FX Note: JPY rides high on sudden market panic
The market was clearly not prepared for today's rather bad news (poor claims. But it wasn't so much the severity of the news that mattered, but apparently the fragility of the market out there as this was more of a case of the move generating the move than any direct fundamental stimulus that caused traders to push buttons today.) Certainly, however, the ISM non-manufacturing employment sub-index and the . There is talk of sovereign panic - one supposes from the situation in the EuroZone - but if we look at long term debt rallying strongly today and gold tumbling 50 dollars into the abyss, this is a hard one to swallow.
Chart: AUDJPY
Someone rolled a grenade into the carry traders' tent today, as the combination of the one of the worst days in gold since the post-Lehman apocalypse in late 2008, rallying bonds and the worst day in equity markets (as of this writing 2 and a half hours before the close today) since late October pushed AUDJPY over a cliff and through the 200-day moving average. This acceleration in risk aversion is to be taken very seriously. Action like today's shows why carry trades are almost always risky bets as the downside is usually more vicious than the upside.
Outlook
The scary thing about moves like this is that they can stretch beyond all logic in the near term. Tails can get very fat when a move like today's is generated. It's usually a black or white situation: the acceleration is either stopped quickly and reversed as large hands on the sidelines decide to dive in and those who bailed in panic believe they were being foolish and decided to take back up their positions that were thrown out the window in the panic. The scarier scenario is when the market accelerates to an even greater pace as the market's participants are simply not ready for developments and the panic deepens.
This certainly sets up a very interesting US employment report tomorrow. As of this writing, the US S&P500 - our basic metric of general risk - is trading right around those lows since early November from last Friday's close. If the market manages to survive this area into the close, then we have markets poised at a fulcrum ahead of the US employment report tomorrow and an either/or outcome to that event risk as well.
Chart: USDCAD
Speaking of either or, we also have USDCAD pushing at that neckline-like area in today's trading. As we have pointed out previously, the oil price has been more important than interest rates lately in determining the CAD's strength. Oil fell off a cliff with gold today on the move in currencies, so this is providing plenty of pressure for a further weakness in CAD. Let's see how the US and Canadian employment reports fare tomorrow.
Please be careful out there.
On a side note as the world seems to be falling apart all of a sudden: to calm ourselves, we might take a glance back at the kinds of moves that shook markets in late 2008 for a little perspective. Another side note: our favorite conspiracy theory at the moment: This is the beginning of an intentionally rigged meltdown in equities that will drive investors into shifting more assets into public debt to stem the risk of a sovereign default in the United States. Farfetched to say the least, but an entertaining idea…