Stocks correct, euro resumes downfall

At some point it was inevitable that the rising US dollar and growing chance of rate hikes would hurt the stock market. After the worst day of the year so far in the S&P 500, we consider whether that time is now and what it means for FX. The yen and US dollar were top performers on the day while the euro lagged. Japanese machine orders are due later. In the latest Premium Insights, Ashraf issued issued 2 new trades on EURUSD with 2 key charts. EURJPY, USDCAD, AUDNZD and EURAUD are all in progress. 1 USDCAD was stopped out earlier this morning, while EURJPY shorts remains +100 pips in the money.

The S&P 500 tumbled 35 points, or 1.7% on Tuesday, closing at the lowest since Feb 4. The move was essentially a continuation of the fall after non-farm payrolls on Friday. It wasn't extremely strong but strong enough to make most market participants confident the Fed will remove 'patient' next week.

At the same time, the ECB has launched its QE program and the market is staring a trillions of euros of Eurozone bonds that already have negative yields with a wave of ECB buying likely to push them even lower. German 30-year bond yields are down a quarter point in the past two days to just 0.75%, almost on par with US 2s.

The best-case scenario for the Eurozone is that economic data picks up but so far good news has been shrugged and every EUR/USD bounce is hammered into oblivion. There is a sense in the market that the ECB might not find the supply to purchase 60 billion euros per month but rumors of just 25-50 million of buying on Monday were dispelled by Coeure who said the ECB and national central banks purchases 3.2 billion, which is slightly above the 60 billion pace.

Looking at stocks, the immediate takeaway is how resilient the US dollar has been against the yen. USD/JPY climbed for four consecutive days leading into Tuesday, mostly in a risk-negative environment. An attempted break above 121.20 was beaten down but the pair managed to close nearly flat. If USD/JPY can't mount more of a correction on the tail-end of a 4-day rally plus a rout on stocks, when can it correct?

Part of the story is the yen equation after the soft Q4 GDP numbers. The economy will remain in focus with January machine orders due at 2350 GMT. They're expected to fall 4.0% m/m after an 8.3% gain in December. A larger fall would further nudge the BOJ toward action. Japanese officials also won't be impressed that EUR/JPY is at 18-month lows.