltic Dry, oil, DJC, Reuters Jeffries and the base metals indices all down. and I think Gold is in for a drop in the short term. bank positions in gold futures are hugely short…

    unrelated, I think EUR is ready for another drop. unemployment over 8%, eastern Euro sovereign CDS rates are unbelievable. compare UK at 163 bps to Poland at 416, Hungary at 554, Lithuania at 849!! West EZ banks are all exposed to this risk…and I think the market is expecting at least a 50bps drop in ECB rate on Mar 3

  2. I am also bullish AUDJPY for the same reasons. If you expect EUR to drop, is not AUDJPY risky? CAD and AUD have quite strong correlations to EUR. EURJPY tends to follow EURUSD down. That puts downward pressure USDJPY so you may be hit on both AUD weakness and JPY strength for a while.

  3. I am not expecting AUD to be punished for EUR weakness (but I’ve been wrong!)
    I think a lot of correlations we’ve seen in the past have broken down (look at equities vs JPY, and JPY vs risk aversion).

    in any case, I have 6 months to find out if I”m right. I only need AUD/JPY to hit 65 for 100% profit on the call- 200 pips to go as I write.

    on another topic, anyone looked at NOK?

  4. On the daily chart(friday), notice we’re in a clear uptrend that started in mid-December. Also note that prices are above all the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are rising. The MACD is rising and the RSI shows increased price strength. The main issue now is will prices move above the previous high?


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