The Portuguese government has collapsed, Moody’s have downgraded Spanish banks and the EU leaders are meeting in Brussels Thursday and Friday to come up with soothing words to patch up the structural shortcomings in the EZ framework. Also since I began writing this commentary, Moody’s has just issued a negative statement regarding the UK economy. Their reasoning is that with slower growth (including much weaker retail sales in February than expected at -0.8%) and weaker fiscal consolidation the AAA rating of the UK could be in danger.

It promises to be an interesting 48 hours for the euro currency, but as I commented via Twitter earlier this morning the performance of the euro against the dollar highlights the fact that many funds continue to enjoy the mega generosity of the Fed, as evidence points to the fact that USD is increasingly becoming the low yield component of the FX carry relationship - with AUD being the principal high yield beneficiary. This relationship, while it persists, also provides a relatively benign risk on background. The real challenge will arise when the Fed (and let’s assume that at some point they will have to) signals that the tide is turning for further ZIRP and QE.

The 240 minute chart below shows that the currency is well supported from an Ichimoku perspective as long as the $1.40 level holds and my inclination would, from a short term trading perspective, to buy pullbacks with a view to seeing FX traders want to re-test the $1.4250 level.



Recently there have been plenty of diversions to move one’s attention away from the US Treasury market and specifically yields on ten year UST’s. Arguably this market is the key barometer to global liquidity.



The alternative barometer for measuring what might be called investor anxiety/fear, and what I call macro risk for shorthand, is to monitor certain key FX rates.

I have made the case here recently that, owing to the special circumstances now facing the Japanese currency, the preferred cross rate for the coming months should be AUD/CHF.

The weekly chart below shows the abrupt drop which was seen over the last two weeks and the suggestion is that whereas ~ 0.9250 had previously acted as support for an extended period; this level could now present a major hurdle. If the level does prove to be an obstacle this would be one key element to add into the calculation of the relative benefits of being heavily exposed to risk assets versus having a more defensive stance.



Reviewing the 240 minute chart for GBP/USD I would suggest that sterling might well retreat towards $1.6080 before finding real buying support.

 

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