Are we seeing a bottom in the euro and pound pairs or is this a pause for breath?

For all the coloured lines and indicators, sometimes a market just has a "look". That look to me right now is one of the dead cat variety, in yen crosses, cable and the euro.


The moves today have been quite strange. It's not often you see such yen strength twinned with dollar strength. There's always some natural pushing and pulling but these moves stand out. The more recent USD moves have coincided with Treasury yields firming but earlier on today, yields were slipping when theses moves gained speed.

The other "look" these markets have is one of flows not speculation. We're still quite early in the year and money is still looking for the best places for potential returns. There's plenty to choose from these days but it looks like the less risky options could be where they're headed.

Flows are always a difficult thing to judge and decipher and usually we only know they're happening a while after they've started. To get some idea of how such things work, imagine the world is your oyster as an investor, where would you put your money?

  1. Europe? Heading for huge political risk this year. Still struggling to reform, fix Greece, banks and a shed full of NPL's. However, there's signs of a proper recovery and a central bank possibly coming to the end of an easing cycle.

  2. UK? A completely unprecedented unknown in Brexit. Domestically looking fine but at the mercy of a long drawn out negotiation with Europe. Also has a central bank running at the bottom in interest rates.

  3. US? A possible fruitcake in charge. Saying the right things (sometimes) but has very bad execution. He's not even started pushing policy through the government. Yet, he has the potential to put a business head on politics which could be a good thing. Look through the grand standing stuff and who wouldn't want a leader so adamant in putting his country first?

  4. Japan? Ever the "must try harder" and "we will continue to flog the dead horse" country. A central bank that owns almost all their own debt. They've thrown the kitchen sink, the bathroom sink and the bath at it. On the other side there might be huge potential if they Abe cements relations with Trump and unveils huge investment plans in the US. That would be massively beneficial to both sides.

  5. Elsewhere? Emerging markets, ever at the mercy of US policy and trade but they have their own strengths and weaknesses. China, another basket case and not fully investable.

That's obviously a very brief and broad look at things but often investors just look at simple risk and decide to go where it's lowest. Adding up where the risk lies, you've got to say the UK and Europe are high risk, the US and Japan are lower risk. Once you know that it's easy to match up the moves we see. If you want further confirmation or analysis, look at your weekly or monthly charts and see the real long-term trends in FX and that can sometimes bring you greater clarity through the everyday noise.

So back to the here and now. No prizes for where USDJPY has topped out.

USDJPY 15m chart

The euro and cable had another little wobble over the data but held their lows again, which will give some confidence to longs. It's still not looking rosy in both so there's more than a good chance we'll see both hitting the downside again. If we are in the midst of strong flows then these moves could continue for some time and I'll be watching cautiously for my EURUSD longs. I may decide to take some off the table until the picture becomes clearer.