Several commentators (including myself) have recently pointed out that more than ever asset markets are being driven by price developments in the foreign exchange markets. And in trading yesterday across several FX pairs and watching the associated movements in equities, gold, oil and other commodities the broad theme was exemplified par excellence.

To grossly oversimplify here are some "Big Picture" themes for "dress down" Friday.

1. There is an inherent bias in US monetary policy to weaken the US dollar, despite all protests to the contrary.

2. The Chinese know this and, as George Soros has recently commented, they have sufficient reserves and enough skin in the game that they can effectively "manage" (manipulate) the FX markets to achieve their longer-term goals of diversification so that they are less reliant on dollar-denominated assets and at the same time secure their stake in resources/commodities to continue to grow their economy at 10% per annum.

3. The world is awash in dollar liquidity which helps to explain why US equities and bonds have marched relentlessly higher despite, especially in the case of Treasuries, the real inflation adjusted returns and expected future returns seem absurdly "underpriced" and defy explanations from "traditional finance theory".

4. Many major funds are massively short US dollars from the use of all kinds of derivatives which are tied into correlation strategies involving everything from commodity plays to yield curve arbitrage and ETF rotation plays.

5. It would not take too much evidence of a short-term US dollar rally to lead to some sudden and large scale shifts in asset allocation.

6. Continuing with the theme from earlier this week in this column, many global equity indices are stalling at key fibonacci levels.

7. Systematic (i.e. overall market) risk is under-priced.

8. Exactly how global policy makers would deal with another bout of systemic risk remains a mystery of staggering proportions.

GBP/USD almost met yesterday’s target of $1.5640 and I have indicated on the chart where I believe the next major target is on the downside...but, as suggested yesterday, it may take the scenic route first.



EUR/JPY has been clearly confined by the descending trendline through the highs drawn on the 60-minute chart below and indicated is a near term target of approximately 112.50



AUD/USD has entered a correction phase after peeking above parity and the near-term target from the 240-minute chart below is around 0.9710.



The S&P 500 futures are trading at 1176 in European trading on Friday morning which puts them at roughly the mid-point of the expanded range seen yesterday.

The intraday moves are becoming more erratic which is indicative of a lot of short sellers trying to pick an intermediate-term top and to a large extent the "traps" are being set in the FX market where, even if the S&P 500 shows remarkable resilience, the astute inter-market traders can reap their rewards from coordinated plays with strategic FX pairs.

1200 is still the upside target but the 1155 value registered earlier this week also represents an Achilles heel which may need to be tested again before the April highs are challenged.

To end for today ... it is vital for those large funds that are aligned with the Chinese currency management goals, and are counting on a weak dollar to sustain further gains in the S&P 500, that the ambushes based on selling the euro, aussie and sterling do not turn into a rout.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market.