FX on Edge

David Rosenberg had this to say in his piece today:

Right now, the foreign exchange market is in a state of disarray and, as I said above, problems here inevitably work their way through the arteries to the equity market.

As is often the case, I am in agreement with David. The FX market is in a state of disarray.

Zero Hedge clarified the picture with a heat map of the action. My observation is that both the dollar and the Euro are weak. The net money flows went to the Swiss Franc and the Yen. The volume for the USD was heavy again and the two way trading in the key crosses was very big.

The bad news story for the EU is heating up. France has gone on strike. Ireland is increasingly looking like an IMF deal is close. After a decent few months the numbers are turning south again. And if you wanted to throw a wild card into the picture consider what is going on in Brussels. I don’t know where this goes. I am certain that it runs against “Pan EU Solidarity”. Watch for this type of thinking to evolve in Germany.

The USD side is dominated by QE2. After the Fed minutes the dollar dropped a bit. Right on cue as it were. What a joke.

Consider the day chart for the EURCHF cross. The drop at time 11 is pure old-fashioned supply and demand. Someone dumped a ton of Euros against the Swissie. The backup in the EURCHF cross in the last 24 hours is a red flag. I see this is evidence that the fast money is again leaving the Euro. Note the pop in the cross at hour 18. That is the Fed minutes. The market reads this as a sell signal for the dollar. This creates demand for the Euro. That demand spills over to the crosses. This can be explained, but as Rosenberg pointed out, there is disarray.

The USDCHF chart completes the story. The people who actually make prices change in the FX market are of the mind that the dollar is a piece of crap and at the same time they are scared to death of the Euro. More disarray.

 

The USDJPY story will be headlines in the next 28 hours. Yes, that is a long-shot call by me. Note that I gave myself tonight and the first few hours of trading on Thursday. I have said previously that I thought the BoJ would be out until one big figure below the last intervention of 82.80. We are there and I am sticking to my view. Should that happen it would have a short-term effect of lifting the USDJPY. It would also hit the EUR on the cross, that means the EURUSD will catch a bid and move back toward 1.40. This would be a “risk on” development. Stocks might catch a bid in Asia on the news. But this is a “shit in your hat” story too. If by noon in NY (on the day of intervention) the USDJPY is trading below the invention, the risk on trade turns to a “risk off” one and a fast reversal will follow. Beyond disarray into chaos.

If the BoJ is a no show we will have another busy day tomorrow. That scenario means money flow to JPY from all directions. My guess this would translate into demand for dollars versus Euro. That would imply a weak EURCHF cross. It took nearly a month for USDJPY to fall 1 big figure. If we have no intervention the next big figure will happen in days. Disarray (squared).

Okay, I’m half kidding you with this gibberish. I was actually thinking it through and ended up writing it down to make a point. The range of outcomes and the various risks associated with what may come are substantial. Use whatever adjective you like. Unstable, disarray, unpredictable, or chaotic. I recently warned that the money flows would heat up. They have. Where this goes is by definition uncertain. For me the status in FX land is at a point where the only conclusion can be that it is a “risk off” market. I’ll repeat Rosenberg’s wise words:

problems here (fx) inevitably work their way through the arteries to the equity market.