Observations Heading Into The Close
Some interesting tactical observations heading into the close via Goldman. Probably the most relevant is the divergence between the USDJPY and the 2 Year: whereas the two have traded on top for the past two years, in the past month we have seen a very notable divergence. Goldman's advice: short the USDJPY big at any level above 92, as the fair value based on the 2 Year is 88. On the other hand a 4 point drop in the USDJPY would cause a wipe out in stocks, due to its impact on the EURJPY, so in essence this is like saying short the market and go sell an overpriced 2 Year. Nonetheless, for recoupling chasers, this should be a pretty sold and profitable convergence trade. Another observation from GS: a close below 1,091 will lead to a retest of 1,036.6. This is now pretty much a given.
From Goldman Tactical on things to watch for the NY close:
USDJPY – Will post a bearish key day with a close below 92.04. The market still looks very over-valued relative to 2-year U.S. yields. Something nearer 88 looks to be “fair value” for USDJPY at this point.
S&P Future – Will post a bearish key day from the 200-dma with a close below 1,091 today. This should argue for a retest of the 25th May low at 1,036.60. It was also highlighted to us today that you can count a particularly negative Elliott structure from the April highs which would imply we’re about to begin another notable down move, something worth keeping in mind.
A few other quick points…
EURUSD- Has broken to new lows for the cycle, below 1.20. Various targets and supports now come in from 1.19 to 1.18. Our aim is to stick with our Favourite Tactical Theme for 1.18. But would emphasise that for various reasons outlined in The Charts That Matter Next Week we’re not targeting significantly beyond that level at this stage. When/if the market trades 1.18 we’d consider the position closed regardless of what’s happening.
G10 commodity currencies- Appear the place to focus attention from here. Copper has now sold off aggressively from the 200-dma, in a similar fashion to Q3’08. This sets a negative backdrop for AUD and other related currencies, and as such makes us think sticking with short-AUDUSD for the 0.7759 double top target is still the right idea.
EM- Two notable triangle continuation patterns have completed today on EURHUF and USDTRY targeting 296 and 1.6670 respectively. EURPLN also still has a very bullish look to it on the weekly charts.
U.S. and UK 10-year/2-year yield curves– Starting to bullishly flatten again. The weekly structure on both of these curves/spreads argues there is scope for significant further flattening and the cross asset market backdrop which now appears to be developing should help those trends.
EURSEK– Is this finally going to bounce? The market has now double bottomed against the prior low from 13th May at 9.5230. With the CEE currencies beginning to weaken sharply SEK could start to weaken “in sympathy” as it did during late-‘08/early-’09.