Nick Nasad
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Market Overview: Risk Sentiment Reverses as Equities Rally, JPY Drops & Aussie Weak

Risk Makes Quick Turnaround: Tuesday gave way to a nice rebound in risk sentiment after the bout of risk aversion to start the week. Economic data was generally supportive as EU industrial production was up a better than expected 1.8% in the month of November and US retail sales rose 0.2%, a tad higher than the 0.1% forecast, while core sales (excluding autos) were up 0.7%. 

The news helped to give market participants some confidence with the S&P500 bouncing up from the 1811 support level I outlined yesterday. US equities will be tuned in to 4th quarter corporate earnings the rest of the week.

Nikkei 225 futures also rallied, but still have an important test coming up in the upcoming Asian session as we see what happens at the 15702 level, the level of support form last week which was cracked yesterday.

JPY Reverses Monday's Gains: Much of the gains from the JPY yesterday were reversed today (you can have a look at my analysis of the EUR/JPY here) while the USD/JPY managed to climb back above the 104 level and looks set to close above that key level (mirroring the action in the Nikkei225).

What happens next as the pair has not managed to pare more than 50% of its downswing that started on Friday, and runs up against the 55-daily EMA (in blue) will give further direction to the pair. Again, much depends on how Japanese traders react when Tokyo opens. The rally could be a chance for the original bears in this pair to reshort, and for the moment, that is my preferred bias in this (and other JPY crosses). However, risk aversion moves did not seem to linger too long in 2013, so let's see if that will again be the case in 2014. What happens with the Nikkei and the USD/JPY will determine what happens with other JPY crosses.

Aussie Stumbles: With the slightly better than expected US retail sales data and further tapering talk from Fed officials, the USD managed to regain its swagger against the AUD and CAD.

The 55-daily EMA held the AUD/USD pair in check, and the inability to push above the 0.9080 level signals that the AUD rally was simply a correction. However, the bottoming process that started in mid-December still holds, and it will be interesting to note what happens here as the pair tests a short term level of support at 0.8960 that had acted as resistance throughout the last few weeks of 2013.

The weakness in the Aussie could be seen against the EUR and GBP which reversed yesterday's moves and look poised to turn around their soggy performance against the AUD. As we can see above the EUR/AUD pair found support before testing the 1.50 level, and pushed above yesterday's highs. While still in a flag pattern, the price action suggests that this may the launching point for further gains in the pair.