Risk Correlated Assets Begging for Relief But No Real Sign of Bottom Yet

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Panic, fear and uncertainty take hold of markets Euro looking to establish below 2012 lows from January Yen starts to find renewed bids on flight to safety status Eurozone political turmoil fuels intensified risk off trade Rating agency downgrades and Greek political developments weigh German producer prices above expectations The risk liquidation continues into Friday, and markets to this point have shown no real interest in any form of a bounce. The US Dollar and Yen have been the prime beneficiaries on their flight to safety status, while the Swiss Franc is still not participating given the aggressive SNB intervention measures. We wonder how much it is costing the SNB to keep the EUR/CHF cross propped above 1.2000, especially in these intense risk-off markets. At this point, the Euro should accelerate to test the yearly lows from January by 1.2625, although any additional declines from there would be hard to comprehend in light of the severely oversold daily technical studies.

Relative performance versus the USD Friday (as of 9:30GMT)

CAD +0.13%

GBP +0.01%

JPY -0.06%

EUR -0.09%

CHF -0.11%

AUD -0.48%

NZD -0.76%

Elsewhere, US equities are now testing some key support levels, while gold has finally found some bids ahead of $1500. It certainly isn’t common to see so many analysts bearish on the Euro and risk in general. We have seen even the most aggressive Euro bulls retract their positions, and these include some larger banks, hedge funds and even central banks.

Moving on, Moody’s downgrade of 16 Spanish banks, along with Spanish yields rising back above 6% has not helped matters, while comments from Greek SYRIZA leader Tsipras that his party will not join the any pro-bailout coalition only weighs further on risk sentiment. European leadership needs to step up and offer a solution; otherwise, we could see additional risk liquidation over the coming hours. It is more than likely that the burden will fall on the European Central Bank, and the introduction of a Eurobond or additional bond buying could offer some relief. Other tools at the ECB’s disposal include the LTRO and the ability to cut rates, both of which would also likely be viewed as a risk positive. One thing is for sure, the G8 Summit kicks off today and we should expect nothing from this front in terms of any helpful solutions.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD:The market remains under intense pressure and the focus for now is squarely on a retest of the 2012 lows from January at 1.2625. While we would not rule out a possibility of a test of this level over the coming sessions, short-term technical studies are well oversold and are showing a need for some form of a corrective bounce from where a fresh lower top is sought out. Ultimately however, any rallies should now be very well capped by previous support turned resistance at 1.3000 in favor of additional weakness over the medium-term that projects deeper setbacks into the lower 1.2000's.

USD/JPY:The market continues to consolidate around 80.00 and is in the process of looking for a medium-term higher low ahead of the next major upside extension back above the yearly highs at 84.20 and towards 90.00 further up. However, for the time being it remains in question whether the market will still head lower towards the 200-Day SMA by 78.50 before ultimately reversing higher. The key level to watch above comes in by 80.60, and a break and close above this level will officially alleviate downside pressures and suggest that a higher low has now been carved in the 79.00's.

GBP/USD:The market remains under intense pressure since breaking back below 1.6000 and setbacks could now extend towards next key support in he 1.5600 area over the coming sessions. Still, daily studies are now stretched and we would prefer looking to sell into rallies towards 1.5900 where a fresh lower top is sought out.

USD/CHF:Overall the structure remains highly constructive and we continue to project additional upside over the coming months back above parity. For now, the latest break and close above 0.9335 is expected to accelerate gains for a retest of the yearly highs by 0.9600, while any intraday pullbacks should be very well supported ahead of 0.9200. Ultimately, only back under 0.9000 would negate outlook and give reason for pause.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

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Why is the Australian Dollar Correlated to the US S&P 500?

Quantitative Strategist 27 March 2012 18:30 GMT  The correlation between the Australian Dollar and S&P 500 has strengthened as stocks take out multi-year highs. We see fundamental reasons why the AUDUSD will remain strongly linked to the S&P and it could favor further AUD strength.
The US S&P 500 has surged to fresh post-financial crisis highs, and the Australian Dollar trades stronger on the heels of stock market rallies. Indeed, we forecasted that the US Dollar (ticker: USDOLLAR) could return to fresh lows against the Austrailian Dollar.
We see a major fundamental reason for why the AUDUSD-S&P 500 correlation will remain strong: interest rates. The Australian Dollar boasts the highest interest rate of any G10 currency, while the US Dollar is in a three-way tie for the lowest.
Unless the US Federal Reserve or Reserve Bank of Australia significantly alter expectations for US and Australian interest rates, expect the Australian Dollar/US Dollar exchange rate to move with similar volatility in global stock markets.
Forex Correlations Summary
View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.
Australian Dollar/US Dollar Exchange Rate (lhs)
US S&P 500 Index (VIX) (rhs)
Correlation between Australian Dollar and US S&P 500
There is a clear fundamental reason for why the Australian Dollar will likely remain correlated to the US S&P 500 through the foreseeable future: yield differentials.
Last week we wrote that the AUDUSD and S&P 500 correlation was trading near its lowest levels in many months, but a sharp rally in both stocks and the Aussie Dollar suggests that the correlation is back and nearly as strong as ever. Indeed, we were confident it would return to strength as the reasoning falls to pure market fundamentals.
The Australian Dollar boasts the highest interest rate of any G10 currency, while the US Dollar is near the lowest. According to London Interbank Offered Rates (LIBOR)—the price at which banks lend to one another in the interbank markets—the overnight US Dollar rate is a mere 0.15% while the equivalent Australian Dollar yield is 4.42%.
In theory this means that an investor would stand to gain 4.27% annual yield for simply borrowing US Dollars to buy its Australian counterpart. In practice one would not collect this full yield due to spreads paid on interest rates, but the net yield should still be fairly significant.
Read: Understanding Foreign Exchange Rollover
That yield becomes all that much more important if the AUDUSD exchange rate remains unchanged or appreciates, but the investor could lose significantly if the Australian Dollar falls at a greater than 4.27% rate on an annualized basis. To put that into perspective, an AUDUSD exchange rate of $1.0480 implies that an investor would lose if the Aussie fell more than 1.7 pips ($0.00017) per day against the US Dollar. (Based on a 250-day yearly trading calendar and using the assumption the investor receives the full 4.27% yield differential)
If investors don’t fear AUDUSD declines, they might gladly take that risk in expectations that yields would reward them over the course of the year. Of course the opposite is also true: they would likely run for the exits if the Aussie looks like it will fall significantly against its low-yielding US namesake.
This dynamic explains why the Australian Dollar will likely remain correlated to the US S&P 500 and other speculative assets through the foreseeable future. Can that correlation break down for weeks at a time? Of course. Past performance is not indicative of future results.
Yet it would take a substantial shift in yields to truly turn the AUDUSD’s link to the S&P and other markets. Look to Reserve Bank of Australia and US Federal Reserve as the two entities who could alter this dynamic via changes in Australian and US interest rates.