I hold a strong view that the instability that we have been seeing over the past few months has in many markets pushed longer term speculative capital to the sides and left the markets to trade on the whim of the short term guys and market news. How else can you explain the lack of reaction, at least decent big sell offs, across wholesale markets to the Greek debacle.
Are we in a pre-Lehmanesque style, “she’ll be right mate” kind of market with a big shock coming or have markets learnt the lessons of 2008 and are ready for a default and all it brings. I think the answer is somewhere in the middle with the news that American Banks are holding a lot of CDS exposure to the PIIGS bothering me but overall markets are dealing with this rather well.
This morning I want to look at a few charts and just highlight where the risks and action are in the markets at the moment.
EUR/CHF: The Euro Swiss exchange rate is the primary place for Europeans to keep their money close but also trade the potential for a Greek default and even a Euro break up. As you can see in the chart below this cross has been falling for a couple of years now and is at an all time low. The Swiss aren’t happy but their isnt muchy they can do ab out it.
This chart tells us that it is a relative risky bet within Europe but is it risk off yet? Let’s keep looking.
EUR/AUD: I quoted this as Euro Aussie because this is the way most people thing about this cross not the AUD/EUR way we like to think about it. So you can see here that the general downtrend (Euro weakness) has stalled for many month’s but has recommenced in the past few days. The fact that Aussie is still outperforming the Euro suggests things haven’t gone completely risk off yet.
AUD/USD: the Aussie is holding in really well against a USD that is doing much better. Certainly it’s acting like the funding currency that it has become and so risk offish events see USD strength but the fact that the Aussie is holding in so well speaks both to the rerating of the currency by investors but equally to the fact, IMHO, that risk is not off yet. Not really anyway.
Indeed the AUD last night bounced off 1.0476, the low in its trend channel, and is now at 1.0576 trading higher with the stronger US equity close.
Dow Jones Industrial Average: This is where I think the notion of risk off will ultimately live or die. As you can see from the chart below and as we saw in the price action overnight this is a market that is repecting the trendline from the 2009 lows. If this breaks and holds below for a couple of days then I think that either something bad has happened and we are risk off anyway or the weakness in the bellwether equity market will drag everything with it.
This is the market to watch.
GOLD: Gold is still high but off it’s highs if that makes sense. This isn’t really telling me anything at the moment but I am, counter intuitively, expecting this to fall when we go risk off. Perhaps a retest of the trendline as the USD strength saps golds.
So, as we move slowly toward a Greek default it seems to me that we haven’t really undergone a risk off event yet. The US data flowing through is just as likely to take down equities as Greece is so I still believe circumspection is warranted given the global fingers of economic instability are growing.
But for now, it not really a risk off event at all.