Thursday, February 6, 2014

The calm before the storm? | Volatility

Chart comments courtesy of MarketWatch.com

Today could be a busy day on the Forex markets, but the monthly announcement on policy by the European Central Bank (ECB), and the interest rate decision announcement by the Bank of England might also be taken in stride as the market awaits the most watched report, which is the Non-Farm Payroll figure from the US Bureau of Labor Statistics tomorrow, Friday. Initial jobless claims today will, no doubt, be divined, in the manner of owl entrails in ancient Rome, in an attempt at anticipation.

Yesterday also saw little in the way of price action for the same reason. The ADP jobs report, which came out yesterday and which can give a leading indication of the Non-Farm Payrolls number, was a little below expectations. This failed to have a profound effect on market sentiment. One reason for this might be that last month there was a marked discrepancy between the two.

We are watching a number of instruments, for which the NFP report will be catalyst, in one or other direction. These are the Yen (USDJPY), the Aussie (AUDUSD), the Aussie / Kiwi pair (AUDNZD) and Gold. These go alongside the Swissie (USDCHF) and Cable (BGPUSD), in which we held positions up to late yesterday. We are now on the sidelines waiting, as is typical on those occasions when high bi-directional volatility is on the cards. This is all part of our normal risk management strategy.

Volatility

The volatility of the equity markets and, in particular, the DOW and S&P indexes, continues to bear on the behaviour of currency pairs. We do not handle equities but, as with gold, our feeling is that if the cheap money made available by Quantitative Easing in the USA has been a factor in the amazing bull market during the last number of years, then its reversal, so-called tapering, can only be expected to result in an unwinding of positions in stocks and shares, and a reversal in the direction of the equity market indexes.

There is much talk, among pundits of the stock markets, of the current pattern of movement in the indexes and in stocks themselves being “a correction”. This would imply that what is happening now is a temporary phenomenon and normal service, as it were, will resume at some stage. There are, of course, other possibilities: One of them is that a cyclical bear market could have just got under way.

It would seem that a great many equity market participants are conditioned against the idea of going short on a stock. They should consider Forex. Here the concept of shorting is normal. One must sell one currency in order to buy another and whether the trade is classified as a “long” or a “short” depends solely on the arrangement of the two currencies that go to make up the instrument being traded. This arrangement is arbitrary.

As always, whatever happens in equities is not likely to be an issue so long as it is orderly.

And, methinks, therein lies the problem. It has been anything but orderly since the "correction" began.


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