More Risk Aversion til Pres. Inauguration

by Ashraf Laidi
Jan 15, 2009 16:11 | 28 Comments

Prolonged risk aversion is expected to ensue until Tuesdays presidential inauguration brings in a temporary feel good rally. Having made their third failed attempt to rise more than 25% since the intensification of the crisis, equities, VIX and the yen are expected to further move in the direction of prolonged reduction in risk appetite (equities negative, yen positive, VIX positive). I warned in the Jan 2nd piece Risk Appetite Pushes the Envelope that the trio of risk appetite will be constrained near 940 for the S&P500, $850 for gold (having failed to break its 8-week cycle gains) and 92.50 yen in USDJPY.

The charts below illustrate the relationship between the VIX and the S&P500, both of which suggesting prolonged risk aversion (rising VIX, falling S&P) as the VIX breaks above its 100-day MA for the first in 4 weeks and S&P500 bears the next support of 817. Weekly oscillators for both instruments also confirm further reduction in risk appetite, which could intensify until a possible bottom in Tuesdays US presidential inauguration. Pres elect Obamas speech may will likely give a short-term relief rally on the feel good factor resulting from a turning of the page in the White House. Despite the long term concerns of the upcoming fiscal deterioration, Obamas promised $300 billion in tax cuts will be reiterated during the inauguration, thereby, justifying the next temporary bottom in risk appetite.

More Risk Aversion til Pres. Inauguration - Vixand S&Amp;P Jan 15 (Chart 1)

The currency implications for the aforementioned pick up in risk aversion is likely to continue boosting the yen at the expense of the Canadian dollar and the NZ dollar, two commodity currencies whose underperformance cannot go unnoticed during. This weeks S&P downgrade of NZs foreign currency credit rating and the impact of a 3-week low in oil prices is weighing on heavily on NZD and CAD.

8000, 800, 800 Dow, Gold, S&P500 may prove as just a coincidence, as the Dow is most likely to break below 8000, while the S&P500 is the least likely break 800 in the short term.

The European Central Bank delivered the expected outcome of cutting by 50-bps, reverting to what is seen as an incremental pattern of easing for now as the central bank is cautious about driving down inflation further below its 26-month low of 1.6%. Anything less than 1.5% annual would be deemed as outside the definition of anchored price stability but it does not necessarily mean aggressive easing mode (-75 bps).

We should also note that Decembers 75-bp cut from the ECB in December was partly to avoid excessive rate differentials relative to the BoE (-150 bps in Nov and 100-bps in Oct) and Fed (which may have signalled to the ECB that it would enter zero % territory later that month).
JC Trichets press conference suggests a return to incrementalism, rather than the end of the easing campaign, which could extend until rates reach 1.00%.

EURUSD was boosted by higher than expected US jobless claims (524K from 470K) as well as the obligatory post-press conference choppy trading, reaching as high as $1.3239 before retreating towards $1.3050. We reiterate the $1.3030 support remains the trend line support extending from the Nov 21 low through the Dec 04 low. Philly Fed and Empire State showed no marked improvement. Tomorrows US figures on indus production are more likely to trigger market impact than the CPI as production decline seen greater than 1.0% following previous 0.6% drop, while capacity utilization seen falling below 75%.

USDJPY consolidation ensues between 89.40 and 88.60, while staying clear from retesting the upside limit of 90.20. While much talk is being focused on USDs risk-driven gains, USDJPY remains in a negative bias, with the shorts still looking to test the 88.60 support, a breach of which seen calling up 87.80 and 87.00.

Comments (Showing latest 10 of 28) View All Comments
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 22, 2009 19:23
Rob, Indeed, rising risk aversion IS driving EURJPY lower. yesterday we tested 112. we should see 110.

Ashraf
Amit
Connecticut, United States
Posted Anonymously
11 years ago
Jan 22, 2009 18:11
-Steve

For EUR/JPY more volatility coming your way so be prepared. 1.10pm est
If EUR/JPY drops below 115 now maybe your OK. Otherwise, its risk management time.
Rob
New York, United States
Posted Anonymously
11 years ago
Jan 22, 2009 17:33
Hi Ashraf,

With equities plummeting shouldn't risk aversion be sending EUR/JPY plummeting along with stocks? Is there another major factor driving EUR/JPY and the other JPY crosses higher? Do you see EUR/JPY going much higher than 115.50? I'm trying to figure out why there is an upward trend and what the downside target is.

