Whether It’s The Weather

A month ago the sun was shining on the US economy and sunny economists were predicting the economy would heat up in 2014. A month later and what started out as some weather concerns has turned into a blizzard of worries. Stocks had their worst day since June on Monday and GBP/JPY fell more than 300 pips. 

For sure, poor US weather in December and January contributed to some weakness in economic data but the market no longer believes that's the full story. Not after the January ISM non-manufacturing survey plunged to 51.3 compared to 56.0 expected.

Technically, it caused a meltdown with USD/JPY smashing through 102, then through 101 to as low as 100.78. EUR/JPY took out the 61.8% retracement of the Nov-Dec rally and cable swan dove to the 100-day moving average.

More levels were broken than we can mention but the major ones that screamed risk-off were the fall below the 200-day moving average in US 30-year bonds and the breakdown below the Dec and Nov lows in the S&P 500.

To keep things in perspective, these moves are squeezing crowded, leveraged trades so they're probably exaggerated but the technicals are concerning. The next wave of data this week including ADP, the ISM-non manufacturing survey and non-farm payrolls will be extremely important.

We get a sense of how central bankers are feeling right away with the RBA decision due at 0330 GMT. Stevens has a nearly neutral outlook but the high quarterly inflation data is expected to prompt some kind of warning on inflation. The risk as that the RBA looks past the current inflation, says prices are contained and continues to re-iterate that AUD is overvalued. That's the formula for 0.8500 or lower in AUD/USD.