JPY flourishes on pre-weekend, near-panic in risk

FX Closing Note: JPY flourishes on pre-weekend, near-panic in risk

US Equity markets today were unable to mount a serious rally attempt today and are grasping at straws as we head into the close of the day and the week. The equity averages, in fact, are registering their worst weekly result since the market bottomed last March at a decade+ low. Today’s market action has kept the fires well lit under the Japanese JPY and the USD has put up a resilient performance as well considering the negative focus on the greenback stemming from the new bank rules.

Please note also the gathering momentum behind the idea that Bernanke may fail to be renominated as Fed chairman. The issue is creating curious political bedfellows as both extremes of the political spectrum are increasingly anti-Fed, if for different reasons. We still consider the odds are in favor of a renomination, but those odds are rapidly declining and we can't help but note that the timing here is more than interesting. The potential for a surprising outcome has risen after the shocking victory of an upstart Republican in the Massachusetts election and the timing of record bonus payouts from bailed out (indirectly or directly, it doesn’t matter in the popular mind) banks coinciding with record high unemployment. The current environment is a political powder keg that Mr. Obama is trying to defuse with new anti-bank rules.

Very importantly, as we also noted this morning: politicians are always interested in generating as much political capital as possible for election season, which is rapidly approaching on November 2 of this year. A “No to Bernanke” vote from the left helps the liberal democrat boast of populist credentials – the people vs. the bad banks and the evil Fed that saved them (the possible mentality of such politicians, not our words…). A No vote from the right is a vote against “socialism” and the heavy hand of government and its over-involvement in the economy. If we look at the risk/reward ratio for politicians on this matter, it seems clear that a No vote has little potential downside and large potential upside for election season for both of these factions. This could get interesting. While Bernanke’s term does expire on 31 January, his reappointment can happen after that date if the Senate is unable to get around to it. In that case, Donald Kohn would likely become the interim chairman

Chart: Saxo Bank Carry Trade Model
As we pointed out just a couple of days ago , we were noticing a couple of divergences in the subcomponents of our Saxo Bank carry trade model, especially the CB forward rate expectations, Emerging Market Spreads, and corporate credit to a lesser extent. Now we see that risk factors are in full retreat, and carry trades have suffered serious damage as result. The model is now registering its lowest level since last April, save for a couple of nervous days in late November and is rapidly moving toward the zero threshold.

Looking ahead: Technical and event risks and Weekly Candle charts

We are seeing interesting closes to the week’s action on the weekly charts. We also note that there are a couple of very chunky risk thresholds out there. The first is the 200-day moving average in the dollar index, which has thus far held despite a feint above that MA yesterday. The second is the idea of a rejection of a reappointing of Fed chairman Bernanke, though it appears uncertain how soon the Senate will move to a vote on Bernanke’s fate.

Here we go down the major charts and look at the candlestick patterns in evidence as we head into a white-knuckle weekend.

Be extra, extra careful out there and have a great weekend!

CHARTS

Weekly EURUSD
This week confirmed last weeks small shooting star reversal. Note that we are closing on the 0.382 Fibo of the huge upwave from below 1.2500 to the top late last year. The Euro may actually perform relatively well if the market continues to lurch into panic mode as liquidity will trump Greek worries in an all out safe haven seeking.

Weekly USDJPY
The very ugly action today is seeing the pair close down through support. Continued winds of risk aversion could see a test of the 88.25 area 0.618 Fibo retracement.

Weekly USDCHF
Semi "teacup" like setup here with a strong resistance line at today’s highs around 1.0500. Above there lies plenty of upside on any continued market nervousness. CHF didn’t seemt to take so well to today’s environment.

Weekly GBPUSD
GBP has a welter of different inputs of late that have kept it supported, but the Obama crackdown is finally proving the poison for the currency one would have imagined if we hadn’t been so distracted with the Cadbury acquisition. This week’s close sets up an ugly dark cloud formation that could see the pair challenging recent lows for the cycle.

Weekly EURGBP
Just to point out that the hostile environment for financials may be putting in a bottom for the likes of EURGBP as well. A hammer formation for this chart on the weekly close sets up an interesting line and the sand and shows a rejection of the attempt to break down through 0.8700 support.

Weekly AUDUSD
Evening star formation. 0.8960 is the tactical level in focus early next week. AUD should be suffering even more than it has thus far and is likely to be the most vulnerable of the G7 if we open up next week in the style we have closed this week.

Weekly USDCAD
Morning star formation could set up much higher levels to come in the days ahead on any continued risk aversion.