Thanks so much
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 22, 2009 13:15
Amit, BoJ isnt pursuing the Feds balance-sheet expansion policy as not only Japanese banks are spared the escalating losses seen in US, but also because BoJ is already pursuing a quantitative easing policy. Remember that interest rates have been at or below 0.5% for at least the last 10-years.

Ashraf
Amit
Connecticut, United States
Posted Anonymously
11 years ago
Jan 22, 2009 11:51
Ashraf i dont want to ask this question to you, however, i am uncertain as to "these" withholdings of currency that institutions have on behalf of BoJ that have been dropping. ( i presume the amount is in their balance sheets posted on their site) I have my assumption ...upside down scythe.

Your call for a USD/JPY in mid 70s somewhere along the way is plausable with my dow at 7000, however, i am uncertain as to how the drop in export demand for japan may lower the appreciation of yen. Japan has been protecting their yen from huge appreciation in time of world growth, however, now that deflation is on the horizon would japan risk itself to manipulating yen by increasing public debt (ie through buying corporate bonds like how FED is buying anything that is high-risk no-return paper thereby subsidizing those markets, or allowing more time to revert large positions because FED know how to scare speculators trying to strong elbow the large positions into liquidating.)
Amit
Connecticut, United States
Posted Anonymously
11 years ago
Jan 22, 2009 11:35
-Steve

USD/JPY cliff after 10 am on 1/21 was due to options expiration on 10am est time. The subsequent upside to USD/JPY is powerful in timing of bids (maybe gov't enterprised operations to prevent yen appreciation) Since the yen spike occured right as the new options became avail, i am assuming one or more powerhouse is long yen and hedged short options.

I am assuming continued risk aversion and more gov't intervention through indirect operations (this looks like an upside down scythe, easy to spot). So you should be fine short EUR/JPY for sometime. Until obama's stimulus package pumping doesnt start, and maybe those fed buying us gov't IOUs dont start.
Steve
New York, United States
Posted Anonymously
11 years ago
Jan 21, 2009 23:19
Hi Ashraf,

I need your advise again. This EUR/JPY down huge today in US seession to 112 area, then US short-covering rally brought EUR/JPY close to 117. How high can this stupid pair goes up before it crashes down to 110. Your insight pls. Tks.

This EUR/JPY and GBP/JPY so volatitle, 1 order is good enough for me!
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 21, 2009 14:25
Hi Rob, Correct. Rising risk aversion drags down CADJPY. It was at 71.50 prior to the BoC and later dropped to as low as 70.48. I should have specified in the IMT that CADJPY went LOWER. Did I say EURJPY 110 was inevitable? I think 111.00 is more of plausible for now. Based on my expectations to see mid 70s in USDJPY later in H1, we could test 110.

Ashraf
Rob
New York, United States
Posted Anonymously
11 years ago
Jan 21, 2009 14:04
Hi Ashraf,

In your latest Intraday thought - would not rising risk aversion trigger CAD/JPY to go lower, as opposed to higher toward the mentioned 76.80. Also, what targets do you see for EUR/JPY and do you still see EUR/JPY 110 as "inevitable" and in what time frame? Thank you.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 20, 2009 12:13
STEVE, from what you ask me about GBPAUD and EUR2.30 in GBPAUD is possible simply on mean-reverting trade but currently the fundamentals remain in favor of AUD. I think we could see 2.02 before we see 2.32. EURGBP has not abandoned its quest to parity this quarter.

RICK, 900 pips in cable is not abnormal considering the pair's historical volatility.Look at the October charts and you will see. I just told CMC clients that traders will continue selling the rebounds and yes, UK fundamentals warrant the drop in sterling. $35 billion losses in RBS is the size of Croatia. BoE on it way to quantitative easing.

Ashraf