Hope is no friend of the USD and neither is the carry trade

The prevailing trend in markets at the moment seems to be hope, but as we all know “hope is not an investment strategy”. It may have worked in getting Barack Obama elected four years ago, but then again look at what has transpired since...

With renewed hope comes USD sales, pretty much everywhere except against the EUR. But even this beleaguered cross is making some inroads higher this morning, predominantly driven by thin market stop hunting having cleared the obvious ones at 1.2315/20 at first attempt and running into supply from the BIS into the initial (and obvious) resistance level at the 1.2330 mark. As noted yesterday between 1.2350/80 we have a raft of stops and offers with the real upside stop pain to be felt above that 1.2380 area where shorts were initiated in size post the Nonfarm Payrolls rip through of a few weeks ago.

On other matters, again as I mentioned yesterday in the absence of anything Earth shattering short and medium term players are looking for yield and while previously demand for the carry trade may have signalled all is well in the world and a fervent risk appetite, now it is simply more of a case of needing to park money somewhere and generate something resembling Alpha anywhere you can.

To this end we see the AUD and NZD smalls outperforming and here I urge keeping an eye on the weekly close in the little battler as we could indeed see a significant upside pop in the ensuing summer lull. On the downside 1.0250 marks the line in the sand and only a close below negates my bullishness at the moment. Don’t get me wrong I don’t think the upside in this cross is unbridled joy, but certainly 1.0530 is not out of the question...

I have chosen to express this view mainly on AUD via the direct USD leg, but also in being long AUDNZD, AUDCAD and short GBPAUD, with the latter 1.5000 target almost in sight.

As erratic as markets currently are and likely to be more so in the coming weeks (summer), some range plays are starting to show up and amongst those is certainly the GBPJPY with levels mentioned in previous posts (within the last week or so) holding well. The wild card in this equation remains the JPY leg, but then of course we always have verbal and/or literal Bank of Japan intervention to keep in perspective.

The US reporting season is keeping US equities relatively well buoyed for the time being and the raft of financials due to report after market today and tomorrow may give us one more leg higher and a Friday squeeze, keep your eyes peeled.

As always, helmets on and good luck.